How To Extract Income From Bitcoin

Despite an age gap that spans thousands of years, bitcoin is often compared to gold. As many advisors and clients already know, the largest cryptocurrency is known as “digital gold.”

While the bitcoin/gold debate isn’t likely to wane anytime soon, the two assets have at least one thing in common: neither delivers any income to investors, meaning those holding either are solely dependent on capital appreciation. That’s right bitcoin, gold and most of the related funds feature no dividends or interest payments.

“They don’t reproduce, they can’t send you a check, they can’t do anything,” Warren Buffet said of digital currencies in a 2020 CNBC interview. “And what you hope is that somebody else comes along and pays you more money for them later on, but then that person’s got the problem.”

He’s long held a similar disdain for gold, excoriating the lack of dividends and asset-level production associated with the yellow metal. However, with the landscape of cryptocurrency exchange traded funds evolving, it’s now possible to generate income with bitcoin.

Bitcoin Meets Covered Call ETFs

On Jan. 18, just a week after the debut of the first US-listed spot bitcoin ETFs, the Roundhill Bitcoin Covered Call Strategy ETF (YBTC) came to market. As its name implies, the actively managed YBTC combines covered calls with bitcoin exposure, providing end users with the first income-based ETF play on the largest cryptocurrency.

YBTC seeks to offer investors exposure to bitcoin, the world's largest cryptocurrency by market capitalization,” according to a statement issued by Roundhill Investments. “The Fund employs a covered call strategy on bitcoin ETFs, designed to generate monthly income while providing investors with exposure to the price movements of bitcoin (subject to an upside cap). Historically, bitcoin has exhibited significant volatility, which may allow for the Fund to generate significant options income from its call selling strategy. In turn, the Fund seeks to provide current income to shareholders.”

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.

Said another way, YBTC could be a prime avenue for getting clients, particularly those in younger demographics, excited about income while showing clients that the advisor is proficient in new asset classes.

YBTC Could Be Credible Gold Rival

For clients with a high level of risk tolerance, traditional bitcoin exposure or the new spot ETFs are likely the preferred assets.

However, YBTC could be a viable alternative for crypto-curious and gold-enthused clients.

“Similar to gold, bitcoin stands out as an asset that does not yield operating profits or cash flows, presenting a unique challenge for income-focused investors. Traditionally, this gap has led to the popularity of on-chain strategies such as staking for crypto assets like Ether. Meanwhile, YBTC overlays a covered call strategy on bitcoin to allow for investors to retain upside to bitcoin while addressing needs for current income,” concludes Roundhill.

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