Regulatory & Political Backdrop in 2024
Bitcoin and ether have seen a rapidly improving regulatory backdrop develop in the U.S. In January 2024, the first U.S. listed spot bitcoin exchange traded funds (ETFs) began trading, followed by spot ether ETFs in July. On November 19, Nasdaq permitted the listing and trading of options on IBIT, while CBOE and NYSE planned options listings for select spot bitcoin ETFs shortly thereafter.
Donald Trump and the Republicans recorded a resounding win on election day. On the campaign trail, President Elect Trump declared his intentions to establish a national strategic bitcoin reserve. To that end, the administration and incoming appointees, combined with a Republican-controlled House and Senate, are expected to support further adoption of cryptocurrencies in the U.S. market. J.D. Vance, the Vice President Elect, holds about a quarter to half a million dollars in bitcoin (at the time of his federal disclosure form filing according to CBS News). Taken all together, initial signs look promising for crypto to continue to gain mainstream adoption.
Consequently, it appears that bitcoin is on track for another triple digit return in 2024 with a month and a half to go after a 157% surge in 2023.
So, what’s next for bitcoin and ether from here?
The Propensity for Volatility
As of November 20, bitcoin trades about 45% above its 200-day moving average. For most financial assets, this could be viewed as an extreme sell signal. However, this current mark for bitcoin is well shy of previous heights, having tallied highs of roughly 150%, 200% and 300% over the past decade. In short, a higher baseline of volatility expectations appears to be more common for the asset class relative to others.
However, the trailing 1-month average of daily volatility is actually below its long-term average. With a long-term average of about 5% daily volatility, bitcoin’s average for the past month is 4.8%.
Ether is in a similar position. Ether’s current one-month average of daily volatility is 5.6%, shy of the longer term average going back to January 2018.
Is this more suppressed volatility profile for bitcoin and ether here to stay? Likely not, as history suggests crypto has a propensity for volatility. Bitcoin has experienced six drawdowns greater than 50% since 2010. In its limited trading history according to Bloomberg, ether has experienced three drawdowns of greater than -50% since 2018 and has yet to return to all-time highs previously set in 2021. Drawdowns are common when it comes to investing in bitcoin and ether.
The Role of Crypto in Investment Portfolios
What can investors do to navigate the higher likelihood of volatility in bitcoin and ether?
Despite the encouraging posturing from the incoming Trump administration, the extent of crypto-friendly legislation will not be fully determined for some time. This means there is a possibility for a misalignment of expectations. Falling short of expectations could pose downside risk and a spike in volatility. A potential solution is the implementation of a covered call option strategy. With a covered call option strategy for bitcoin and ether, investors maintain long exposure to the asset class while collecting premiums from sold call options. The high volatility profile of the asset class could lead to generally higher premiums and could help those targeting income generation in addition to capital appreciation.
YBTC and YETH: A Covered Call Approach to Crypto
Our Roundhill Bitcoin Covered Call Strategy ETF (YBTC) and Roundhill Ether Covered Call Strategy ETF (YETH) offer exposure to bitcoin* and ether** respectively, subject to an upside cap, while providing the potential for monthly income by writing monthly call options. This type of strategy can be attractive to investors who are looking for an income-generating strategy that harnesses the volatility profile of bitcoin and ether, all within the efficient ETF wrapper.
*The Fund does not invest directly in bitcoin. The Fund does not invest in, or seek direct exposure to, the current “spot” or cash price of bitcoin. Investors seeking direct exposure to the price of bitcoin should consider an investment other than the Fund. The fund seeks to provide exposure to the price return of one or more exchange-traded funds (“ETFs”) that provide exposure to bitcoin and whose shares trade on a U.S.-regulated securities exchange (a “Bitcoin ETF”). The fund is not suitable for all investors and involves a high degree of risk.
**The Fund does not invest directly in ether. The Fund does not invest in, or seek direct exposure to, the current “spot” or cash price of ether. Investors seeking direct exposure to the price of ether should consider an investment other than the Fund. The fund seeks to provide exposure to the price return of one or more exchange-traded funds that invest principally in ether futures contracts (the “Ether Futures ETF”). The fund is not suitable for all investors and involves a high degree of risk.
A Compelling Opportunity in Crypto
2022’s bear market challenged the traditional 60/40 portfolio framework that investors have grown accustomed to. As a result, investors have broadened their search for alternative solutions to portfolio diversification. While time will tell whether cryptocurrency warrants a spot at the table in terms of long-term portfolio allocations, the outlook and investment potential remains exciting. With ease of access expected to improve, the crypto market appears fertile for strategic innovation. YBTC and YETH, the first U.S. listed covered call ETFs for bitcoin and ether respectively, are proof that investor demand is present for alternative solutions. The cryptocurrency market appears to be maturing, and that is a compelling opportunity for prospective investors.
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus or summary prospectus, if available, with this and other information about the Fund, please call 1-855-561-5728 or visit our website at YBTC, YETH. Read the prospectus or summary prospectus carefully before investing.
All investing involves risk, including the risk of loss of principal. There is no guarantee the investment strategy will be successful. The funds face numerous risks, including options risk, liquidity risk, market risk, cost of futures investment risk, clearing broker risk, commodity regulatory risk, futures contract risk, active management risk, active market risk, clearing broker risk, credit risk, derivatives risk, legislation and litigation risk, operational risk, trading issues risk, valuation risk and non-diversification risk. For a detailed list of fund risks see the prospectus.
Covered Call Strategy Risk. A covered call strategy involves writing (selling) covered call options in return for the receipt of premiums. The seller of the option gives up the opportunity to benefit from price increases in the underlying instrument above the exercise price of the options, but continues to bear the risk of underlying instrument price declines. The premiums received from the options may not be sufficient to offset any losses sustained from underlying instrument price declines, over time. As a result, the risks associated with writing covered call options may be similar to the risks associated with writing put options. Exchanges may suspend the trading of options during periods of abnormal market volatility. Suspension of trading may mean that an option seller is unable to sell options at a time that may be desirable or advantageous to do.
Bitcoin Futures ETF Risks. The Fund will have significant exposure to the Bitcoin Futures ETF through its options positions that utilize the Bitcoin Futures ETF as the reference asset. Accordingly, the Fund will subject to the risks of the Bitcoin Futures ETF, set forth below.
Bitcoin Risk. Bitcoin is a relatively new innovation and the market for bitcoin is subject to rapid price swings, changes and uncertainty. The further development of the Bitcoin network and the acceptance and use of bitcoin are subject to a variety of factors that are difficult to evaluate. The slowing, stopping or reversing of the development of the Bitcoin network or the acceptance of bitcoin may adversely affect the price of bitcoin. Bitcoin is subject to the risk of fraud, theft, manipulation or security failures, operational or other problems that impact the digital asset trading venues on which bitcoin trades. The Bitcoin blockchain may contain flaws that can be exploited by hackers. A significant portion of bitcoin is held by a small number of holders sometimes referred to as “whales.” Transactions of these holders may influence the price of bitcoin.
Ether Futures ETF Risks. The Ether Futures ETFs do not invest directly in ether. Accordingly, the performance of an Ether Futures ETF should not be expected to match the performance of ether. The Fund will have significant exposure to an Ether Futures ETF through its options positions that utilize an Ether Futures ETF as the reference asset.
Ether Risk. Ether is a relatively new innovation and the market for ether is subject to rapid price swings, changes and uncertainty. The further development of the Ethereum network and the acceptance and use of ether are subject to a variety of factors that are difficult to evaluate. The slowing, stopping or reversing of the development of the Ethereum network or the acceptance of ether may adversely affect the price of ether. Ether is subject to the risk of fraud, theft, manipulation or security failures, operational or other problems that impact the digital asset trading venues on which ether trades. The Ethereum blockchain, including the smart contracts running on the Ethereum blockchain, may contain flaws that can be exploited by hackers. A significant portion of ether is held by a small number of holders sometimes referred to as “whales.” Transactions of these holders may manipulate the price of ether.
Unlike the exchanges for more traditional assets, such as equity securities and futures contracts, ether and the digital asset trading venues on which it trades are largely unregulated or may be operating out of compliance with applicable regulation. As a result, individuals or groups may engage in fraud or market manipulation (including using social media to promote ether in a way that artificially increases the price of ether). Investors may be more exposed to the risk of theft, fraud and market manipulation than when investing in more traditional asset classes.
Digital Asset Industry Risk. The digital asset industry is a new, speculative, and still-developing industry that faces many risks. In this emerging environment, events that are not directly related to the security or utility of the Ethereum blockchain or the Bitcoin blockchain can nonetheless precipitate a significant decline in the price of ether and bitcoin.
Digital Asset Regulatory Risk. Digital asset markets in the U.S. exist in a state of regulatory uncertainty, and adverse legislative or regulatory developments could significantly harm the value of bitcoin futures contracts or the Bitcoin Futures ETF’s share, such as by banning, restricting or imposing onerous conditions or prohibitions on the use of bitcoin, mining activity, digital wallets, the provision of services related to trading and custodying digital assets, the operation of the Bitcoin network, or the digital asset markets generally. Such occurrences could also impair the Bitcoin Futures ETF’s ability to meet its investment objective pursuant to its investment strategy.
New Fund Risk. The fund is new and has a limited operating history.
Roundhill Financial Inc. serves as the investment advisor. The Funds are distributed by Foreside Fund Services, LLC which is not affiliated with Roundhill Financial Inc., U.S. Bank, or any of their affiliates.
Glossary
Bitcoin was proposed in a white paper in 2008 by a pseudonymous software developer going by the name of Satoshi Nakamoto. It is a decentralized, fully independent, digital or virtual currency also known as a cryptocurrency. No institution controls the Bitcoin network and it is not tied to a country as transactions can be performed cryptographically without the need for a central issuing authority.
Ethereum is a open source blockchain platform that supports smart contracts and enables decentralized applications. ETH is the native token for the network and is used to pay for transaction fees. Ethereum was first described in a white paper in 2013.
The S&P 500® High Beta Index measures the performance of 100 constituents in the S&P 500 that are most sensitive to changes in market returns. The index is designed for investors initiating a bullish strategy or making a directional bet on current markets.
The S&P 500 Low Volatility Index is designed to measure the performance of the 100 least volatile stocks of the S&P 500 Index Volatility is defined as the standard deviation of the security computed using the daily price returns over 252 trading days.
The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).
The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting.
