IBIT is growing. But is BlackRock actually buying new Bitcoin?

Blackrock will let a bitcoin holder get IBIT ETF shares in exchange for their btc without first selling that bitcoin and converting it into dollars.

In this transaction the person no longer holds btc directly in their wallet. Instead they hold publicly traded IBIT shares that aim to represent that same bitcoin exposure.

Now there is a very important distinction here

This does not mean new money entered bitcoin or new btc is being bought from the market.

If you can separate this you understand these developments much better.

So lets think about it like this for example lets say alice already has 10 btc. And lets say she converts this into IBIT shares.

➛ Alice was already a btc holder

➛ So there may be no new dollar inflow

➛ Bitcoin’s total supply already doesnt change

➛ Bitcoin only moves from a personal wallet into the ETF custody structure

This is already called wrapper migration. So we can basically say the format of the investment vehicle changes.

Keep this part in mind for now and lets remember the difference between holding bitcoin and holding a bitcoin ETF again together.

Now holding BTC directly is basically something like this:

➛ You hold BTC in your own wallet or on a crypto exchange

➛ Seed phrase or private key responsibility is yours

➛ You can send BTC onchain and use it in defi

➛ You can trade 24 7 on crypto exchanges

➛ Custody and operations are on you

➛ So you actually directly own BTC

What about holding a bitcoin ETF:

➛ You hold ETF shares in a traditional securities account

➛ The fund’s custodian holds the Bitcoin

➛ You cant move the ETF share onchain

➛ You can generally buy and sell during stock market trading hours

➛ There is a fund management fee and broker structure

➛ You own a share economically linked to the BTC held by the fund

Now lets come to IBIT. IBIT is blackrock’s spot bitcoin etf that aims to track the bitcoin price.

The fund holds BTC while the investor buys and sells shares of the fund on nasdaq. They describe the purpose of this product as getting bitcoin exposure without directly dealing with custody and operations.

I think understanding these differences is important because it always lets us read the market better.

Holding BTC directly is like keeping gold in your own safe. Holding an ETF is more like holding a publicly traded share economically linked to the gold sitting inside that safe.

Yes these things affect bitcoin price but understanding how they affect it matters for us.

So how does money normally enter an ETF?

Lets say investors start heavily buying IBIT through nasdaq. And there arent enough IBIT shares available for sale in the market. Then special institutions inside the ETF system step in. These are Authorized Participants (APs)

APs are basically authorized intermediaries that can do large transactions directly with the etf.

So the flow looks like this:

1-investors buy IBIT shares

2- as demand increases IBIT shares can start trading above the value of the bitcoin it holds

3- the AP transacts with the fund to create new IBIT shares

4- in the cash model this process can cause the fund to buy new BTC

5- new IBIT shares enter the market. Supply and demand gets balanced again

When I look at this what I take from it is this: money entering the ETF can increase the BTC held by the fund and can create real BTC buying in the spot market.

These can be a sign that genuinely new dollar demand is moving toward bitcoin.

So what is an “in-kind” transaction?

Basically it means asset for asset exchange.

In the old model it looked like this:

When an ap wanted to create ETF shares it first gave cash. Then the fund or transaction bought BTC. New ETF shares were given to the AP.

In this model the fund may have to go into the market to buy BTC.

In the new model it looks like this:

This is the in kind model. BTC is given and ETF shares are received in return.

So the fund doesnt have to first receive cash and then go buy BTC from the market. IBIT shares are created directly in return.

On july 29 the SEC allowed authorized participants in spot crypto etfs to do in kind creation and redemption transactions.

How does this work in practice?

I think there is one critical detail people skip here.

A normal retail user cant just send BTC from their wallet to blackrock and get IBIT with one click.

A large BTC holder first needs to go through an eligible intermediary channel with an AP to get into the IBIT fund.

Like I said before IBIT shares are created in large baskets.

So there is an operational and legal chain of institutions between the BTC holder and the ETF fund.

Why is this not new Bitcoin demand?

Yes some things are a bit confusing and kind of left hanging here. Lets make it clearer together with two scenarios.

➛ Scenario a:

Jack has $1 million cash but no BTC.

Jack buys IBIT

There is demand for new IBIT shares in the market

AP does a creation

The fund acquires BTC depending on the mechanism

The fund’s BTC balance increases

Here jack’s dollars were not previously in the bitcoin market. So economically new demand is created.

➛ Scenario b:

Alice already has $1 million worth of BTC

Alice gives her BTC into an in kind transaction through an eligible institutional channel

She receives IBIT shares in return

The amount of BTC held by the fund increases

But the fund doesnt need to additionally go into the open market and buy BTC

Here alice is not exiting bitcoin. She is only changing the way she holds bitcoin.

So what we need to take from this is basically this: saying the ETF’s BTC holdings increased does not automatically mean the ETF bought new BTC from the market.

Dont mix these two statements together.

For example you probably saw the recent news saying $5 billion moved into the ETF.

But this did not mean blackrock put this much money into bitcoin.

Existing bitcoin holders had moved this much value of BTC into the ETF structure

There was no new demand. The custody type changed.

Why does this matter?

Custody preference can change for large BTC holders.

Holding a high amount of BTC comes with serious operational responsibility.

There are some security problems too as we know.

So here people can basically be exchanging one type of risk for another.

Another important result is maybe not bitcoin’s usage but its distribution as an investment product can expand.

Thats why we need to read ETF data and ETF news more carefully.

People also buy and sell existing IBIT shares from each other on the stock exchange. This also doesnt change the ETF’s BTC holdings and isnt new BTC demand.

If an AP creates new IBIT shares in exchange for cash then the fund may need to acquire BTC. There can be new demand.

If an existing BTC holder moves into IBIT through an in kind method then the fund’s BTC can increase but there may be no new demand.

My take

Of course I also read this as bitcoin becoming more financialized.

Long term bitcoin is becoming a financial asset with this many different options around it.

Structurally this looks positive to me too. More access, deeper liquidity and more institutional channels.

But I think there is a cost to it.

A larger part of bitcoin’s supply can end up concentrated inside large custodians and traditional finance institutions.

And at that point bitcoin moves further away from its philosophy. Your keys your coins.

So holding an ETF is not using bitcoin. Holding an ETF is only getting exposure to bitcoin’s price.

And self custody slowly disappearing is part of that too.