Bitcoin ETF Market Making: How Authorized Participants Keep Prices Fair

When BlackRock’s iShares Bitcoin Trust (IBIT) trades on Nasdaq, its price should reflect the value of the Bitcoin it holds. But unlike a stock whose price is set by earnings and growth expectations, an ETF price is anchored to its net asset value (NAV) by a mechanical process: creation and redemption. The firms that execute this process are called authorized participants (APs), and without them, Bitcoin ETF shares could drift far from the actual price of Bitcoin.

Since the U.S. spot Bitcoin ETFs launched in January 2024, this mechanism has processed over $50 billion in cumulative net inflows and facilitated the accumulation of more than 1.25 million BTC across all twelve funds. Understanding how APs, market makers, and custodians interact is essential for anyone evaluating Bitcoin ETFs as an investment vehicle or building infrastructure that touches institutional Bitcoin flows.

What Is an Authorized Participant?

An authorized participant is a financial institution, typically a registered broker-dealer, that has signed an agreement with an ETF sponsor granting it the exclusive right to create and redeem ETF shares directly with the fund. No other entity can do this. Retail investors buy and sell ETF shares on the secondary market (exchanges like Nasdaq or NYSE Arca), but only APs transact at NAV with the fund itself.

APs must also be participants of the Depository Trust Company (DTC), the central securities depository that settles U.S. equities. This requirement ensures that newly created shares can be credited electronically and distributed through the standard securities infrastructure.

Who Are the Bitcoin ETF Authorized Participants?

When IBIT launched, BlackRock named Jane Street, JP Morgan Securities, Macquarie Capital, and Virtu Americas as its initial authorized participants. By late 2024, five additional firms had signed on: Goldman Sachs, Citadel Securities, Citigroup Global Markets, UBS Securities, and ABN AMRO Clearing. Other ETF issuers have their own AP rosters, though significant overlap exists: Jane Street and JP Morgan serve as APs for multiple Bitcoin ETFs.

The caliber of these firms matters. Jane Street alone held over $1 billion in Bitcoin ETF positions as of its 13F filings, reflecting the scale of inventory required to fulfill the market-making and arbitrage role. The more APs a fund has, the tighter its price tracking tends to be, because competition among arbitrageurs narrows the window of opportunity for any single firm.

How Creation and Redemption Works

The creation and redemption mechanism is the engine that keeps ETF prices tethered to NAV. It operates in large blocks called baskets (typically 10,000 to 50,000 shares per basket) rather than individual shares.

Creation: When Shares Trade at a Premium

When buying pressure pushes an ETF’s market price above its NAV, the shares trade at a premium. An AP can profit from this gap:

1. The AP delivers the required amount of Bitcoin (or its cash equivalent) to the fund’s custodian.
2. The fund’s transfer agent creates a new basket of ETF shares and credits them to the AP’s DTC account, typically on a T+1 settlement basis.
3. The AP sells the newly created shares on the open market at the higher market price.
4. The spread between the NAV (at which shares were created) and the market price (at which shares are sold) is the AP’s profit.

This process increases the supply of ETF shares, which pushes the market price back down toward NAV. The arbitrage is self-correcting.

Redemption: When Shares Trade at a Discount

When selling pressure pushes the market price below NAV, the process reverses:

1. The AP buys discounted ETF shares on the open market.
2. The AP delivers those shares to the fund for redemption, receiving Bitcoin (or cash) at NAV value.
3. The AP profits from the difference between the lower purchase price and the higher NAV redemption value.

This reduces the supply of ETF shares, pushing the market price back up toward NAV. Together, creation and redemption form a continuous feedback loop.

Why baskets, not single shares: Processing creations and redemptions in large blocks (typically 10,000+ shares) reduces transaction costs, minimizes the operational burden on custodians, and ensures that only well-capitalized institutional participants can interact with the fund directly. Each basket order also carries a non-refundable processing fee paid by the AP.

Cash-Create vs In-Kind: The Model That Changed

When the SEC approved the first U.S. spot Bitcoin ETFs in January 2024, it imposed a critical restriction: all creations and redemptions had to occur in cash. APs could not deliver or receive actual Bitcoin. Instead, they sent U.S. dollars to the fund, and an execution agent purchased Bitcoin on the fund’s behalf.

Why Cash-Only Was Chosen Initially

The SEC’s rationale centered on broker-dealer registration. Most APs are registered broker-dealers, but broker-dealer registration did not at that time authorize the handling of spot Bitcoin. Requiring cash transactions meant APs never needed to touch BTC directly, sidestepping regulatory ambiguity about whether broker-dealers could custody crypto assets.

Problems With the Cash Model

The cash-create model introduced friction at multiple points:

• The fund bore execution risk when buying or selling Bitcoin on the open market to fulfill orders, adding slippage costs that were passed through to shareholders.
• Cash transactions created taxable events for the fund on every creation and redemption, potentially generating capital gains distributions that in-kind transfers avoid.
• Settlement times were longer because the fund had to execute Bitcoin trades after receiving cash, rather than simply taking delivery of the asset.
• APs had less flexibility in managing their hedging and inventory because they could not directly offset ETF share creation with Bitcoin they already held.

The Shift to In-Kind (July 2025)

On July 29, 2025, the SEC voted to permit in-kind creations and redemptions for all U.S. spot Bitcoin and Ethereum ETPs (Release 2025-101). Chairman Paul Atkins stated that “investors will benefit from these approvals, as they will make these products less costly and more efficient.” Nasdaq, NYSE Arca, and Cboe BZX received accelerated approvals to implement the change.

Under the in-kind model, APs deliver Bitcoin directly to the fund’s custodian during creation, or receive Bitcoin from the custodian during redemption. This aligns crypto ETPs with how commodity ETFs like SPDR Gold Shares (GLD) have operated for decades.

The ETF Ecosystem: Participants and Their Roles

A Bitcoin ETF does not operate in isolation. Multiple specialized entities coordinate to ensure that shares are created, priced, traded, and settled correctly.

Sponsor (Issuer)

The sponsor designs the fund, files with the SEC, selects service providers, and manages the trust. For IBIT, the sponsor is BlackRock. For FBTC, it is Fidelity (FD Funds Management). The sponsor sets the basket size, chooses the NAV calculation methodology, and determines the creation/redemption cut-off times.

Custodian

The custodian holds the fund’s Bitcoin in cold storage. Coinbase Custody Trust Company serves as the Bitcoin custodian for the majority of U.S. spot Bitcoin ETFs, including IBIT, BITB, ARKB, and BTCO. Fidelity is a notable exception: its FBTC fund uses Fidelity Digital Assets for self-custody. During creation and redemption, Bitcoin may temporarily move through trading accounts before settling into cold storage.

Transfer Agent

The transfer agent maintains the official record of share ownership, processes creation and redemption orders from APs, and interfaces with DTC. Once a creation order is approved, the transfer agent instructs DTC to credit the new shares to the AP’s account.

Market Makers

While APs create and redeem shares with the fund, market makers provide liquidity on the secondary market (the exchange). They continuously post bid and ask prices, earning the spread between the two. Some firms serve as both AP and market maker (Jane Street and Virtu, for example), but the roles are distinct: AP activity changes the total share count, while market making facilitates trading of existing shares.

Index Provider / NAV Calculation Agent

Each fund uses a reference price or index to calculate its NAV. Many reference the CME CF Bitcoin Reference Rate (BRR), which aggregates prices from multiple spot exchanges during a specific calculation window. The NAV is typically struck once per day at 4:00 p.m. Eastern, though intraday indicative values (iNAV) are published throughout trading hours.

Premium and Discount Dynamics

The effectiveness of the creation/redemption mechanism shows up in how tightly an ETF tracks its NAV. In theory, AP arbitrage should keep the gap near zero. In practice, several factors cause temporary deviations.

What Causes Premiums

When demand for ETF shares outstrips the speed at which APs can create new baskets, the market price rises above NAV. This happened in the first weeks after the January 2024 launch: IBIT traded at a persistent premium of approximately 20 basis points (0.20%) as massive inflows overwhelmed the relatively small initial AP base.

What Causes Discounts

When selling pressure exceeds AP capacity to redeem shares, or when broader market conditions make arbitrage less attractive, discounts can appear. In May 2024, IBIT briefly traded at a discount of nearly 2% during a period of institutional rebalancing at month-end. FBTC, BITB, and ARKB simultaneously traded at discounts of approximately 1.5%.

The GBTC Lesson

Before converting to a spot ETF in January 2024, the Grayscale Bitcoin Trust (GBTC) was a closed-end fund with no creation/redemption mechanism. This structural flaw led to extraordinary price deviations: premiums of 20% to 40% during bull markets (2017 to 2021) and discounts exceeding 48% during the 2022 bear market. GBTC is the clearest illustration of why the AP mechanism matters. Without it, the price of a Bitcoin investment vehicle becomes detached from the value of the Bitcoin it holds.

Fewer APs mean wider gaps: Only a handful of authorized participants are currently equipped to handle spot Bitcoin trading at the scale required for ETF arbitrage. This makes Bitcoin ETFs more vulnerable to premium/discount swings during volatile periods than gold ETFs like GLD, which have a deeper bench of commodity-experienced APs and decades of operational history.

Bitcoin ETF Spreads vs Gold ETF Spreads

The SPDR Gold Shares ETF (GLD) is the most commonly cited benchmark for commodity ETF liquidity. It has operated since 2004, holds over $70 billion in assets, and maintains a 30-day median bid-ask spread of approximately 1 basis point (0.01%), according to State Street’s fund page. Bitcoin ETFs are still converging toward that benchmark.

IBIT, the largest Bitcoin ETF by assets, has attracted daily trading volumes that rival GLD (exceeding $1 billion per day at times), which helps compress its spreads. However, several structural differences work against Bitcoin ETFs:

• Bitcoin trades 24/7, but ETF shares trade only during U.S. market hours. Overnight Bitcoin price moves create gap risk that APs must price into their spreads.
• Bitcoin’s annualized volatility is significantly higher than gold’s, requiring market makers to hold wider spreads to compensate for inventory risk.
• The Bitcoin custodial infrastructure is younger and involves different operational risks (key management, blockchain settlement) compared to gold vaulting.
• Fewer APs have the capability to trade spot Bitcoin at scale, reducing competitive pressure on spreads compared to the deep bench of commodity-specialist APs that serve gold ETFs.

As the AP roster expands and in-kind creation becomes standard, Bitcoin ETF spreads should continue to narrow. The trajectory from 2024 to 2025 already showed meaningful compression as more institutional participants entered the ecosystem.

The Creation/Redemption Flow: Step by Step

The following describes the in-kind creation process as it operates post-July 2025. The redemption flow mirrors this in reverse.

Step 1: Order Placement (Trade Date, T)

The AP submits a creation order to the fund’s transfer agent before the daily cut-off time (typically 3:59 p.m. or 4:00 p.m. Eastern). The order specifies the number of baskets to create. The sponsor reviews and approves the order.

Step 2: Bitcoin Delivery (T+1)

The AP transfers the required amount of Bitcoin to the fund’s custodian, typically by 1:00 p.m. Eastern on the settlement date. The custodian verifies receipt and confirms the deposit to the transfer agent. For most funds, Bitcoin is initially received into a trading account and then moved to cold storage.

Step 3: Share Issuance (T+1)

Once the custodian confirms Bitcoin delivery, the transfer agent instructs DTC to credit the new basket of ETF shares to the AP’s account. This happens by the close of business on the settlement date. The AP can then sell these shares on the secondary market or hold them in inventory.

Step 4: Secondary Market Distribution

The AP (or affiliated market maker) sells the newly created shares on Nasdaq, NYSE Arca, or Cboe BZX to retail and institutional investors. If the ETF was trading at a premium, the act of selling these new shares into the market pushes the price back toward NAV.

What Happens During Extreme Market Conditions

The creation/redemption mechanism works well under normal conditions, but stress scenarios can test its limits.

Massive Inflow Surges

In the weeks following the January 2024 launch, U.S. spot Bitcoin ETFs attracted billions of dollars in daily inflows. The initial AP base was small (four firms for IBIT), and the cash-create model added execution delay. This led to persistent premiums as APs could not create shares fast enough to meet demand. The expansion of the AP roster and the shift to in-kind creation have since improved the system’s capacity to absorb large inflows.

Rapid Redemption Pressure

During sharp Bitcoin selloffs, investors may rush to redeem ETF shares. APs must then sell Bitcoin on the spot market (or receive it in-kind and sell it themselves) to fund redemptions. If multiple funds face simultaneous redemption pressure, the combined selling could amplify downward price movement. This is a form of liquidity risk that is present in any commodity ETF but is magnified by Bitcoin’s relatively thin order books compared to traditional markets.

Custodian Operational Delays

Bitcoin settlement is on-chain and typically finalizes within 10 to 60 minutes. But the operational processes around custodial transfers (moving from cold storage to trading accounts, compliance checks, multi-signature authorization) can take hours. During periods of network congestion, the Bitcoin blockchain itself may add delay through higher fee markets and slower confirmation times.

Institutional Adoption and Settlement Infrastructure

The success of Bitcoin ETFs has accelerated institutional Bitcoin adoption beyond the ETF wrapper itself. Pension funds, endowments, and sovereign wealth funds that cannot hold Bitcoin directly can now gain exposure through a regulated securities product. By mid-2025, IBIT alone held over 700,000 BTC (approximately $76 billion), making BlackRock the custodian of record for more Bitcoin than any publicly known entity except Satoshi Nakamoto’s estimated holdings.

But the ETF mechanism also highlights friction in Bitcoin’s settlement infrastructure. The creation/redemption process requires coordination between traditional securities settlement (DTC, T+1) and Bitcoin’s native settlement (on-chain, variable finality). These two systems operate on different timelines, with different risk profiles, and bridging them requires significant operational overhead.

This is where Layer 2 protocols become relevant. Solutions like Spark offer instant finality for Bitcoin transfers without requiring on-chain confirmation for each transaction. For institutional participants that need to move Bitcoin between custodians, trading desks, and fund vehicles quickly, Layer 2 settlement could reduce the latency and operational complexity that currently characterizes the ETF creation/redemption pipeline. Spark’s FROST-based threshold signing also aligns with the multi-party security models that institutional custodians already employ.

Risks and Limitations of the AP Mechanism

Concentration Risk

Despite expansion, the AP ecosystem for Bitcoin ETFs remains concentrated. A small number of firms (particularly Jane Street, which operates as both AP and market maker across multiple funds) account for a disproportionate share of creation and redemption activity. If a major AP were to withdraw from the market, it could widen spreads and increase premium/discount volatility.

Regulatory Uncertainty

The in-kind model requires APs to handle spot Bitcoin, which raises questions about broker-dealer capital requirements, anti-money laundering obligations, and the regulatory status of Bitcoin itself. While the SEC’s July 2025 approval resolved the immediate permission question, the broader regulatory framework for broker-dealers holding crypto assets continues to evolve under legislation like the GENIUS Act and proposed market structure legislation.

Custodial Concentration

Coinbase Custody serves as the Bitcoin custodian for the majority of U.S. spot Bitcoin ETFs. This creates a single point of operational (though not necessarily security) risk. A prolonged Coinbase outage or regulatory action against Coinbase could disrupt creation and redemption across multiple funds simultaneously. Fidelity’s self-custody approach with FBTC provides some diversification, but the ecosystem would benefit from additional qualified custodians.

What This Means for Bitcoin Infrastructure

The ETF creation/redemption process is fundamentally a settlement problem. APs need to move Bitcoin between entities quickly, reliably, and with clear finality. The current process works but involves multiple intermediaries, variable confirmation times, and operational complexity that would be unnecessary if Bitcoin itself settled instantly.

As the Bitcoin ETF market matures and in-kind transactions become the norm, the demand for faster, more programmable Bitcoin settlement will grow. Institutional participants evaluating the full stack of Bitcoin infrastructure can explore how Layer 2 protocols fit into this picture through the Spark documentation and developer SDK. For a deeper comparison of Bitcoin’s Layer 2 landscape, including how different protocols handle settlement finality, see our dedicated research coverage.

This article is for educational purposes only. It does not constitute financial or investment advice. Bitcoin and Layer 2 protocols involve technical and financial risk. Always do your own research and understand the tradeoffs before using any protocol.