Beware of the "encryption income ETF" trap: high returns but difficult to maintain value, how do futures premiums and leverage erode investor returns?

A new wave of Crypto Assets ETFs, especially those focusing on high income products, is emerging. They capture the high Fluctuation of Crypto Assets through active management and the use of futures contracts. However, despite these “Crypto Income ETFs” claiming to offer high dividend yields, investors must be cautious of their total returns. Due to the use of futures (instead of holding the underlying Crypto Assets) to generate income, combined with the erosion from futures premiums (Contango) and leverage effects, many income ETFs have failed to preserve value. For instance, the ProShares Bitcoin ETF (BITO) boasts an annualized dividend yield of over 50%, yet its share value has dropped nearly 20% year to date, highlighting a severe disconnect between high yields and total returns.

The Operating Model of Income ETFs and the Cost of High Returns

Crypto Assets Income ETF aims to provide investors with the upside potential of Crypto Assets, while also offering regular income, but its underlying structure determines its inherent flaws.

· Addressing the demand for volatility: Although crypto ETFs allow investors to access crypto assets through traditional brokerage accounts, their extreme volatility (such as the $19 billion leveraged liquidation on October 10) has deterred many traditional investors. They are eager for crypto products that can eliminate extreme fluctuations and have lower volatility.

· The strategy for earning from ETFs: The new wave of ETFs comes with higher fees and more aggressive management. They generate income by buying long-term futures and selling short-term futures to take advantage of price fluctuations, rather than simply buying and holding (HODL) spot.

· Illusion of High Returns: The returns of certain income ETFs look good, especially during bull markets. For example, the ProShares Bitcoin ETF (BITO) has an annual dividend yield of over 50%.

· The Truth About Total Returns: However, investors must pay attention to total returns. Although Bitcoin has risen by more than 20% during the same period, BITO shares have fallen by nearly 20% so far this year. This means that investors have to bear capital losses while paying the dividend tax they received. In addition, investors also need to pay a management fee of 0.95%.

Futures Premium and Leverage: Structural Flaws Eroding Value

The disconnection between the price of the Crypto Assets ETF and the underlying assets primarily stems from the inherent flaws of futures contracts and the use of strategic leverage.

· Impact of Futures Premium: Using a futures ETF essentially involves purchasing assets at a price that includes a time premium (which decays over time). In a bull market, this effect may be offset by the market's rise; however, in a sideways market or “crypto winter,” such losses can be quite brutal.

· Amplified risk of leverage: If used in conjunction with leverage, the outcome can quickly become very bad.

· The painful lesson of ETHI: The Defiance leveraged long income Ethereum ETF (ETHI) launched in early October, aiming to return 150% to 200% of Ethereum's daily performance and generate income through credit spreads. However, just a few weeks after its launch, its shares fell by 30%.

· Long-term bleeding structure: Although the liquidation event on October 10 was the direct cause, the structural design of this ETF determines that it is likely to continue bleeding over time, only bringing profits to investors during a hot bull market, while struggling to perform in sideways or bear markets.

The Diversification Trap of Crypto Stocks ETF and Wake-Up Suggestions

In addition to the single encryption asset income ETF, the ETF tracking crypto-related stocks is also beginning to emerge, but their returns also require caution.

· Crypto Assets ETF: Theoretically, these ETFs provide investors with some diversification by holding stocks of multiple crypto-related companies (such as mining companies, Bitcoin treasury company MicroStrategy, and even Visa, etc.).

· Performance of CEPI: The REX Crypto Assets Premium Income ETF (CEPI) has seen fluctuations in stock value since its launch at the beginning of the year, but has achieved a positive total return supported by dividend payments (over 20% year-to-date).

· The failure of LFGY: Another YieldMax Crypto Industry Portfolio Option Income ETF (LFGY) launched this year reported an annualized distribution yield of 19.9%, however, the ETF has fallen nearly 25% since its inception. This ETF, which manages less than $200 million in assets, has clearly failed to attract investors.

· Investment Advice: For crypto enthusiasts, there is no reason for them to give up owning real crypto assets for these ETFs. For investors seeking exposure to encryption, holding spot ETFs of the underlying crypto assets remains the best choice.

Conclusion

Crypto Assets ETF Although it offers attractive high dividend yields, its failure in value preservation is a long-standing issue. Complex strategies using futures contracts often lead to total returns being eroded in a non-strong bull market environment. Investors, attracted by high yields, must have a deep understanding of the structural flaws of these products and prioritize total returns. As new Crypto Assets ETFs continue to emerge, market competition should encourage product design improvements, but spot ETFs remain the most direct and transparent way to gain exposure to Crypto Assets.

Disclaimer: This article is for news information only and does not constitute any investment advice. The crypto market fluctuates wildly, and investors should make decisions cautiously.