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Buying a spot crypto ETF looks simple. An investor opens a brokerage account, buys shares and gets exposure to Bitcoin, XRP or Ethereum without touching a crypto wallet.
Behind that trade, however, is a much more complicated process involving authorized participants, market makers, liquidity providers and institutional crypto custodians.
And one common assumption is wrong: when you buy $1,000 of a Bitcoin ETF, the fund does not necessarily rush out and buy exactly $1,000 of Bitcoin because of your individual trade.
So how does the crypto actually get into the ETF?
Your ETF Purchase Doesn't Go Straight to Bitcoin
Most investors buy and sell ETF shares on an exchange from other market participants.
If you purchase shares of a Bitcoin ETF, your money usually goes to whoever sold those ETF shares—not directly to the fund manager.
The underlying crypto becomes relevant when demand causes the ETF's share supply to become insufficient or pushes its market price away from the value of the assets it holds.
That's where authorized participants (APs) enter the picture.
These are large financial institutions permitted to create and redeem large blocks of ETF shares known as baskets. BlackRock's Bitcoin and Ethereum products, for example, restrict basket creations and redemptions to authorized participants.
Cash vs In-Kind: Two Ways Crypto Enters an ETF
There are two major creation mechanisms.
Under a cash creation, an authorized participant provides dollars. The trust then arranges for the corresponding Bitcoin, Ethereum or XRP to be purchased through institutional trading counterparties or liquidity providers and placed with its custodian.
Under an in-kind creation, the process can be more direct: the authorized participant or its designated party delivers the cryptocurrency itself and receives newly created ETF shares in return.
The SEC originally required spot Bitcoin and Ethereum products to operate with cash creations and redemptions. In July 2025, however, it approved in-kind creations and redemptions for crypto ETPs, bringing their structure closer to traditional commodity products such as gold ETFs.
How Bitcoin and Ethereum ETFs Buy Crypto
For a cash creation, a Bitcoin ETF can receive cash and use trading counterparties to convert that money into BTC.
BlackRock's structure, for example, allows its trust to transact with approved Bitcoin counterparties or execute through Coinbase Prime. The Bitcoin is then allocated to the trust's custody account.
Ethereum works similarly. Authorized participants can create baskets using cash or ether, depending on the product's available creation mechanism.
This also helps explain why Bitcoin ETF inflows can influence BTC prices. Sustained net creations can ultimately produce additional demand for the underlying asset.
But ETF inflows should not be interpreted as millions of retail investors directly placing Bitcoin purchase orders.
What About XRP ETFs?
XRP products use broadly similar machinery, although the exact process varies between funds.
Some XRP trusts currently use cash orders. In that structure, an authorized participant supplies cash and a liquidity provider obtains the required XRP for the trust. Other XRP funds permit creations using XRP and/or cash.
One XRP fund's SEC filing describes the in-kind process particularly clearly: an authorized participant can deliver XRP through an onchain XRP Network transaction to the trust's custody account, after which ETF shares are credited to the participant.
That means growing institutional demand can ultimately translate into actual XRP being held by ETF vehicles.
This is why recent XRP ETF inflows have attracted so much attention, particularly when XRP funds attract capital while Bitcoin products experience withdrawals.
Who Actually Holds the Crypto?
Usually not the ETF investor.
The underlying BTC, ETH or XRP is held by an institutional custodian on behalf of the trust. Investors own ETF shares representing economic exposure to those assets, rather than coins sitting in their personal wallets.
That distinction also explains why spot ETFs are different from holding cryptocurrency directly. ETF investors gain brokerage convenience and regulated market infrastructure, but they generally cannot withdraw the underlying Bitcoin or XRP to their own wallet.
What Happens When Investors Sell?
Selling an ETF share does not automatically force the fund to sell crypto either.
Another investor may simply buy the share.
Actual redemptions occur when authorized participants return large baskets of shares to the trust. Depending on the product, the fund can then sell crypto and return cash or transfer the underlying cryptocurrency in-kind.
That is the key to understanding crypto ETF flows.
