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The first derivatives-based strategy to piggyback on a U.S.-listed Bitcoin exchange-traded fund has begun trading as experimentation in the fund industry accelerates at breakneck speed.
Round Hill Investments’ Bitcoin Covered Call ETF (YBTC) is designed to generate yield from Bitcoin, and is similar to other covered calls such as JPMorgan’s hugely popular Equity Premium Income ETF (JEPI). – Similar to a call strategy, the investor gives up some of the potential market profit in return.
“This is a unique intersection of two highly sought-after areas: income generation and cryptocurrencies,” said David Mazza, chief strategy officer at Round Hill.
Industry insiders say YBTC is one of the first in an expected wave of new ETF launches, following the recent approval of a U.S.-listed “spot” Bitcoin ETF that invests directly in the cryptocurrency. .
“We are at the beginning, not the end, of crypto-related ETF innovation. The door is open to provide the public with strategies that provide exposure to Bitcoin in a risk-on and risk-off manner,” says the consultant. said Todd Rosenbluth, director of research for the company VettaFi.
Cryptocurrency giant Grayscale Investments has announced the launch of the Bitcoin Trust Covered Call ETF (GBTC), which is based on options from the $23.5 billion Bitcoin Trust ETF (GBTC), the world’s largest cryptocurrency fund. An application was filed with the Trade Commission.
Other new ETFs in development include vehicles proposed by ProShares and Direxion, which have filed to launch five ETFs offering leveraged and inverse exposure to Bitcoin, respectively, and have already It amplifies the fluctuations in stable assets.
Covered call ETFs are designed to do the opposite: reduce risk. They work by selling out-of-the-money call options, allowing the buyer to buy the underlying asset (in this case Bitcoin) at a set price and fixed expiration date. If Bitcoin rises enough to trigger this option, it would limit the upside of returns for investors, who could underperform the digital asset’s rise.
However, ETFs pocket the premium income from option writing no matter what happens, reducing the burden on investors if the option is exercised, and putting the investor out if the option is not exercised. Contribute to performance.
Mazza argued that Bitcoin’s high volatility means it is ideal for this approach.
“One of the biggest things when you combine cryptocurrencies, especially Bitcoin, with a covered call strategy is the potential for higher income,” he said.
“Bitcoin is highly volatile as a commodity, so if you decide to sell it to cap the upside, you have the advantage of being paid a fairly attractive premium in return. Potentially higher yields than stocks.” .”
Since Bitcoin has no yield, this “artificial” source of income may be welcomed by some investors. Because “mining” of new coins is done on a “proof of work” basis.
Many other cryptocurrencies, such as Ether, Cardano, and Polkadot, use a “proof of stake” mechanism instead. This allows investors to lock up their crypto assets for a set period of time to support blockchain operations. In return, they earn more cryptocurrencies, effectively generating income.
“Being able to invest in GBTC and have passive long-term exposure to Bitcoin while earning additional income and yield is very attractive,” said Grayscale CEO Michael Sonnenshein. Ta.
Rosenbluth highlighted the potential market for covered call ETFs. “The biggest concern we hear from advisors about Bitcoin is that it is volatile. So these products, with downside protection and income generation, alleviate some of those concerns. “It will help us,” Rosenbluth said.
But the opposite could also be true, he noted. “On the contrary, many people want to access Bitcoin to take advantage of its volatility. They prefer a high-risk, high-reward experience.”
Brian Armor, director of North American passive strategies research at Morningstar, also noted the appeal of volatility, saying, “I don’t understand the desire for a Bitcoin covered call ETF.”
“Volatility is the reason investors buy Bitcoin, and capping the upside seems antithetical to that investment thesis,” Armor said. He added that covered call ETFs “are exposed to Bitcoin tail risk, and if Bitcoin craters like it did in 2022, investors could still lose a significant amount of their investment.” I don’t think these are useful products for most investors. ”
Until this month, Grayscale’s GBTC was a private trust traded on the over-the-counter market. Therefore, the option was not listed. Sonnenschein hinted that this situation is changing.
“We are fully committed to growing GBTC and the ecosystem around it,” he said. “There is a tremendous amount of investor interest and excitement about the development of the options ecosystem.”
Roundhill does not have its own spot Bitcoin ETF, instead basing its options on the $1.8 billion ProShares Bitcoin Strategy ETF (BITO), by far the largest Bitcoin futures ETF.
This is because, although several exchanges have applied to the SEC to launch spot ETFs, options have not yet been listed on the new spot ETFs.
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“We are closely monitoring what happens with spot ETFs,” Mazza said, adding that YBTC has the freedom to “pivot to where the biggest options market is.”
YBTC fees are 95 basis points. Grayscale has not yet disclosed details of its proposed ETF.
Rosenbluth believed that even more Bitcoin exposure was likely to occur in the United States.
One possibility is a buffered ETF that uses options to provide some downside protection. Other vehicles were launched late last year, including the Cyber Hornet S&P 500 and the Bitcoin 75/25 Strategy ETF (ZZZ), which provides exposure to Bitcoin futures and Wall Street stocks.
“It seems inevitable that we will see more asset allocation approaches that include Bitcoin exposure in their packages,” Rosenbluth said.