Los Angeles-based asset management firm Wave Financial has announced the creation of the world's first Bitcoin-based yield fund, which aims to generate an investment yield by selling call options on bitcoin held inside its fund.
Call options are financial contracts that gives the option buyer the right (but not the obligation) to buy an asset at a specified price within a specific time period.
Wave Financial expects such option sales to generate “attractive premiums” due to bitcoin’s high volatility—which should provide a steady stream of income that can be paid out monthly to investors. The firm hopes to distribute a dividend of 1.5% per month—which, if achieved, would result in an 18% target annual yield.
Any excess premiums generated above the fund’s target yield rate will be credited back to it, to purchase more bitcoins. The fund generates this premium by “selling call options with strikes higher than the current price,” to help further capture potential upsides in the price of bitcoin.
Wave will issue tokens for participation in the fund “based on cryptographic technologies similar to those used for creation and transfer of select virtual currencies”. It also anticipates that the fund's tokens will be able to be “traded on alternative trading systems at a later date”.
Wave’s fund will be incorporated in the British Virgin Islands, while financial services provider Fidelity Digital Assets will provide custody for the fund’s BTC. The firm is taking a cautious approach towards US regulators; would-be investors in the United States will need to be accredited, and outside the United States the fund and tokens can only be sold to non-US persons.
Earlier this month, the Chicago Mercantile Exchange (CME) announced that they are looking to add Bitcoin options trading to complement their futures trading business that launched in December 2017.
"For high net worth investors, appetite for innovative yield product with upside potential is strong,” says Benjamin Tsai, President of Wave Financial. “This product monetizes higher volatility of BTC to deliver yield, independent of the interest rate environment while keeping some upside exposure".