Risk-averse investing in cryptocurrencies may sound contradictory, but some U.S. exchange-traded fund providers have plans to let investors make just such investments.
Four asset management companies have applied to U.S. regulators to create an ETF that would invest in Bitcoin but use derivatives to minimize or completely prevent potential losses.
Todd Rosenbluth, head of research at consultancy TMX VettaFi, said, “Given Bitcoin's meteoric rise this year, many investors regret missing out on their investments because they were nervous about the cryptocurrency's volatility.'' I would have done so,” he said. “These pending downside protection ETFs will allow more people to add Bitcoin exposure to their portfolios in a risk-conscious manner.”
The series of filings was prompted by the listing earlier this month of options contracts for some of the spot Bitcoin ETFs, which launched in the U.S. in January and currently hold about $100 billion in assets. .
The arrival of exchange-traded options will allow ETF providers to incorporate Bitcoin into both buffered/managed floor and covered call strategies. These are two very popular concepts that use derivatives to reduce investors' risk and forego some of their potential profits.
The filing has the potential to offer a variety of options to those looking to cautiously enter the world of cryptocurrencies.
Some are buffered ETFs (see description box below), a format that has exploded in popularity in recent years, with assets soaring from almost nothing to $47 billion in 2019, according to Morningstar.
Calamos Investments has filed four managed floor ETFs (see box below).
First Trust Portfolios filed for a 15% floor ETF and a buffer ETF designed to protect the first 30% of losses.
The Innovators ETF seeks a 10% buffer product that runs for three months. In a separate development, the company has also filed for a three-month managed floor ETF with a 20% “participation rate” (see box below).
“If people are going to allocate 1 to 2 percent; [of their portfolio to bitcoin] They don't necessarily want to put a cap on it. Graham Day, chief investment officer of the Innovators ETF, said this is because if Bitcoin were to rise 300%, it would need to hold most of it for it to have a meaningful impact on its portfolio. He said he was in a similar situation.
Day believed that removing the risk of extreme losses would make Bitcoin even more attractive to advisors.
“If you look at the quarters where Bitcoin has fallen, the losses can be quite wide ranging, 50, 60, 70 percent. Investment advisors have been looking for ways to make Bitcoin more investable for their clients. This will allow for smoother operations and greater allocation,” Day said, adding that the company is also applying for a risk-on leveraged ETF and an inverse Bitcoin ETF.
To round out the filing, Grayscale Investments plans to launch a Covered Call Bitcoin ETF, which will sell call options on Spot Bitcoin ETFs. This reduces the potential price increase if Bitcoin goes up, but in return you receive regular premium income.
One complication for all applications is the 25,000 position limit for each option in the underlying spot Bitcoin ETF. For example, given the current price of the iShares Bitcoin Trust ETF (IBIT) at $55, this means that no risk-managed ETF can hold $137.5 million worth of options on IBIT. means.
ETFs can't lock out new investors, which can create difficulties if they prove popular.
But while each ETF could potentially hold options written within the range of the underlying ETF, Day said the options on the Chicago Options Exchange-created Bitcoin index could be much larger. He was confident that the company would be listed as early as next week, with high position limits in place. .
“This will significantly increase our ability to structure these products,” Day said, adding that he expects position limits to be increased if demand is strong. “The options market is still in its infancy.”
Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, sees the development of risk-managed Bitcoin ETFs as “inevitable.”
“The financial industry will do what the financial industry does. As long as the market can tolerate it, things will become overcomplicated,” he said. “When you have a new asset class that is very popular, this is a natural step.”
Lamont believed that such a product might have niche uses, but was not convinced that it needed to be widely available.
“If you don't want to take on the risk and return characteristics of an asset class, shouldn't you be exposed to that asset class? Or buy less,” he said.
“There is potential for a big upside.” [to crypto]. You want to know that, so why pay for this to limit upside? ”
But Rosenbluth was more optimistic. “These funds, like other buffered or structured protection ETFs, don't appeal to risk-on people, but they can fit into many portfolios. “I think there are a lot of people out there who don't have it and are worried they're missing out,” he says.
If approved by the Securities and Exchange Commission, the ETF could go public in February.
An overview of some of the proposed risk limiting ideas
Buffer ETFs purchase options that provide an initial layer of downside protection (say, 15%) that protects investors from losses up to this level within a specified period of time (say, one year). Investors may incur losses if this amount is exceeded. This protection is paid for by selling the option, which means the investor misses out on profits above the pre-set limit.
Given Bitcoin's inherent volatility, some applications are a spin on this approach, known as managed floor ETFs. In this form, investors are exposed to losses up to a certain point (say 20 percent), but are protected beyond that point.
Calamos Investments has filed four managed floor ETFs. Third, limit potential losses to 20%, 10%, or zero in a year (excluding fees and expenses). Fourth, it provides full downside protection for six months. The greater the protection, the lower the potential upside gain.
Instead of capping potential profits, Innovators ETF's 20% three-month managed floor ETF offers a “participation rate,” where investors earn a pre-set percentage of Bitcoin's profits during the quarter. You will receive it.
