Blackrock is seeking to launch a bitcoin ETF designed to cushion market losses while limiting potential gains. The proposed fund would use options and fixed-income investments instead of holding bitcoin directly.
Key Takeaways
- Blackrock files for the Ishares Bitcoin Managed Protection ETF (PBIT).
- The strategy targets an initial 10% loss threshold per tranche, not a guaranteed limit for shareholders.
- Investors would sacrifice some potential gains in exchange for downside protection.
Blackrock Proposes Bitcoin ETF With Built-In Downside Protection
Bitcoin investors could gain access to a new exchange-traded fund (ETF) designed to reduce exposure to sharp market declines under a proposal filed by Blackrock. The world’s largest asset manager submitted a registration statement with the U.S. Securities and Exchange Commission (SEC) on Oct. 19 for the Ishares Bitcoin Managed Protection ETF, which would trade under the ticker PBIT.
The proposed fund would seek gains linked to the Ishares Bitcoin Trust ETF (IBIT) or similar bitcoin-linked assets while seeking to provide a level of downside protection. Unlike traditional spot bitcoin ETFs, PBIT would not directly hold bitcoin or bitcoin exchange-traded products. Instead, it would use options contracts and fixed-income securities.
Investors can gain bitcoin exposure through ETFs without directly owning the cryptocurrency. PBIT would introduce a different approach, limiting potential gains to help cushion losses. However, shareholders could still lose some or all of their investment.
How Blackrock’s Bitcoin ETF Would Limit Potential Losses
The proposed fund would generally use three overlapping sets of options contracts, known as tranches, starting in different months. Each tranche would combine purchased call options, which provide the right to buy an asset at a predetermined price, with sold calls that cap gains above a specified price, called the strike price.
Call options would generally be purchased with strike prices approximately 10% below the reference asset’s starting value. The reference asset, such as IBIT, is the investment the options are tied to. This structure would initially limit losses to approximately 10% of that asset’s starting value for each tranche, before expenses.
That protection would not guarantee a 10% maximum loss for shareholders. Thresholds could change, and losses measured from a higher market value could exceed the initial limit. The fund expects to use Flexible Exchange Options (FLEX Options), exchange-traded contracts with customizable terms, and may adjust its options positions as market conditions change.
The strategy would also include cash, money market funds, short-term government obligations, and investment-grade fixed-income securities. Interest income could help cover options costs and offset some losses.
Bitcoin ETF Would Cap Gains in Exchange for Protection
Selling call options would generate payments to help finance the protective strategy, while restricting returns during bitcoin rallies. PBIT could therefore underperform bitcoin in rising markets, with volatility and trading expenses potentially weakening its downside protection.
The existing Ishares Bitcoin Trust ETF (IBIT) seeks to reflect bitcoin’s price performance without employing the proposed managed protection strategy. The fund held approximately $65.34 billion in net assets as of Oct. 16, according to Blackrock’s published figures.
An earlier filing for a bitcoin income ETF, submitted Jan. 23, outlined a fund holding bitcoin and IBIT shares while selling call options for income.
A subsequent Form 8-A filing in June preceded the planned Nasdaq listing of its income-focused bitcoin product. The strategy uses covered calls to collect payments while limiting some potential gains.
The same income product launched June 16 as the Ishares Bitcoin Premium Income ETF (BITA). While BITA emphasizes income generation, PBIT would focus on downside protection.
Blackrock’s New Bitcoin ETF Faces Regulatory Process
A post-effective amendment to an existing Ishares Trust registration statement proposes that it become effective 75 days after Oct. 19. The preliminary prospectus prohibits sales until the registration becomes effective.
Responsibility for managing the ETF would fall to Blackrock Fund Advisors, and the filing flags risks involving options liquidity, interest rates, and counterparty exposure, the risk that another party fails to meet its financial obligations. Under its 80% investment policy, the fund would normally allocate at least 80% of net assets, plus investment borrowings, to bitcoin exposure or its protection strategy.
The management fee remains unspecified. Expenses would reduce returns, while changing options positions could produce different outcomes depending on when shareholders invest.