Simply put
- Bitcoin ETF shares can be created or redeemed by authorized participants without needing to buy or sell Bitcoin on a public exchange immediately.
- Experts point out that the timing of derivative hedging and settlements could create a disconnect between ETF inflows and actual spot price changes in the short term.
- While this approach is legal and commonly used by ETF market makers, price shifts to the futures market can occur during periods of significant institutional investment.
Bitcoin’s surge on Wednesday has rekindled discussions about the influence of Wall Street market makers in Bitcoin spot ETFs, especially following online speculation linking price changes to a lawsuit involving Jane Street, a quantitative trading firm.
After a discussion circulating on X suggested that Bitcoin’s approximately 10% increase over two days coincided with the end of a supposed intraday selling pattern, it led to claims that legal action against Jane Street may have altered market dynamics.
However, analysts and ETF experts cautioned that focusing solely on one company obscures the more intricate market mechanisms that dictate how Spot Bitcoin ETFs function.
Although these ETFs are designed to track the asset’s spot price, their process for creation and redemption allows institutional players to fulfill demand without conducting transactions on public exchanges.
Jeff Park, chief investment officer at ProCap and an advisor for Bitwise, stated that this view reflects a misunderstanding of ETF structures rather than indicating manipulation.
Park elaborated on X, explaining how authorized participants, who are the major trading firms that create and redeem ETF shares, operate under certain regulatory exemptions. This enables them to meet ETF demand without requiring quick purchases of Bitcoin on the spot market.
He mentioned that while such exemptions apply to all authorized participants, they can create a “gray window” where the processes of ETF share creation, hedging, and spot market trading are not synchronously tied together.
This disconnect means that increases in ETF demand don’t automatically lead to greater buying pressure in the Bitcoin spot market, complicating the belief that ETF activity directly influences spot prices.
Ryan McMillin, chief investment officer at Merkle Tree Capital, pointed out that this structural setup also incentivizes a preference for derivatives over the spot market.
Because Bitcoin futures can trade at a premium to the spot price in a situation known as contango, authorized participants might use futures to hedge their exposure while also benefiting from the pricing difference.
“The assets of the ETF can grow without necessitating immediate Bitcoin purchases, maintaining the bull market under critical thresholds where excitement propels prices up like a flywheel,” McMillin noted.
He further explained that a reduction in futures positions owing to macroeconomic changes or tightening spreads can lead to significant price swings, which may appear abrupt to individual investors.
Both analysts emphasized that this behavior is legal and aligns with how ETFs are designed to operate, without implying any wrongdoing by specific firms.
Instead, they suggested it underscores how the discovery of Bitcoin pricing is increasingly influenced by trading on institutional platforms like futures markets, rather than just through spot exchanges.
“Authorized participants are essentially acting with hedge fund-like motives and tools, but with less accountability, using substantially volatile assets,” McMillin remarked. “These ETF ‘innovations’ may risk becoming vehicles for Wall Street yield-skimming, prioritizing institutional arbitrage at the expense of authentic support in the spot market.”
