BlackRock’s Bitcoin ETF Gains Traction- Wall Street Firms Jump on Board

BlackRock’s iShares Bitcoin Trust (IBIT) is attracting significant interest from investors and major Wall Street institutions. Here is a closer look at Citigroup, Goldman Sachs, Citadel Securities, UBS, and ABN AMRO’s recent additions as authorized participants (APs) for the IBIT fund.

Authorized Participants- The Backbone of ETF Operations

Authorized participants play a key role in the functioning of ETFs. They are institutions responsible for creating and redeeming ETF shares. This process involves exchanging ETF shares for a basket of underlying securities that reflect the ETF’s holdings (creation) or vice versa (redemption). Essentially, APs ensure liquidity within the ETF ecosystem.

How it Works

• Investors purchase shares of the ETF on the stock exchange.
• APs create new ETF shares by providing a basket of underlying assets (usually Bitcoin in the case of a Bitcoin ETF) to the ETF issuer in exchange for newly created shares.
• Conversely, APs can redeem existing ETF shares with the issuer, receiving the corresponding basket of underlying assets.

This continuous creation and redemption process by APs helps maintain a stable price for the ETF shares that reflects the value of the underlying assets.

BlackRock’s IBIT Attracts Big Names

BlackRock’s recent addition of Goldman Sachs, Citigroup, UBS, Citadel Securities, and ABN AMRO as APs for the IBIT fund indicates growing institutional interest in the Bitcoin market. This development is noteworthy for several reasons:

• Increased Market Credibility—Established Wall Street firms like Goldman Sachs’ involvement adds legitimacy and credibility to the Bitcoin ETF space. This can potentially attract more traditional investors who might have been hesitant to enter the cryptocurrency market previously.
• Enhanced Liquidity- With more APs involved, the IBIT fund can benefit from increased liquidity. This means investors can buy and sell shares of the ETF more easily, reducing potential price fluctuations.
• Shifting Perceptions—The participation of major financial institutions like Goldman Sachs, whose CEO previously expressed skepticism about cryptocurrency, suggests a broader shift in perception toward Bitcoin as a potential asset class.

Breakdown of Authorized Participants for BlackRock’s IBIT

Although the number of APs for IBIT has increased to nine, some larger ETFs might have over a dozen APs for optimal liquidity.

The Role of the SEC and Cash Settlement Mechanism

A key consideration for the SEC is mitigating potential market manipulation risks associated with Bitcoin ETFs. To address this, most Bitcoin ETFs, including IBIT, utilize a cash settlement mechanism.

Unlike traditional ETFs, where creation and redemption might involve directly handling the underlying assets, Bitcoin ETFs operate through a cash-based system. This means that new shares of the ETF are created or redeemed only through cash transactions. Investors provide cash to the AP in exchange for new shares and vice versa when redeeming shares. This aims to reduce the risk of intraday price manipulation that could occur with the physical delivery of Bitcoin.

With the addition of new Wall Street giants as APs and the established cash settlement mechanism, BlackRock’s IBIT appears well-positioned to play a significant role in the evolving landscape of Bitcoin ETFs. 

https://cointelegraph.com/news/blackrock-updates-btc-etf-adds-5-wall-street-firms

https://www.coindesk.com/business/2024/04/05/blackrock-adds-goldman-sachs-citigroup-citadel-as-aps-for-bitcoin-etf/