BlackRock’s Bitcoin Income Fund Is Paying an Eye-Popping 12% Yield Right Now. Is It Too Risky?

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BlackRock’s newly created iShares Bitcoin Premium Income ETF (BITA) offers an estimated annual yield of roughly 12.4% (paid monthly) and may provide bitcoin investors with an attractive way to generate income. This new exchange-traded fund (“ETF”) eliminates one of the major downsides for bitcoin holders – the fact that it doesn’t generate dividends.

The fund uses a well-known options strategy known as a covered call to generate income, which limits some of the potential upside of investing in bitcoin.

Here’s how the covered call works at the new Bitcoin Premium Income ETF:

• The fund owns shares of BlackRock’s sister fund, the iShares Bitcoin Trust ETF (IBIT), which closely tracks the spot price of bitcoin and does not pay a dividend.

• The fund then sells call options on the sister fund to generate income, capping their upside for a specified period of time (i.e., until the option’s expiration).

• The options premium generated from selling the call options is distributed to investors.

Covered calls produce income today in exchange for the promise that the new fund will deliver shares of the sister fund if bitcoin’s price rises above the call’s strike price by expiration. As long as bitcoin stays below the call’s strike price at expiration, the new fund keeps the full premium.

However, if bitcoin rises above the strike price at expiration, the new fund’s investors miss out on the upside they would have otherwise earned if they owned the iShares Bitcoin Trust ETF or another of the best bitcoin ETFs.

Bitcoin’s history of high volatility plays in favor of an options strategy, too. The elevated volatility means option sellers can charge a large premium.

Based on the use of this options-based strategy, the fund is likely to perform best for investors when bitcoin’s price is flat or rising moderately. Investors can enjoy the dividends produced from the fund as well as some moderate upside in bitcoin’s price – and the cash payout helps cushion the downside, too.

Risks of the iShares Bitcoin Premium Income ETF

While this iShares fund reduces some of the risks of investing in bitcoin, it doesn’t eliminate all of them. Here are some of the more prominent risks:

• Volatility: Any bitcoin fund will retain some level of volatility, since bitcoin itself fluctuates so wildly. This fund may mitigate some of the volatility when bitcoin rises, however.

• Capped upside: Because it uses covered calls, this fund will likely offer lower returns in scenarios where bitcoin is rising rapidly. If bitcoin rises too quickly, the fund may need to close its call positions at a loss, resulting in lower gains when bitcoin is climbing.

• Exposed to underlying bitcoin losses: Like a spot bitcoin fund, this fund still exposes investors to losses when the cryptocurrency declines, though its high yield helps offset the loss.

• No intrinsic value in bitcoin: Bitcoin has no intrinsic value, and its price is held up only by traders who believe they can sell it to other traders in the future for more money. This risk is not specific to this BlackRock fund but rather to all funds investing in bitcoin.

• Fluctuating yield: The fund’s yield will fluctuate based on premiums received from the covered call strategy. So, this fund won’t likely pay out a steadily rising stream of income over time, unlike the best dividend ETFs are likely to do.

Is BlackRock’s New Bitcoin ETF a Buy?

Whether the new BlackRock bitcoin ETF is a buy depends on the kind of exposure you’re trying to achieve with your bitcoin investment. The new fund’s strategy may significantly alter the payoffs from any given change in bitcoin’s price.

For example:

• If you think bitcoin is set to rise quickly, it might make more sense to go with BlackRock’s original spot bitcoin ETF, the iShares Bitcoin Trust. It will likely offer the most upside if bitcoin is rising quickly. However, investors bear the full downside if bitcoin falls.

• If you think bitcoin is likely to rise more moderately or even trade flattish, then the Bitcoin Premium Income ETF may be a better fit. Effectively, it trades some potential upside in bitcoin for income today, which can even help offset some modest declines in bitcoin. In short, it may help make bitcoin investing less volatile overall.

So, your expectations for bitcoin’s performance will likely shape your preference here.

Also worth noting is the difference in expense ratio. As noted, this bitcoin income fund charges an expense ratio of 0.65%, compared to the spot bitcoin fund’s 0.25%. In practical terms, that means paying $65 annually for every $10,000 invested, as opposed to $25. For short-term traders, the difference is likely immaterial. Buy-and-hold types may want to pay attention, though.

Investors will need to pay taxes on income distributed from the new fund, but the tax treatment is likely to be more complex than the traditional Form 1099 statements. BlackRock will issue a K-1 form for income from the fund, a form that’s used to report income from partnerships. It’s more complex to deal with than the usual dividend statement, so it may require professional advice.

The Bitcoin Premium Income ETF may make the most sense for those who are looking to generate income and aren’t trying to maximize their crypto gains. Still, those who are long-term bullish on bitcoin may find it attractive to generate income, particularly when crypto hits an inevitable down period.

Regards,

James Royal, PhD

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