BlackRock and downside protection in Bitcoin ETFs

A new BlackRock product

BlackRock has filed with the SEC for a Bitcoin ETF named the iShares Bitcoin Managed Protection ETF, which would be listed under the ticker PBIT. The proposed financial product aims to provide investors with Bitcoin exposure without requiring them to own the cryptocurrency directly. Unlike traditional Bitcoin ETFs that track the asset's price, the proposed fund uses option contracts and fixed-income securities for its strategy. The main objective of this proposed product is to create downside protection while limiting potential gains. This approach could provide an alternative for investors seeking to reduce exposure to sharp bitcoin declines.

The ETF's operation relies on three overlapping tranches of call options spanning several months. Each tranche combines purchased call options intended to limit losses to approximately 10% of the reference asset's initial value with sold call options that cap gains above a strike price. The fund would also use fixed-income securities, short-term government bonds and cash funds to cover option costs and offset some losses. This complex structure aims to stabilise fund performance in falling markets without guaranteeing investors a maximum loss of 10%.

Comparison with existing products

BlackRock already offers a Bitcoin income ETF, the iShares Bitcoin Premium Income ETF (BITA), using a call-writing strategy to generate income. The new PBIT ETF differs by focusing on downside protection rather than income generation. The existing IBIT fund, holding approximately $65.34 billion in net assets, simply seeks to reflect Bitcoin's performance without a specific hedging strategy.

The process of regulatory examination for the proposed new ETF is still ongoing, with an amendment proposing effectiveness 75 days after filing. The preliminary prospectus does not yet authorise share sales. Management would be the responsibility of BlackRock Fund Advisors, which would need to manage risks concerning option liquidity, interest rates and counterparty exposure. The preliminary prospectus stresses that management fees have not yet been specified and results could vary depending on when investors subscribe. The proposed offering forms part of a broader development of financial products incorporating hedging strategies.

Understanding index construction

An index is built on precise rules announced in advance, defining eligible securities and the weighting method used. For equities, the most common weighting method is market capitalisation, calculated by multiplying the share price by the number of shares outstanding. This measure differs from other indicators such as company revenue or employee numbers. Index providers organise systematic reviews to reflect changes in companies and markets, maintaining the indicator's relevance.

An index may represent a country, region, sector or specific size segment, and serves as a benchmark for many financial products. It is essential to distinguish construction rules, securities meeting those rules and financial products using the indicator as an underlying reference. Understanding these mechanisms is necessary when analysing the performance of ETFs and other derivatives tracking an index. The index methodology determines its composition and value, thereby influencing investments that refer to it. Rules defining the indicator and the operation of a product referring to that indicator remain different elements of the analysis.