BTCI Is Not Bitcoin, And That 38% Yield Is Largely An Illusion

Summary NEOS Bitcoin High Income ETF (BTCI) offers a headline 30-40% yield, but this is largely return of capital, not true net investment income. BTCI employs a synthetic covered call strategy on bitcoin-linked ETFs, prioritizing income from option premiums over direct bitcoin price exposure. BTCI's structure leads to NAV erosion, underperformance versus spot bitcoin ETFs like IBIT, and significant downside participation without meaningful capital preservation. I avoid BTCI due to its lack of true bitcoin tracking, capital erosion, upside capping, and unsuitability for risk-averse or long-term income portfolios. Introduction The NEOS Bitcoin High Income ETF ( BTCI ) has a very high yield. At a 30-40% distribution rate (this varies by methodology), it stands out in the bitcoin ETF universe, providing – so people think– a high, regular income alongside exposure to the asset class. This is actually a misunderstanding on both counts. It is neither a true Bitcoin ETF, nor is that yield entirely supported by net investment income. I will get to these ideas shortly, but just a quick look at BTCI’s returns – (35%) price return and (14%) total return over the past year – should make a skeptic out of the most fervent believer in its headline yield. This is happening because of its structure. BTCI does NOT directly hold Bitcoin, and does not track its price. Instead, as we will see from its holdings, it holds a modest Bitcoin-linked exposure with an options overlay. It uses bitcoin’s volatility to generate immediate cash flow. Frankly, it is not Bitcoin but its volatility that is the tool here. This is how BTCI behaves vastly different from spot Bitcoin ETFs and even futures-based Bitcoin funds. The Bitcoin Investment Universe There are at least four distinct ways one can invest in Bitcoin. One is, of course, to actually own a Bitcoin. If you do not want ~$78k of your portfolio fixed in one hard asset, the next best way is to own a Bitcoin spot ETF – like the iShares Bitcoin Trust ETF ( IBIT ) or the Fidelity Wise Origin Bitcoin Fund ( FBTC ). These funds directly hold Bitcoin and track its price movements closely. Upside comes from price returns – these funds do not produce any income. As the IBT fact sheet makes clear, effectively 100% of these funds’ holdings are Bitcoin. They do not attempt any overlay, they have no leverage, and like we said, no income. They are just letting investors hold bitcoin in easier chunks that are tradeable in the market. This is direct exposure. Another way is to use futures-based ETFs for indirect exposure. These include products like the ProShares Bitcoin ETF ( BITO ). These do not hold Bitcoin directly, but rather buy Bitcoin futures contracts. As futures prices move, BITO et al can deviate from spot performance. There are also structural drags like rolling costs and tracking error. So you are exposed to Bitcoin through futures, and through some friction. The third bucket, where BTCI sits, comes with some indirect bitcoin exposure and an income overlay. Another name in here is Simplify Bitcoin Strategy PLUS Income ETF ( MAXI ). These have indirect bitcoin exposures through ETFs or futures, and use options strategies to generate income. Like other option-strategy ETFs, they trade upside potential for cash flow – a key difference with names like JPMorgan Equity Premium Income ETF ( JEPI ) is that BTCI finds its volatility in bitcoin, whereas JEPI finds usable volatility in the equity market. Although both BTCI and MAXI sit in this general corner, MAXI runs with higher beta because it has a futures setup with an aggressively levered options strategy, while BTCI uses ETFs. Putting It Together Author What BTCI Actually Does BTCI doesn’t directly hold bitcoin – we have already said that. It holds a mix of bitcoin-linked ETFs (such as IBIT), and derivatives that replicate bitcoin behavior. Looking at the portfolio itself, it is mostly collateral. ~66% is allocated to T-bills, ~24% to bitcoin-linked ETFs, and ~9% in options positions (with larger notional exposure). Majority of the capital is not in bitcoin here; rather, it is in low-risk collateral, mainly to support the derivative strategy. The derivatives overlay uses a synthetic long exposure. It uses a combination of long calls and short puts with similar strikes/tenors. These resemble the payoff of holding the underlying. On top of this delta exposure, the fund also writes out-of-the-money calls for premium income. This is effectively a covered call setup on a synthetic base. Since the structure is a mix of bitcoin-linked ETFs and option-derived delta, not physical bitcoin, we can say it is a synthetic covered call strategy. The fund manages positioning actively, using strikes, generally short-dated tenor, and overwrite levels. This way, when bitcoin price changes, the fund can adjust its net delta and income profile. Most of the portfolio lies in Treasuries, so income does not come from dividends, or interests except for a small component, or cash flow. It comes primarily from option premiums. The strategy depends almost entirely on bitcoin volatility. It does not benefit if bitcoin goes up –– that is not the bet here. It depends on bitcoin remaining broadly stable with controlled upside. The 38% Yield Illusion That ~38% yield is BTCI’s defining feature. That number stands out even among high income ETFs. But given the option strategy it uses, that number needs to be looked at more closely. Looking at the headline math: current TTM distribution is ~$13.84 per share. Current price is ~$36.43. This implies: Yield ≈ 13.84 / 36.43 ≈ 38% This is the number most visible to investors. What they don’t always see is the composition: what the payout consists of. According to recent 19a notices : ~92–96% of distributions classified as Return of Capital (ROC') Only ~4–8% from net investment income (NII) As the fund tells us, distributions “may exceed income and gains” and can include substantial return of capital. ROC, as I have said many times in my articles, is often misunderstood. It is not always bad, but sometimes it can be quite bad. The thing is to understand: is it bad in the context of BTCI? Let’s first understand that a meaningful portion of ROC here is just options premium and trading gains. However, another equally meaningful portion is not. That part is clearly returning your own capital back to you, and eroding NAV. Now, looking at the past year, BTCI paid out 30-38% as income, but still delivered a negative 14.5% total return. That means, the fund generates income, but not enough to offset losses. BTCI vs Bitcoin: A Useful Comparison It is useful to compare BTCI with IBIT here to understand what is going on, and what might happen. Over the past year, IBIT is down roughly ~19%, BTCI price/NAV are down roughly 40-45% from peak, and BTCI total return is around ~-14.5%. This tells us two things. First, BTCI did not protect capital. Its price decline was worse than bitcoin because its options strategy introduces path dependency during volatile times, and caps upside during rallies. Second, the income is real. BTCI distributed roughly 30-38%, which is why total return is better than price return. The option premium strategy worked. Indeed, it is also up slightly more than IBIT itself. But that does NOT mean BTCI did better. BTCI lost much more than IBIT on price – nearly 25% more, actually – and only ended up ahead in total return because of the large cash it paid out. However, that cash was paid out using some of your own capital, and therefore, it eroded your net asset value. That has a forward implication if this pattern continues. Start with current NAV of ~$36. Let’s assume BTCI generates ~30% income but sees another ~40% decline in price. NAV would fall to around 21-22, while still distributing about ~10-11 over the year. Next year, even if the yield percentage remains ~30%, that would now apply to ~$22 NAV instead of ~$36. You will thus get $6-7 in income. The takeaway – IBIT preserves capital; BTCI doesn’t. As a result, the absolute value of your return keeps declining. Structural Frictions Beyond the strategy itself, BTCI carries several risks you should consider. First is the 0.99% expense ratio. It may not look excessive for an actively managed fund, but it compounds the already constrained returns. Compared to that, IBIT has a 0.25% fee. Secondly, BTCI frequently trades below NAV. In the last listed period, there were 212 days it traded at discount, and only 39 days it traded at a premium to NAV. That means, you could well buy BTCI at a discount, but you could also end up selling it at a discount. Third, BTCI doesn’t track bitcoin directly. It is exposed to bitcoin ETFs, not direct bitcoin holdings, then there’s the option overlay. Each of these creates potential divergence. So if you want to invest in bitcoin, BTCI is not the right instrument. BTCI also has structural complexities. It uses a Cayman subsidiary to manage exposure. The company prospectus tells us of a risk here - if the IRS does not call this as “qualifying income,” then the fund may fail to qualify as a regulated investment company (RIC) status. If that happens, the fund would be taxed as an ordinary corporation. Now, another tax related idea is that BTCI’s distributions, being ROC, are not often taxed immediately, but are deferred until the shares are sold. This makes BTCI relatively tax-efficient in a taxable account. The trade-off is the NAV erosion. Investors benefit from tax deferral, but potentially on a shrinking capital base. There are other risks. Some are broad risks associated with option instruments, for example, upside capping and path dependency. There is also no true hedge. If there’s a strong price decline in bitcoin, BTCI participates in that downside fully, with only some partial offset from the option income. Conclusion BTCI works for a very specific type of investors – those who are looking for income, do not worry about capital preservation, and understand the trade-offs involved in options-based funds. The tax advantage matters mainly in taxable accounts; in IRAs, it’s largely irrelevant. However, BTCI caps upside, does not hedge against downside, and does not preserve capital. It does not track bitcoin properly, but simply uses its volatility for generating income. As such, it is best viewed as a tactical income solution, not a core bitcoin holding. If I am interested in buying bitcoin exposure, BTCI is not the right instrument. Nor is its income profile suitable for a risk-avoiding, laid back income portfolio – the kind I am interested in. As such, I will avoid BTCI.