We look at the implications of the much sought-after “in-kind” ETF creation/redemption orders as exchanges begin to file for changes.
We unpack bitcoin’s changing correlations, which show two distinct eras, before and after COVID.
We expect the monetary factors increasing bitcoin’s correlations to US stocks to lessen over time, but the changing investor base also has important implications.
Implications of “In-Kind” Creation/Redemption Orders for ETFs
Over the past week, Nasdaq and Cboe BZX have filed the initial paperwork, 19b-4 change of rule request forms, to allow certain ETFs to add “in-kind” creation and redemption orders. These ETFs include BlackRock’s iShares Bitcoin Trust ETF (IBIT) traded on Nasdaq, ARK 21Shares Bitcoin ETF (ARKB) traded on Cboe BZX, and 21Shares Core Ethereum ETF (CETH) traded on Cboe BZX. This change, if approved, would allow bitcoin and ether to be directly contributed or redeemed for ETF shares – a request that was initially made by the ETF sponsors during the bitcoin ETF approval process, but ultimately denied by the SEC.
If allowed the change would simplify the operations of the ETFs and have important implications for secondary market trading and financial aspects of ETFs, as well as second-order effects on market participants. For secondary market trading, because creation and redemption orders can be satisfied by the underlying crypto and not just shares, it may reduce the trading of the ETF shares, especially during the critical NAV index calculation windows. In addition, the change should also lead to tighter spreads to NAV, lower tracking error, lower create/redeem costs, and potential tax benefits.
There are important timing implications as well. Because the change to IBIT pulls up the in-kind creation/redemption order cutoff window to 3:59 PM day of trade, there should be decreased financing needs associated with the current 6:00 PM day before trade cutoff window. This would also shift the relationship between secondary market trading of shares, create/redeem orders, and the acquisition or disposition of the underlying crypto. For 21Shares, the timing change is the opposite – in-kind orders must be placed by 12:00 PM day of trade, while the exchange is seeking to pull up cash orders right up until the close at 4:00 PM.
As a reminder, the only entities allowed to submit these primary market orders are Authorized Participants (APs) who are designated broker-dealers trading the secondary market of the shares. Some of these APs are part of banks that presently cannot hold the underlying crypto. These APs may be disadvantaged compared to those that can trade both the securities shares and the underlying cryptocurrencies. The idea that ETF investors will be able to withdraw or contribute the underlying assets is only true if they work directly with an AP and is likely only reserved for the largest of institutions. Most holders of the ETFs, nearly 80% of shares, are still retail (non-13F filers).
As a final reminder, SEC approval is required for these changes to happen. The SEC, fearful that issues in the underlying crypto markets would affect a regulated entity, disallowed in-kind orders under the Gensler regime. With a changeover underway at the SEC, perhaps the incoming regulators are more supportive of the change. Still, the shot clock once started (it hasn’t yet) could last up to 240 days in total. We should know by sometime in October (10/11/25 if timelines hold with previous filings), how the SEC is thinking about this matter. We expect to see other exchanges file for similar changes for the ETFs they trade.
Unpacking Bitcoin’s Changing Correlations
The launch of the DeepSeek AI models, which claim to match OpenAI’s performance at a significantly lower cost, unsettled financial markets on Monday, driving indices lower and causing AI-related shares to plunge. Caught up in the fray was bitcoin, which fell 7% Sunday into Monday. While the revelation of more competitive AI models from China has zero to do with bitcoin the asset (perhaps some impact on bitcoin miners which have some AI/HPC market expectations built into them) the event spurred an important question about bitcoin’s correlations. Media coverage of sell-side analysis on this topic presents an incomplete picture, however, missing key distinctions that investors, especially allocators, should consider.
Throughout its history, bitcoin has maintained either zero or very little price correlations with all major asset classes—including stocks, bonds, commodities, gold, real estate, volatility, and the US dollar. This conclusion is based on an analysis of Bitcoin’s rolling 90-day daily price correlations since 2011, which, on average, have hovered around zero with every major asset class. While Bitcoin’s correlations fluctuate within a certain range, as shown in the table below, they have consistently returned to this neutral average. The most recent readings also reflect this pattern, except in the case of U.S. equities, high-yield bonds, and volatility (VIX).
This makes sense, that bitcoin would have little correlation with other asset classes, as there are no factors (inflation, interest rates, money supply, USD, etc.) that explain bitcoin’s returns since 2011.
Examining bitcoin’s correlation with U.S. equities is particularly important, as equity market risk is the primary exposure for most investors—whether directly through stock ownership or exposure to the underlying factors that drive stocks. Given this, diversification away from U.S. equity market risk is highly valued by many investors. Among traditional asset classes, only bonds, volatility, and cash (USD) have historically shown inverse correlations with U.S. equities, while gold has been uncorrelated.
Looking at bitcoin’s correlations with US equities tells a multilayered story. First, as mentioned previously, its long-term average correlation is quite low, 0.13 since 2011. However, there appear to be two distinct eras of correlations, before COVID (BC) and after COVID (AC) with February 2020 as the dividing line. In the BC era, bitcoin was uncorrelated to US equities, with an average correlation of 0.00. The AC era, however, has marked higher average correlations with US equities, averaging 0.36 with the most recent measure of 0.44. We would still classify this as a low correlation, but certainly not the “no correlation” of the BC era.
Since COVID, bitcoin's correlation with equities has risen structurally due to two key factors. First, the pandemic-induced market crisis led to an increased influence of monetary and macroeconomic forces on asset prices, including stocks and bitcoin. The initial shock from the global shutdown triggered an extreme financial response—massive monetary and fiscal stimulus. This influx of liquidity drove both stocks and bitcoin higher, but the aftermath brought inflation, followed by aggressive rate hikes to curb it. The ebb and flow of liquidity likely impacted both markets, increasing correlations. Said another way, interest rates, monetary policy, and inflation have likely had outsized influence on asset prices since 2020, while other macro factors such as economic growth, corporate profits, employment rates, and consumer spending seemed to have mattered less.
One other often-overlooked factor is bitcoin’s changing investor base during this time, going from primarily retail-driven to including institutional investors and professional traders. These new investors are much more responsive to macroeconomic data, and bitcoin’s high liquidity and around-the-clock trading have increasingly made it an asset for traders looking to express their investment views.
While this retrospective analysis offers valuable insights, what truly matters is bitcoin’s forward-looking correlations - what lies ahead. Here we can only make an informed guess. We anticipate that influence monetary factors have had on bitcoin and stocks in the AC era to moderate. However, we do not expect bitcoin’s investor base to revert back to retail. If anything, the shift toward professional investors should persist. Given this, we anticipate bitcoin will maintain a stronger correlation with U.S. equities than in the BC era, though likely lower than what has been observed in the AC era.
Market Update
Bitcoin rose 1.5% for the week, recovering from the DeepSeek-induced selloff by Thursday. Savvy investors who recognized that DeepSeek’s AI advancements had little direct impact on Bitcoin took advantage of the dip to buy at a discount. Meanwhile, equity markets ended the week lower but recovered most of their initial losses, with the S&P 500 closing down 0.8% and the Nasdaq down 1.9%.
On Wednesday, the FOMC held interest rates steady as expected. While the absence of a rate cut—the first since July—could have been seen as a hawkish signal, markets responded positively to Fed Chair Powell’s briefing, driving stocks and bitcoin higher. During the press conference, Powell addressed the risks associated with cryptocurrencies, clarifying that banks can provide services to crypto entities but face stricter requirements when directly engaging in crypto activities. Our view is that those expecting the repeal of SAB 121 to immediately lead to increased crypto involvement by banks may be premature.
Powell is also grappling to judge the impact that Trump’s economic plan, the centerpiece of which has been tariffs, may have on jobs and inflation. While developments are unfolding in real time, presently tariffs are expected to go into place against Canada and Mexico tomorrow. In addition, while Powell stated that the job market hasn’t been a source of inflation, we wonder what the impact will be now that immigration reform has ramped up. Furthermore, Trump is back to his old tactics of trying to influence the Fed, taking to Truth Social to complain about the lack of rate cuts, and using his appearance at Davos to argue for lower interest rates.
This environment favors Bitcoin and other non-sovereign stores of value, like gold. With rising geopolitical uncertainty, persistent inflation, and mounting sovereign debt, it’s no surprise that Bitcoin is up 12.3% year-to-date, while gold has gained 6.9%, including a 2.1% increase last week alone. The year is still in its early stages, and the Trump administration is just beginning to take the reins—there could be more upside ahead.
Feb 12 - CPI release Mar 4 - FTX creditor payment deadline Jul 2 - Final SEC deadline for decision on GDLC ETF conversion Jul 22 - EO Working Group report deadline
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