Seen a lot of chatter on this related to IBIT in particular and #bitcoin ETFs in general.
There is some amount of misunderstanding (and some truth) based on what I've seen.
This tweet has 1.1 mm views, so will do my best to clarify below 🧵
There is some amount of misunderstanding (and some truth) based on what I've seen.
This tweet has 1.1 mm views, so will do my best to clarify below 🧵
https://twitter.com/TylerDurden/status/1790941726544478602
First need to understand how the account-architecture at Coinbase works.
IBIT has two account types:
1. 'trading account' or "Trading Balance Account"
2. 'custody account' or "Vault Balance"
1. is at Coinbase Prime (in Coinbase, Inc.)
2. is at Coinbase Custody Trust Co., LLC
IBIT has two account types:
1. 'trading account' or "Trading Balance Account"
2. 'custody account' or "Vault Balance"
1. is at Coinbase Prime (in Coinbase, Inc.)
2. is at Coinbase Custody Trust Co., LLC
IBIT also requires that all of their OTC trading counterparties have accounts at Coinbase Prime (trading accounts) in order to do business with IBIT.
Transfers between any 2 'trading balance' accounts are not onchain transactions.
They are not recorded on the Bitcoin blockchain and are internal ledger movements between accounts at Coinbase Prime (which rolls up to Coinbase, Inc.), recorded on the books and records of $COIN.
They are not recorded on the Bitcoin blockchain and are internal ledger movements between accounts at Coinbase Prime (which rolls up to Coinbase, Inc.), recorded on the books and records of $COIN.
Transfers from the 'trading account' to the "Vault Balance" are onchain. This is a movement of corn from Coinbase Inc. and into cold storage custody at Coinbase Custody Trust Company, LLC
OK, so. The way that IBIT is set up, they either (a) trade with an OTC CP or (b) trade directly with the "Prime Execution Agent" (which is coinbase prime).
The way $BITB does it is using OTC CPs (but without the "trading balance" accounts.
The way $BITB does it is using OTC CPs (but without the "trading balance" accounts.
https://x.com/teddyfuse/status/1775556676021592500
IBIT disclosed that, initially, they expected to do all of their trading using the Prime Execution Agent.
The snippet that @TylerDurden posted is one part of explaining how this trade execution model works.
It is different than the OTC model I posted above...
The snippet that @TylerDurden posted is one part of explaining how this trade execution model works.
It is different than the OTC model I posted above...
@TylerDurden In this model (call it the 'Prime Execution Model') the ETF is going to buy corn from Coinbase Prime as its execution agent, or trading counterparty.
On the day the ETF gets a creation order, it does not have cash in its account to buy the bitcoin it needs to acquire.
On the day the ETF gets a creation order, it does not have cash in its account to buy the bitcoin it needs to acquire.
@TylerDurden Since the account needs cash to fund the account to buy bitcoin, it borrows it from the Prime Execution Agent for a short period of time to fund the purchase.
This cash borrowing is described in the S-1 as being in the form of "Trade Credits."
This cash borrowing is described in the S-1 as being in the form of "Trade Credits."
@TylerDurden The account borrows this cash in the form of Trade Credits to fund the account and buy the corn. Coinbase Prime deposits the cash into the account, and then the ETF uses that cash to buy bitcoin from Coinbase Prime.
This specific transaction is not onchain.
This specific transaction is not onchain.
@TylerDurden There's no shorting of any bitcoin going on here.
It's: (a) get creation order (b) borrow cash in form of trade credits (c) buy bitcoin (d) exchange cash for btc (e) btc settles into trading balance (offchain).
It's: (a) get creation order (b) borrow cash in form of trade credits (c) buy bitcoin (d) exchange cash for btc (e) btc settles into trading balance (offchain).
@TylerDurden In a regular end-of-day sweep process, the bitcoin that was acquired in the step above gets transferred from the trading account to the "Vault Balance."
^^ this transaction is on-chain ^^ remember: transactions from the Prime entity to the Custody entity are onchain.
^^ this transaction is on-chain ^^ remember: transactions from the Prime entity to the Custody entity are onchain.
@TylerDurden Once the AP that started the process delivers cash to the ETF (which I believe happens on T+1 but we'd need to ask Blackrock to be sure, could be T2) IBIT takes the cash & repays the loan to Coinbase (cash in the form of trade credits) and that leg of the txn is complete.
@TylerDurden Reminder! You can DYOR and look up all of this stuff by scrolling through how to access the S-1s in this thread, and I'm happy to post on questions that arise from your research here if you have them
https://x.com/teddyfuse/status/1771655472560353281
@TylerDurden all of that said, my preference (and our preference at Bitwise) is for onchain transactions and maximum transparency.
BITB offers an unprecedented level of transparency and we would like to see a world where all other issuers follow suit
BITB offers an unprecedented level of transparency and we would like to see a world where all other issuers follow suit
https://x.com/teddyfuse/status/1770110144308760806
I linked together all of my longer threads on #bitcoin ETF mechanics here in case helpful.
Might be worth it to read through how the AP process works (also in here) to get a sense for that process to put the two together and see the whole system.
Might be worth it to read through how the AP process works (also in here) to get a sense for that process to put the two together and see the whole system.
https://x.com/teddyfuse/status/1783487046486573416
Hope this helps clarify! If you have any other q's @ me and I'll try to get to them.
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