Bitcoin ETFs don't buy BTC on the open market for every share sold. Instead, Authorized Participants (APs) — typically large broker-dealers like Jane Street, Virtu, or JPMorgan — deliver BTC to the issuer in exchange for Creation Units (typically 5,000–10,000 shares), then sell those shares to the public. Redemptions work in reverse.

This two-tier market (primary: AP↔issuer; secondary: AP↔public) is what keeps ETF price tethered to NAV. When the ETF trades at a premium, APs create shares and sell them, pushing price down. When it trades at a discount, APs buy shares and redeem for BTC, pushing price up.

Cash-create vs. in-kind: Most spot BTC ETFs (IBIT, FBTC) use cash creations — APs wire USD, issuer buys BTC via a trading desk. This adds a 1-day settlement lag and slippage.
In-kind (rare in US spot BTC): AP delivers actual BTC. Faster, cheaper, but requires the AP to already hold BTC.
Arb spread: Typically 5–20 bps on liquid ETFs, widening to 50+ bps in stress (e.g., March 2020 for gold ETFs).

Flow	AP Action	Market Effect
ETF at premium	Create shares, sell	Price ↓ toward NAV
ETF at discount	Buy shares, redeem	Price ↑ toward NAV
Heavy inflows	Create, buy BTC	Spot BTC ↑