Bitcoin Spot ETFs Prepare for Crypto Hedging

As money floods into new spot bitcoin ETFs as the major cryptocurrency's price rises, one platform sees an opportunity for financial advisers to better manage client crypto holdings. SpiderRock Advisors, a Chicago-based option overlay strategy business, wants to employ put and call options on some of the new spot bitcoin ETFs to collar crypto assets to reduce volatility and tax ramifications.

“We see this as the biggest opportunity in the space,” said SpiderRock managing director Dave Donnelly. “The ability to hedge an outstanding universe of crypto is probably the biggest story for wealth managers using these products.” SpiderRock targets crypto assets held by clients outside advisor-managed accounts.

Financial advisors have been put in a horrible box because they have clients with millions of dollars of crypto they can’t advise on,” Donnelly added. "Often, they can't see it, can't charge a fee, and can't connect crypto assets to clients' accounts."

SpiderRock, founded in 2015, manages approximately $4.5 billion in option overlay methods on concentrated individual stock investments for financial advisers and institutional investors. SpiderRock sold a minority share to BlackRock in 2021.

Access and liquidity of options are essential to implementing the technique to crypto assets, which often restricts the upside and minimizes the downside of the underlying investments.

The iShares Bitcoin Trust ETF (IBIT) with $4.7 billion and the Fidelity Wise Origin Bitcoin ETF (FBTC) at $3.8 billion are the breakout leaders from the dozen spot bitcoin ETFs that began on Jan. 11. A closed-end unit trust that owned bitcoin, the $22.9 billion Greystone Bitcoin Trust (GBTC) became a spot bitcoin fund.

Donnelly expects several of the major spot bitcoin ETFs will have enough volume and scale to support an options market by midyear. SpiderRock may then provide option overlay methods to advisors with direct crypto ownership customers.

"When a client has crypto, an advisor can reduce risk without triggering a tax bill," Donnelly said. Despite the wide and diversified crypto investing pool, Donnelly concedes the collar approach that caps gain and minimizes downside will not appeal to everybody.

“People who like volatility are trading it; not investing in it,” he remarked. “A hedge is probably not appropriate for them.” For crypto investors who wish to safeguard gains or take profits, Donnelly said financial advisers may offer a unique service and put those crypto accounts into fee-based portfolios.

Donnelly said SpiderRock costs 50 basis points yearly for the overlay strategy and that financial advisors add their own expenses. He remarked, “This is an existing strategy, we’re just doing it with a different ticker symbol.” We haven't done it yet because we need time to ensure option liquidity on one or more freshly launched ETFs.”

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