Bitcoin Doesn’t Pay Dividends, So How Is This ETF Yielding 25%?

There are no earnings, dividends, coupons, rents, or contractual cash flows attached to holding a bitcoin. Your investment return ultimately depends on what someone is willing to pay for the asset in the future. That’s not necessarily an argument against owning it.

Bitcoin’s investment thesis rests on different characteristics, including its fixed issuance schedule, decentralized network, global liquidity, and potential role as a scarce digital asset. But if you’re a retiree or income investor who actually wants regular cash distributions, simply holding Bitcoin doesn’t provide them.

Its extreme volatility, however, creates another possibility. Options on Bitcoin exposure can command substantial premiums precisely because the underlying asset moves around so much. The NEOS Bitcoin High Income ETF (BTCI) attempts to monetize that volatility, producing a current distribution rate of 25.61%.

How BTCI Turns Bitcoin Volatility Into Income

BTCI obtains its underlying Bitcoin exposure primarily through spot Bitcoin ETFs rather than holding Bitcoin directly. On top of those holdings, NEOS runs an actively managed options strategy. The fund can write options on spot Bitcoin ETFs as well as options tied to the Cboe Bitcoin U.S. ETF Index, or CBTX.

That’s an important part of the structure because BTCI isn’t limited to mechanically writing covered calls against one Bitcoin ETF. The managers can sell and purchase both calls and puts, allowing them to construct multi-leg option positions. Selling options brings premium into the portfolio, while purchased options can alter the strategy’s exposure beyond particular strike prices or help manage the risks created by its short options.

Bitcoin is particularly suited to generating large option premiums because implied volatility tends to be substantially higher than it is for broad stock indexes. An option buyer is effectively paying more for exposure to Bitcoin’s potential price swings, giving the option seller more premium to collect.

Of course, the reason those premiums are large is that Bitcoin can actually make those enormous moves. BTCI is therefore taking one of Bitcoin’s defining risks, volatility, and attempting to convert some of it into current income.

That 25% Yield Isn’t a 25% Return

BTCI currently has a 25.61% distribution rate and pays monthly. That’s an extraordinary amount of cash flow for an underlying asset that pays nothing itself. You also pay considerably more for the strategy than you would for straightforward spot Bitcoin exposure. BTCI charges a 0.99% expense ratio.

There has at least been a potentially useful tax characteristic to the distributions. According to BTCI’s September Section 19(a)-1 notice, approximately 95% of its latest distribution was estimated to consist of return of capital. ROC generally reduces your adjusted cost basis rather than creating an immediate tax liability. That can defer taxes until you sell the shares or your basis reaches zero. As always, a 19(a)-1 notice is preliminary and the final tax characterization can differ on Form 1099-DIV.

But I’d pay even closer attention to total return. Since inception, BTCI has lagged the S&P Bitcoin Index on a cumulative total-return basis. That’s critical context for anyone attracted to the 25.61% distribution rate. Bitcoin can experience extremely powerful rallies. When an options-income ETF repeatedly sells exposure to some of that upside, the premiums collected may not fully compensate for gains surrendered during those periods. Add BTCI’s 0.99% expense ratio and there is another hurdle relative to simply holding spot Bitcoin exposure.

That doesn’t make BTCI’s distributions meaningless. Someone actually withdrawing and spending the cash has a different objective from an investor trying to maximize long-term Bitcoin exposure. But for an accumulation investor reinvesting everything, I think the comparison becomes harder to justify. You’re taking Bitcoin risk either way while paying a higher fee and potentially giving up some upside to manufacture income you don’t actually need.

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