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Bitcoin is often referred to as “digital gold” and one of the superficial similarities between the largest cryptocurrency and the yellow metal is that in their traditional forms, neither offer income.
Whether an investor owns bitcoin on an exchange or in a digital wallet or gold bars, coins or a standard gold exchange traded fund, they will not be receiving coupon payments or dividends. These are capital appreciation assets and the payout comes when the investor sells them, hopefully at a profit. And much like ETFs such as the SPDR Gold Shares (GLD), the spot bitcoin ETFs that came to market in the U.S. last year don’t feature income components.
Give ETF issuers credit. They’ve more rapidly responded to crypto investors’ income demands than they did when regarding gold. The Global X Bitcoin Covered Call ETF (CBOE: BCCC) debuted last week as the latest addition to the bitcoin covered call ETF fray – a growing segment to be sure and one that’s benefiting from younger investors’ enthusiasm for crypto and big yields.
The options market, specifically buy-write strategies, stands as prime opportunity for generating robust levels of alternative income while damping the aforementioned risks. Covered calls, including in fund form, are solid avenues for generating income outside the realms of stocks and bonds. This strategy is increasingly accessible via exchange traded funds, many of which sport big yields and tolerable expense ratios. Plus, the asset class is pertinent in the current environment.
Examining BCCC’s Methodology
One of the primary tradeoffs with covered calls and the related ETFs is that investors are limiting potential upside in exchange for income. The actively managed BCCC attempts to allay related concerns because it writes options against a portion, not all of its portfolio. The underlying security within BCCC is the VanEck Bitcoin ETF (NYSE: HODL).
BCCC’s methodology is important for multiple reasons, including the point that it’s likely to feature lower distributions and yields than competing products, but it’s also likely to capture more of bitcoin’s upside than established competitors.
Those differences are important because while the universe of bitcoin covered call ETFs isn’t yet densely populated, BCCC will be competing with products that have already gained traction with investors and that doesn’t include the plethora of options-based ETFs linked to Michael Saylor’s Strategy (NASDAQ: MSTR) – the largest corporate owner of bitcoin. Volatile as they are, those ETFs are highly popular with retail investors because those funds lob off huge yields.
BCCC takes a page from some of its rivals in that it uses weekly options. That’s important because many of the options-based ETFs with outsized yields, including some bitcoin-related products, deliver weekly distributions. It’s a feature many in the income-hungry retail crowd now expect if not demand. BCCC’s weekly “paychecks” have advantages.
“By writing options week after week, in succession, the fund may be able to generate larger premiums than it would by writing options with longer tenors (time until expiration),” according to Global X research. “Options naturally lose value as they approach their expiration date, and this decay happens more rapidly during the final days before expiration. By repeatedly selling short-term weekly options, rather than longer-term options, the fund can potentially capture this accelerated value decrease more efficiently, allowing it to collect more premiums over time when compared to a strategy using longer-dated options.”
BCCC as a Hedge
In addition to lack of income, one of the other reasons some investors have yet to embrace bitcoin is because the digital currency is volatile. A covered call ETF, such as BCCC, can potentially mitigate some of that turbulence. However, investors should note the premiums collected by BCCC can only limit so much of HODL’s downside if bitcoin slides.
On the other hand, bitcoin’s volatility is an ally to options sellers because that volatility paves the way for higher options premiums, meaning funds like BCCC harvest higher premiums and deliver huge income investors.
Put it this way, one of the products with which BCCC will compete, though not an identical twin to the Global X ETF, has a distribution rate above 107%. That won’t be the case with BCCC because it won’t be writing calls on all of its HOLD position, but the point is bitcoin is conducive to high options premiums and that should enhance BCCC’s income-generating capabilities.
“The same measure of volatility that might promote disinterest in a bitcoin investment is something that may well allow BCCC to procure better option premiums and provide more generous distributions,” adds Global X. “Bitcoin has shown the propensity to operate under these wider levels of volatility, as illustrated by the standard deviation of its daily returns over time relative to some major domestic equity indices.”