BlackRock files for downside-protected bitcoin ETF 'PBIT' with capped upside

BlackRock is seeking to launch a bitcoin ETF that would limit losses when the price falls in exchange for capping gains when it rises. Its iShares unit filed a registration statement with the U.S. Securities and Exchange Commission on Oct. 19 for the iShares Bitcoin Managed Protection ETF. The fund would trade under the ticker PBIT; its listing exchange and management fee were left blank in the filing.

Buying and selling calls to build a floor

The fund would not hold bitcoin or spot bitcoin exchange-traded products directly. Instead, it would use options on bitcoin reference assets such as BlackRock's spot bitcoin ETF, the iShares Bitcoin Trust (IBIT). The filing lays out three parts to the strategy.

• Buying call options, the right to buy at a set price, to gain exposure to bitcoin's upside
• Selling higher-strike call options to help offset the cost, giving up gains above that level
• Holding cash and cash equivalents, money market funds and short-term government obligations to earn interest that helps offset option costs and some losses

The strike price of the purchased calls is typically set at about 90% of the reference asset's value at the start. The filing says that establishes an initial maximum loss of about 10% for each set of options, which it calls the "Floor." The upside cap is set by the strike of the sold calls; BlackRock said it would be determined by market conditions at the start of each set and gave no specific figure. Both the floor and the cap are before fees and expenses such as the management fee.

Three option sets, staggered a month apart

The fund would typically hold three overlapping sets of options, or tranches. Their start dates are staggered by a month, so one set expires and a new one is added each month. The fund expects to mainly use Flexible Exchange (FLEX) options, exchange-listed contracts whose strike price and expiration can be customized, and may also use standardized listed options.

Because each set starts at a different price, the fund as a whole has no fixed floor or cap. The filing says investors should not expect the same outcome as holding a single set from start to finish. If the reference asset rises after a set begins, the potential loss measured from that point exceeds 10%. The filing also warns that extreme volatility can significantly reduce both upside participation and downside protection, and that investors may lose some or all of their money. Cap and floor values for each set, along with holdings, will be published on the iShares website.

The opposite design to June's BITA

This is not BlackRock's first bitcoin product beyond IBIT. The iShares Bitcoin Premium Income ETF (BITA), launched on June 9, holds bitcoin and IBIT shares and writes call options on roughly 25% to 35% of its assets, generating income from the premiums in a covered-call strategy. Its fee is 0.65% a year. Where BITA holds bitcoin and sells options, PBIT holds no bitcoin and centers on buying options.

The legal structure differs too. BITA is not an investment company registered under the Investment Company Act of 1940, while PBIT was filed under that law on Form N-1A as a new series of the existing iShares Trust. BlackRock said in the filing it intends to qualify as a regulated investment company (RIC) for tax purposes, but noted that some aspects, including the tax treatment of its options strategy, are not entirely clear. The fund would be managed by Erin Armstrong, Kyle McClements and Richard Mejzak.

Effective in 75 days; IBIT holds $65.3 billion

BlackRock designated the filing to become effective 75 days after it was filed, and the prospectus is dated only "2027." IBIT, the underlying reference asset, had net assets of $65.34 billion as of Oct. 16. The filing also discloses that PBIT's use of IBIT options may add assets to IBIT and indirectly increase fees paid to BlackRock and its affiliates.

Bitcoin traded around $82,100 on Binance at 7:30 a.m. KST on Oct. 20, up 0.7% from 24 hours earlier. At the same time it fetched 110.52 million won on Upbit's Korean won market, about 0.9% above Binance's price converted into won. That gap is known as the kimchi premium, the difference between prices on Korean exchanges and global markets.