Bitwise Invest Chief Investment Officer Jeff Park argues Bitcoin (CRYPTO: BTC) is not being suppressed as claimed by some on social media. The issue, in fact, lies with ETF authorized participants.
The Regulatory Carve-Out
In a detailed explanation on X, Park points out that authorized participants operate under a special exemption that allows them to short ETF shares without borrowing costs, capital requirements, or deadlines to close positions.
Any AP can create shares at will by virtue of their role in ETF creation and redemption.
This exemption isn’t unique to Jane Street.
For BlackRock’s (NASDAQ:IBIT) alone, nine firms have this power: Jane Street Capital, JPMorgan, Macquarie, Virtu Americas, Goldman Sachs, Citadel Securities, Citigroup, UBS, and ABN AMRO. All operate under the same rules.
The Broken Arbitrage
Normally, if IBIT trades below the value of its Bitcoin holdings, an arbitrage trader would buy IBIT shares, redeem them for Bitcoin, and pocket the difference. This buying pressure should close the gap.
But APs control the entire process, which changes the incentive structure.
When APs short IBIT shares, they can hedge that short position with Bitcoin futures instead of buying actual Bitcoin spot. If they choose futures, no spot Bitcoin ever gets purchased.
This matters because the natural arbitrage that should push Bitcoin prices higher never happens. The buyer who should be closing the gap chose not to buy spot Bitcoin at all.
The In-Kind Problem
The SEC recently approved in-kind creation and redemption for Bitcoin ETFs.
Under the old cash-only system, APs had to give cash to the fund, and the fund’s custodian would buy Bitcoin on the open market. That forced real spot buying.
The new system eliminates this requirement. APs can now deliver Bitcoin directly, sourced from over-the-counter desks at negotiated prices with minimal market impact.
They can buy Bitcoin whenever and wherever they want, potentially after holding short positions for extended periods.
Park explains that the beginning of this process looks like normal market-making and the end looks like normal market-making. What happens in between is where the problems occur.
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