Invictus Capital’s new Bitcoin Alpha Fund (IBA) went live in the second week of August, offering a different approach to long Bitcoin exposure over simply buying and holding the asset itself.
The “Alpha” in the title alludes to the fund’s objective of outperforming Bitcoin over the medium to long term by limiting Bitcoin price downside exposure using a novel options strategy . The fund is available to a global investor audience who are able to buy into the fund with no minimum investment amount. What follows is a look into Bitcoin as an investment and a deep-dive into how the IBA fund strategy offers full Bitcoin exposure, with the added features of downside protection and yield generation.
Please Note: This is a Press Release
Bitcoin – A digital asset for a digital age
The investment case for Bitcoin is extensive and includes a multitude of investor perspectives. However, some key features inherent to Bitcoin stand out in solidifying its investment thesis.
Bitcoin is a store of value and is almost infinitely divisible and unalterably scarce (with 21 million bitcoin to be issued by 2140, of which over 18 million are already in circulation). This means that bitcoin exhibits many of the same properties that make precious metals desirable namely: both can act as stores of value and can be used as means of exchange.
In an age of excessive money printing, fixed supply assets such as Gold or Bitcoin are excellently positioned. This has been noted from an institutional perspective, with Paul Tudor Jones headlining a change in sentiment describing Bitcoin as a “portfolio weapon.” This bullishness is primarily owing to the current environment of historically accommodative and loose monetary policy – with currencies (and the dollar in particular) under threat from quantitative easing, yield curve control and expectations of elevated inflationary pressure. Additionally, with risk-adjusted returns in traditional markets at all-time lows, fixed supply assets’ lack of intrinsic yield becomes a non-issue.
Looking further forward, Bitcoin and the collective crypto market possess an asymmetric risk/return profile. Growth prospects in this infant industry dwarf any possible drawdown, provided the market can attract just a small fraction of traditional investment flows. Institutions are showing major interest in including Bitcoin into a complete portfolio – with the popularity of cryptocurrency derivatives surging and institutional-grade exchanges such as Bakkt and CME recording futures trading volumes exceeding US$ 8 billion in Q1 2020. This indicates sophistication among crypto markets and exchanges and bodes well for the industry as an heir to traditional finance.
Bitcoin is well placed to capture much of this potential growth even amongst fierce competition. It has the first mover advantage as a digital store of value and its wide acceptance and blockchain participation (with the Bitcoin network the foundation to many other successful crypto projects) cements its position in the ecosystem. Considering the envisioned role for Bitcoin as society’s decentralized, borderless store of value, its price trajectory is likely still in its infancy and it should continue to provide fantastic diversification benefits to a balanced portfolio through its low correlation with returns of other asset classes.
Furthermore, the cryptocurrency has been described as antifragile by some, implying that it is resilient and even benefits in the face of financial distress. This makes it appealing for an investor who wishes to hedge against an incumbent financial system during times of historic turmoil – as we are currently experiencing.
Despite the positives, Bitcoin is not without its drawbacks as an investment. A major weakness is significant price volatility along its upward trend – with a history of recurring booms and busts. Another weakness is that Bitcoin itself does not generate a yield.
Due to the sophistication and availability of financial instruments mentioned above, the IBA fund executes a strategy that mitigates these weaknesses – aiming to outperform the Bitcoin spot price. The result is a Bitcoin fund that enables you to prevent major drawdowns while generating a low-risk yield to cover the cost of this protection.
IBA Fund Strategy
Apart from being fully exposed to Bitcoin at all times, there are three key mechanisms at play that enable the fund to achieve its desired return profile: capital drawdown protection through the purchase of a put option, yield generation through lending activities, and the sale of an out-of-the-money call option to cover a portion of the cost of the put. No annual management fee will be charged to the fund with only performance fees for outperformance of its Bitcoin benchmark.
Capital drawdown protection using options
Preserving capital is a key concern for both traditional and cryptocurrency investors. This is the defining characteristic of the IBA fund in a market that poses severe downside risk over short time periods. The IBA strategy aims to limit capital drawdown to a maximum of 10% per calendar month. This is achieved by purchasing monthly put options to construct a full hedge on the fund assets. This ability to limit capital loss in volatile times is the main factor that cultivates IBA outperformance over the Bitcoin spot price. After a drawdown event exceeding 10% on the spot Bitcoin price, the IBA fund will outperform its Bitcoin benchmark. Therefore, when the market resumes its uptrend, the fund will appreciate from a higher base, allowing for greater compounding effects over the medium to long term.
Protective puts, however, are not free. Income received from the sale of call options is used to assist in covering the cost of the protective put. In traditional finance jargon this is referred to as a “collar”. The call options generally cap upside performance at 30% over a calendar month. Each month a new put will be purchased with a new corresponding sale of a call option. This is a necessary pay-off to protect capital drawdown. Over the backtesting period of 28 months, the upside cap was struck only 4 times, with IBA surrendering gains of 37% in total. Over the same period, the downside limit protected IBA 6 times, preventing losses of 66%. This divergence in the frequency of each cap being reached is expected to widen with time.
Yield for Outperformance
Digital asset lending has grown significantly over the past years enticing new market participants with the promise of outstanding interest rates on deposits. Providers such as Celsius, Nexo, and Genesis Capital aggregate crypto deposits and lend them to institutional clients for trading purposes. Peer-to-peer lending markets, such as the one offered by Bitfinex, have also surged in popularity. Often the USD lending rates on Bitfinex have exceeded 20% annualized. To take advantage of these rates, the assets in IBA will be lent out at the highest available rates, generating additional performance for the fund.
Ultimately, the IBA fund offers an enhanced Bitcoin investment opportunity. Downside protection with added yield generation on invested capital makes for a smoothed and more robust investor experience, in a market that can be unforgiving at times.
Invictus Capital are pioneers in the blockchain asset management space, having launched the world’s first tokenized cryptocurrency index fund in 2017, Crypto20, followed by the world’s first tokenized venture capital fund in 2018, Hyperion. The Bitcoin Alpha Fund (IBA) is their 7th tokenized fund offering: Subscriptions into the fund are facilitated on a daily basis through a number of digital assets, including USDT. For more information on the IBA Fund, or to view a range of other innovative investment products by Invictus Capital, please visit their website.