
Summary The Purpose Bitcoin Yield ETF (BTCY:CA) generates income by writing call options on Bitcoin, sacrificing some upside for current yield. This strategy suits investors seeking income from Bitcoin, but not those focused on maximizing capital appreciation from BTC's price growth. BTCY:CA offers a high distribution yield (around 17.7%), but comes with significant volatility and liquidity concerns, including a wide bid/ask spread. Personally, I find giving up Bitcoin's upside for income unconvincing, but this ETF may appeal to a niche group of income-focused investors. Instrument designs matter How an instrument is designed tells us what its purpose is. A proper examination of that design - and purpose - will also tell us whether it meets, or is likely to meet, our own goals. This is all as true of the design of an investment product as it is of anything else. So, before using an investment instrument we should grasp how it works, the design, to see whether it matches up with our own investing goals. Purpose Bitcoin Yield ETF - ETF Units ( BTCY:CA ) This is an interesting idea to me. Interesting in that it's interesting that is, not in the sense that I recommend it as an investment. I also don't not recommend it. There will be a small subset of investors for whom this is an appropriate instrument. The question - all about the instrument design - is in finding out whether this is true of us as individual investors. The aim and the game here is to produce an income from Bitcoin. Not just a buy and hold strategy looking for capital gains, but to produce an ongoing income. Given that there are very few - if any - bitcoin bonds out there and so on this would seem to be a difficult task. But given that we've now got options markets in Bitcoin this is possible. A holder of Bitcoin could write call options. That would mean giving up the upside on BTC price appreciation in return for income now. Which is the strategy being employed here. And, well, that's interesting. It's one of those things that would definitely meet the desires of people who hold a particular and specific view of BTC itself. But I'd imagine a pretty limited number of people hit that profile. The details So the first thing is that this is in Canadian dollars and quoted in Canada. My assumption here is that the Canadian exchanges allowed such novel instruments earlier than the SEC in the US did. Well, no, I'm certain of that in fact as we've only just recovered from the US allowing straight BTC ETFs let alone more complex than that. BTCY:CA has been running since 2021. It's also true that there are US ETFs arriving - Global X and Grayscale are recent -ish arrivals in this space - using the same basic strategy. One advantage of looking at BTCY:CA is that there's that track record. There is also a Canadian quoted but USD version, BTCY.U:CA . In one sense looking at the C$ instrument will mean it's of interest only to Canadian investors. On the other hand as the longest running - so far as I know, always something open to contention - ETF following this strategy we gain an insight into the idea not just the implementation of it. The strategy itself is simple enough. We have options markets in BTC now. This requires that people be willing to write options on BTC. Hmm, a little more - an option is the right, but not the necessity (if it's a "necessity" then it's a future) to buy or sell something at some point in the future at a price decided now. In order to fix that future price now a premium is paid. Those who buy options - I get to buy Bitcoin in 30 days at today's price, say - buy options. Those who sell those options - they agree to sell BTC at today's price in 30 days - are said to "write" options. Options also come in two types, put - the buyer is betting the price will fall, so gets to sell at today's price in 30 days - and call - betting on a price rise and being able to buy at today's price in 30 days. If there's going to be the possibility of buying options then there must be people who write them. The natural writers of call options are those who hold the asset. They gain the income of the premium at the risk of having to deliver the asset when the price rises. The other thing we need to know is that the premium rises when the volatility of the price of the asset does. People charge more when prices bounce about because more price bouncing makes it more likely they'll have to deliver the asset, right? So writing call options on a volatile asset can produce very good returns - high premiums. But rather with the hope that the price never does move enough to mean that the option is exercised and you hve to deliver the asset. Because that would mean that the price ha risen strongly and you, the holder of the asset don't get that price rise because you're already sold the upside by writing the call option. That is, what an option writer wants is high perceived volatility, thus high options premium, without the volatility actually happening. A difficult trick that. We also need to note that none of this protects against price declines. Because the fund holds the asset a price decline happens anyway. So the perfect asset to write call options upon is one with high perceived future volatility but whose price doesn't change in the future. Again, a difficult trick. But of course the actual strategy is that the return from the options premium is sufficient to cover those risks - which it theoretically could be of course. So, how does it work out? The first thing is to see how the profit works out with price movements: BTCY price performance (Purpose) If BTC falls in value then of course the fund - which owns BTC - falls in value. If BTC rises strongly in value then the buyers of the options written exercise and the fund loses out on the price appreciation. It's in that sweet spot, where an option premium can be charged but the price doesn't rise that the strategy really pays off. Of course, as we know BTC can decline: BTC price (Purpose) We can see periods there where the charge for an options premium would have worked very well, others where giving up the upside would be painful. Everything is choices, no? The fund's capital value has itself been, shall we say, volatile ? BTCY price (Purpose) More details The fund charges 1.29% which is not cheap. But given the volatility of the investment proposition itself this is not, I think, a particularly important point. The average bid/ask spread, of 0.64%, that would worry a little more. That's not under the control of the investment managers of course but it does show there's no great liquidity here (spreads and liquidity are intimately connected). Av dealing volume is a little over 100 k units. So, yes, we can move in and out of likely retail sized investments but at that price of the spread. The big thing though The big and interesting point is, well, given all these risks and problems - carrying the capital downside, giving up the capital gain upside - what's the end result? Sure, sure, we have to recall that they're not writing options on the entire holding of BTC. They have the right to do so on 10 to 50% of the holding. So, some of that capital upside still remains. Also, they're not, in fact, holding BTC. They're holding their own ETF which does hold BTC. Which is fair enough, the capital appreciation will feed through and so on. They can sell the ETF to meet option deliveries. There's nothing wrong with this although 1.29% looks a bit cheeky for that - they currently hold 8 options positions so it's not like expenses are truly high. But all of that is quibbling. The real issue here - and it will be much the same for the US funds now opening - is is the basic strategy a good idea? To repeat what that strategy is. To take the whole downside of BTC valuations, give up the upside, in return for an income now by writing options. Yes, I know giving up the upside is only on that portion of the holding that options are written upon. And, well, I'm not sure. In fact, it's something that is up to the individual investor. For the distribution is significant. Here at Seeking Alpha it's at 17.70% . Which is, you know, pretty darn good. On the other hand : BTCY return (Purpose) Is 17% - OK, 18% - worth being in such a volatile asset while also giving up some to all of the upside? That's not a decision that I can make for anyone else. Why I'm wrong In the analysis of what's being done I don't think I am. In my opinion which follows of course I can be. But opinions are just that, opinions. And it's an opinion about the value to us as investors. My opinion This doesn't convince me. I grasp, wholly, the idea. We're holding an asset that produces no income. So, let us write covered options on it in order to gain income. Given the volatility of the asset, BTC, those options premiums generate a very decent income. Yet as far as I am concerned the point of BTC is to hold for the upside. So trading that upside away for an income now, well, it doesn't really work for me. But that is me - no doubt others will have different options.