BTCI: Earning Yields From Bitcoin Without A Bull Thesis

Summary BTCI lets you earn monthly income from Bitcoin exposure without needing a bullish thesis, using covered call and spread strategies on partial spot and synthetic holdings. Holds ~25% in spot Bitcoin ETP and remaining in futures/synthetic positions for tax efficiency and simplified 1099 filing—no K-1s, and capital gains are internally handled. Upside is only partially capped via call spreads, and BTCI offers some drawdown protection and lower volatility, suitable for neutral-to-mildly-bearish market views. Compared to similar funds like YBTC or YBIT, BTCI tracks Bitcoin more closely, offers better long-term upside potential, and hasn’t compromised NAV with aggressive payouts. I am not a bitcoin expert. My analysis of the NEOS Bitcoin High Income ETF ( BTCI ) will be purely from an agnostic income generation strategy perspective. Which is fair because if I were to have a thesis on bitcoin, I would play bitcoins directly. The reason I evaluate BTCI is because I am seeking income. Of course there are tactical uses of BTCI that could come up which requires view on the underlying’s next move. Those general characteristics of the ETF will be covered. Methodology and What to Expect The ETF works by holding ~25% of assets as spot Bitcoin ETP via a Cayman subsidiary and replicates synthetic positions through bitcoin futures of synthetic futures (an option setup that replicates the futures). his underlying holding structure makes for better tax efficiencies. Unlike many crypto and crypto adjacent fund themes, BTCI does not issue additional K-1 forms for tax compliance. There is one simplified 1099 form that is issues and makes tax handling easier for investors. BTCI also pays capital appreciation taxes on mark to market gains reducing your tax filing to only when there is a payout or withdrawal. But my understanding points to filing efficiencies over tax savings. After taking the cash position, BTCI employs call writing structures (including call spreads if appropriate) on the underlying and aims to generate income over the underlying. Expect this structure to cap upside and reduce drawdowns (but limited to premiums received). Such a structure works out well if the underlying moves flat or corrects. Over a long term, the upside opportunity loss is far higher than the income gains. However BTCI’s call spreads do capture a part of the upside. It may manage to create a case for reduced volatility risk adjusted returns. NAV and Yield BTCI is a relatively new income play on bitcoins and shows around ~20% yield. That is not too aggressive and gives a chance for the NAV to retain its levels or even grow if the underlying appreciates. Aggressive payouts are often NAV eroding in nature and shrink future payouts in an absolute sense. Is Bitcoin as Volatile as It Sounds? There was an era when Bitcoin was rallying by leaps and bounds and corrections were extreme as well. That era of volatility appears to be behind us as Bitcoins have matured. Now bitcoins are no more volatile than say a Palantir. Not docile enough compared to Google or a broad index ETF like QQQ. But sufficient volatility to be earn more premiums on wins to be able to offset single large losses. It is not as volatile as MSTR as well to make winning difficult. Too high volatility is a killer for option strategies as managing option sell structures become difficult. Either ends up in large opportunity losses or large drawdowns, sometime both. Bitcoin qualifies with just the ideal amount of volatility today to attempt option writing on. Data by YCharts Comparison with Bitcoin In the relatively short period of existence, BTCI shows underperformance against bitcoins (proxied as IBIT), particularly since the period of analysis has been largely bullish. That’s expected. The underperformance is not huge either given the quantum of upside within a short period of time. Data by YCharts Zooming into the only significant drawdown period for Bitcoin, the limited drawdown protection is evident for BTCI. This is decent delta saved on drawdowns but not large enough to offset the upside opportunity losses. There is a case for BTCI on drawdowns, but not strong. Data by YCharts Comparison with Other Bitcoin Income ETFs I will compare BTCI’s total returns against YBTC and YBIT , two other income generating bitcoin based ETFs. Both have a similar proposition, but for no physical holdings in Bitcoin (which BTCI has), fully capped upside (BTCI has partial upside exposure through spreads) and much more aggressive payouts. YBIT has started to drag from potential payout pressures. But between YBTC and BTCI, the latter is the more aggressive total growth vehicle i.e. it tracks Bitcoin more closely. Higer upsides can be captured at times (not always) through BTCI, but there is no great downside excess vs YBTC. If we see the performance graphs, the one time upside gained in BTCI in November 2024 is more or less retained throughout since. That is the spread at work – capturing big upsides at speed, but not always. Data by YCharts Data by YCharts Final Call – Buy BTCI BTCI’s structure shows ability to closely track bitcoin while reducing downsides a bit. Its drawdown performance is not great but provides cushion even if limited. The upside opportunity loss is not as great as in the case of YBTC (YBTC will likely manage drawdowns slightly better although not much evidence so far). If you are bullish Bitcoins even after the last rally, buy Bitcoin. The use case for any option income generator like BTCI appears when you want to tactically use it for a bearish to flat view. The other use case is to generate income without having to actively manage payouts from a core Bitcoin holding. I rate BTCI a buy among the alternative option writing strategies on Bitcoin. If you value downside reduction far more than growth and are looking for steady yields prefer BTCI in your portfolio. For aggressive income de-risking you from Bitcoins quicker and better volatility management, YBTC could make the cut also. But so far, BTCI even over YBTC till new patterns emerge.

Source: Seeking Alpha