The largest American exchange-traded fund issuers are simplifying the transition for institutional Bitcoin holders from self-custody to structured financial products. Investors are gaining the ability to exchange the leading cryptocurrency directly for ETF shares without first selling their digital assets for fiat currency. The in-kind creation mechanism is becoming increasingly accessible and standardized across the market, and BlackRock has already processed more than $5 billion in such conversions through its Bitcoin ETF under the ticker IBIT, Bloomberg reports.
Until recently, such transactions were predominantly bespoke arrangements available only to the largest institutional investors. However, after U.S. regulators approved the in-kind ETF creation mechanism, the practice has been spreading rapidly across the market. In July 2026, BlackRock lowered the minimum size for such an operation from $25 million to $1 million. Under this mechanism, an investor transfers Bitcoin directly to the fund and receives a corresponding number of ETF shares in return. The technical execution of the transaction is handled by an authorized participant or market maker acting as an intermediary between the cryptocurrency holder and the fund issuer.
This mechanism offers large cryptocurrency holders several structural advantages. First, the investor transfers the management of private keys and crypto wallets to a professional custodian within a traditional financial product. Second, the investor retains economic exposure to Bitcoin through a regulated exchange-traded instrument. Third, depending on the investor's specific circumstances and applicable tax legislation, the exchange of cryptocurrency for ETF shares could potentially be treated as a transaction that does not require the immediate recognition of a taxable event, unlike a direct sale of Bitcoin for cash. However, the final tax characterization of each specific transaction requires individual consultation with qualified specialists. Demand for such services is also supported by the objective risks associated with self-custody of large cryptocurrency holdings, including incidents involving custodial services and operational security concerns.
"This will continue to grow because we continue to expand access. People see what is happening in the outside world — kidnappings, ransoms, custody problems — and that motivates them to move all or part of their assets," said BlackRock's Head of Digital Assets Robbie Mitchnick, commenting on market trends.
Against the backdrop of recovering demand in the cryptocurrency market, interest in the in-kind mechanism is intensifying. Bitcoin rose above the $79,000 mark during the past week, and U.S. spot ETFs recorded their largest weekly capital inflow of 2026 at $1.92 billion. Combined, Bitcoin and Ethereum ETFs attracted $2.62 billion over the reporting period. According to Robbie Mitchnick, more than $5 billion in conversions of the leading cryptocurrency into fund shares have already passed through IBIT — the largest U.S. spot Bitcoin ETF. For comparison, in October of last year this figure stood at more than $3 billion, indicating substantial growth in institutional participant activity.
However, the process is not yet fully automated. An operation can take more than a week and requires the mandatory involvement of market makers and authorized participants for technical execution. Bitwise, another major cryptocurrency ETF issuer, initially set the minimum size for the first such transaction at $100 million. That threshold was subsequently lowered to $50 million and currently stands at around $3 million. "The whole process is still bespoke — from introducing the client to the market maker to working with an advisor — but it is becoming more standardized," noted Bitwise Chief Investment Officer Matt Hougan. In his assessment, whereas operations used to proceed relatively slowly, they are now increasingly resembling a standardized process and may eventually become essentially a one-click operation.
Gradually, in-kind creation conversions are moving beyond Bitcoin and expanding to other digital assets. Grayscale and VanEck use this mechanism for Ethereum-based products, while Bitwise conducts similar operations with Ethereum and Solana as well. At Grayscale, the share of gross ETF creations conducted via the in-kind mechanism has grown substantially over several months. In March 2026, it stood at 28% for Bitcoin products and 57% for Ethereum products; by June these figures had reached 62% and 63% respectively, signaling a fundamental shift in the structure of the primary ETF market.
At Morgan Stanley, in-kind conversions account for approximately 5–7% of the assets in its spot Bitcoin ETF under the ticker MSBT, which has total assets of around $560 million. At 21Shares, the average size of transactions completed over the past three months was approximately $5 million, reflecting diversification of the client base by deal size. The primary infrastructure constraint remains the need for intermediaries willing to work directly with cryptocurrency and handle the technical side of the conversion. However, as the number of such participants grows, minimum transaction sizes may continue to decline, opening the mechanism to an ever-wider range of institutional investors.
"Today this crypto-native use case is working in full force. We are also increasingly seeing ETF market makers utilizing the in-kind option, returning to the original and often more efficient way of operating ETP," noted Grayscale Head of Trading and Capital Markets Krista Lynch, highlighting the evolution of market infrastructure.
***
This material is prepared for informational purposes only and does not constitute financial advice or a recommendation.