An Oct. 19 filing describes the iShares Bitcoin Managed Protection ETF, ticker PBIT, which would use staggered call spreads on the iShares Bitcoin Trust to cap both losses and gains. Each options layer would typically limit losses to about 10% before fees. The fee, the cap level and the exchange are blank.
The world's largest bitcoin fund manager is preparing a version of bitcoin for investors who cannot stomach bitcoin.
BlackRock filed with the Securities and Exchange Commission on Oct. 19 to add a new series, the iShares Bitcoin Managed Protection ETF, under the ticker PBIT. "The Fund seeks to provide upside exposure to the iShares Bitcoin Trust ETF (IBIT) and/or similar bitcoin exposure up to an approximate limit, while seeking to provide a level of downside protection," the filing says.
How it would work
The fund would not hold bitcoin or bitcoin funds directly. Instead it would buy what the filing calls long call spreads on IBIT, an options position that rises in value with the underlying fund up to a cap. It would generally hold three such layers, or tranches, started a month apart over each calendar quarter, alongside short-term fixed-income investments whose interest helps pay for the options. It expects to use FLEX options, which allow customized strikes and expiration dates.
Each tranche's protection would typically start at about 90% of IBIT's price, which the filing describes as "an initial maximum loss exposure ... of approximately 10%," before fees. BlackRock retains "broad discretion" to change that level. The filing is explicit that the fund "does not provide a fixed Tranche Protection Start Value, Floor or Tranche Cap Value," and that investors "may lose some or all of their money."
The management fee, the upside cap and the listing exchange are all left blank in the filing.
What it is and is not
Because the protection resets tranche by tranche, an investor buying on a given day gets a blend of three floors and three caps set at different prices, not a single fixed outcome. And because the floor comes from limiting how much money is at risk in options, rather than from a guarantee, the product is better described as risk-managed than protected.
The trade-off is the cap. Every option structure that limits losses on bitcoin has to pay for that limit, here partly through the interest on the fixed-income holdings and partly by giving up gains above the cap. Until BlackRock fills in the cap level, investors cannot judge how much of bitcoin's upside they would surrender.
The feedback loop
The filing also notes that the fund's use of IBIT options "may result in additional assets in IBIT and indirectly increase fees to BFA," BlackRock Fund Advisors, the adviser to both funds. Demand for PBIT could deepen the options market on IBIT, which in turn supports IBIT's position as the largest bitcoin fund. On Monday, IBIT took in $665 million while every other U.S. spot bitcoin fund had outflows or no flows.
Market implications
One reading is that this widens bitcoin's reach. Financial advisers whose clients cannot accept bitcoin's large drawdowns could use a fund with a typical 10% floor, opening model portfolios and conservative accounts that are now closed to spot bitcoin.
A second reading is that the cost will limit demand. Options and fees together may give up much of bitcoin's upside, and investors have yet to show how much they will pay to limit losses on it.
A third reading is that the main beneficiary is IBIT. A fund built on IBIT options adds liquidity and fees to BlackRock's flagship product, whatever PBIT's own size.
What to watch
An amended filing with the fee, cap and exchange; any SEC comments; launch timing; and the size of IBIT's options market. A disclosed cap well below bitcoin's typical annual gains would show how expensive the floor is.