Summary The NEOS Bitcoin High Income ETF has surpassed $700 million AUM in under a year, reflecting strong investor interest. BTCI's strategy balances high monthly income (25.8% TTM) from Bitcoin volatility with better NAV protection compared to higher-yielding peers YBTC and YBIT. While BTCI limits upside during Bitcoin rallies, it delivers superior total returns (56%) and cushions against NAV erosion, though downside risks remain in case Bitcoin drops acutely. BTCI is a compelling choice for investors seeking income from crypto exposure, especially as interest rates decline and regulatory clarity improves. As shown in the orange chart below, it's impressive how quickly the NEOS Bitcoin High Income ETF ( BTCI ) has grown, crossing $700 million in AUM (assets under management) since its October 2024 launch. This steady growth in assets contrasts sharply with the highly volatile price action, but it has nonetheless delivered a net upside of around 19% since its inception. Data by YCharts Now, investor sustained interest in the fund is likely due to its unique strategy of generating high monthly income (26% TTM) from Bitcoin's volatility while better protecting against NAV erosion when compared with two peers, as this thesis aims to show. Also, while highlighting the risks, I will make the case for an investment based on the Federal Reserve's monetary policy path and its diversifier potential for crypto exposure in a volatile market. First, I provide a quick overview of the fund's key details, emphasizing the income factor. BTCI Generates Income, but its Yield is not the Highest As an actively managed fund charging 0.98% , it generates income by writing (selling) call options on Bitcoin ( BTC-USD ) Futures ETFs. In this way, the fund collects premiums, which form the basis for its high monthly distributions. Moreover, as shown below, dividends have been paid regularly, but, unlike some income funds which investors may be familiar with, the amount has varied depending on market conditions. Still, BTCI's core strategy to use Bitcoin's well-known volatility to generate income has worked since its dividend exceeds the median for all ETFs by a whopping 848% . seekingalpha.com Looking further, the alternative investment industry has seen the emergence of other such ETFs last year, with one of these being the Roundhill Bitcoin Covered Call Strategy ETF ( YBTC ), which pays much better yields of 43.8% every week, as shown in the comparison table below . There is also the YieldMax Bitcoin Option Income Strategy ETF ( YBIT ), which pays an appetizing 53.8% monthly. seekingalpha.com Now, each of these income-oriented ETFs has its own strategies to generate income, and their outcomes (yield) also depend on specific volatility conditions to work best, but this comparison shows that for those prioritizing yields, BTCI does not come first. Still, the AUM comparison shows that more money has flowed towards the NEOS fund, at least three and five times YBTC and YBIT, respectively, despite it being incepted much later. Therefore, the reason for BTCI's appeal cannot be just the yields. BTCI Provides Better NAV Protection Diving deeper into the comparison, one notices that the NEOS strategy has fared better in terms of price performance (or NAV performance since we are comparing ETFs), both during the short and long terms, as shown below . Interestingly, these periods comprise both crypto appreciations or depreciations, and show BTCI has performed better during different market conditions. Comparison with peers (seekingalpha.com) Without going into the details for the other two funds, and considering its above-25% yield, this means that NEOS's data-driven strategy to maintain exposure to Bitcoin futures, as pictured below , has worked best when it comes to balancing yields with price protection. neosfunds.com Now, some will argue that an eleven-month period is too short to assess the price performance, but as shown in the chart below, market conditions have varied extremely, with Bitcoin making new highs (after gaining more than 50% from April to July) or suffering extreme volatility (dropping by about 30% from January to July). Data by YCharts I further support the fact that BTCI offers the best yield to NAV protection balance using total returns, which is the price appreciation plus the dividends if reinvested. Thus, as shown below, NEOS has demonstrated the best total returns (56.3%), followed by Roundhill (52.8%), with YieldMax coming in a distant third. Data by YCharts Now, to be fair to YieldMax, as its very name suggests, it aims to maximize the yield, but for those who are mindful of NAV erosion, this represents a risk better avoided for an already volatile asset class. Talking risks, the next step is to show that, despite its superior total returns, NEOS is not immune to severe drawdowns. The Risks Involved with BTCI's Strategy In this respect, the chart below shows that while BTCI shadows (tracks) BTC, it does not exactly replicate crypto's price movements. Analyzing an upside scenario, NEOS caps the fund's upside potential during sharp Bitcoin price rallies. Hence, when Bitcoin's futures price rises significantly, the fund may not capture all of those gains because of the options strategy. Data by YCharts Looking into the modus operandi, NEOS utilizes a “ synthetic covered call strategy ” for exposure to the Bitcoin Futures ETF, which also limits its participation in the rise of the crypto beyond a certain point. In other words, if Bitcoin surges sharply, the call options get exercised, denying BTCI the ability to fully participate in its underlying asset's appreciation. This can be frustrating for growth investors wanting maximum gains out of Bitcoin's rallies, as provided by spot ETFs. Analyzing a downside scenario, the premiums collected by writing call options act like a buffer to partially offset (soften) the downside when Bitcoin drops. However, this only happens during mild volatility, not during sharp price drops. Thus, as shown by the blue chart above closely shadowing the orange one during the January to April period, both BTC and BTCI lost around 40% showing that the option strategy was not that effective in cushioning against volatility when the underlying asset's drawdown is severe. Taking into consideration the above risks, BTCI is good for high-income seekers who are also prepared to sacrifice part of the upside. Moreover, taking into consideration the fund's vulnerability to severe drawdowns since its price performance is tied to Bitcoin, it is important to assess how the latter is performing. Bitcoin Volatility May Continue, and BTCI is a Good Diversifier As seen by the price action during the last five days, when it lost more than 3% , crypto's value can change very quickly and by a large percentage, which makes it risky to invest in, especially for those who cannot stomach risks. Thus, after reaching a high of $123K on August 12, investor appetite for BTC appears to have cooled off despite the Federal Reserve cutting rates by 25 basis points, notably the first dovish action this year. Now, Bitcoin’s price normally moves inversely to interest rates, meaning when rates go down, Bitcoin tends to rise as this increases liquidity in the monetary system. Thus, in the immediate aftermath of the rate cut on September 17, the price did appreciate to $117K, but the move was temporary, and subsequently, it traded at about $113.5K and at the time of writing, it was at approximately $110K. This drop coincided with the U.S. GDP for the second quarter growing stronger than was expected, meaning the Fed may not need to stimulate economic growth by lowering rates. Hence, in case rates stay at this level for longer, risk assets, including stocks and crypto, may not get sufficient of a boost. Another factor that raised the volatility level was the at least $22 billion in crypto options set to expire by the end of this week. In these circumstances, BTC price action is likely to fluctuate, especially in the case of inflation becoming sticky, forcing the Fed to remain restrictive. However, at the same time, the current U.S Administration, seen as pro-Bitcoin, aims to make America the " crypto capital of the world". Concrete measures include encouraging digital asset adoption and reducing regulatory uncertainty, hence making it easier to launch new crypto products. At the same time, institutional adoption is on the rise . Therefore, these factors can provide support to Bitcoin and avoid severe drawdowns, which could be detrimental to BTCI's NAV. BTCI is also Appropriate as a Bitcoin Diversifier In these conditions, I have a hold position on BTCI, which is also due to momentum indicators . With BTC's value situated below the 10-day, 50-day, and 100-day moving averages, the downside pressure could continue. However, with the RSI at 43, not oversold ( 70), this implies weakness, but not necessarily a sharp selloff. Also, the price could slide further from around $57 to the $47-$48 support level, constituting an opportunity to buy. So, the technicals could point to a downside drift, not a sharp drawdown, which is actually favorable for BTCI’s option-led income generation. In this scenario, the dividends generated lead to better total returns, thereby lessening the gap with BTC. For investors, the chart below shows how the gap between BTCI and BTC has narrowed to around 9% compared to 45% when only price returns are considered (above chart). www.ycharts.com In conclusion, this thesis has shown that for those wanting income while being mindful of NAV erosion, BTCI's strategy provides the best balance between yields and price performance, or NAV depreciation in this particular case. Moreover, given the volatility risks associated with this asset class, it may be better for those who already hold Bitcoin through an ETF and are contemplating putting more money into cryptos to diversify their exposure using the NEOS option strategy. To this end, compared to pure growth available through spot ETFs, BTCI presents a strong case involving generating income from volatility, making it suitable as a complementary holding in a crypto portfolio. In this connection, I calculated that BTCI's asset flow has accelerated by 600% (from around $100 million to $700 million in the introductory chart), just after Bitcoin’s dip. By comparison, the cumulative inflows into Bitcoin Spot ETFs, while still positive, have experienced greater daily variability during this time period. Also, periods of outflows have started to emerge, like in August, coinciding with spot Ethereum ( ETH-USD ) ETFs seeing heightened investor interest. Well, this could be transitory and but income is a key factor that supports BTCI. It's above 25% source of yield, which already dwarfs those of classical equity and bond funds, will become even more attractive as interest rates on savings and cash equivalents decline in case the Fed carries out two further cuts by the end of this year, as expected.
