In a groundbreaking development for the burgeoning cryptocurrency investment space, global asset manager Calamos has launched a first-of-its-kind bitcoin exchange-traded fund (ETF) that pledges to completely shield investors from the downside risk of the notoriously volatile digital asset. By cleverly combining positions in bitcoin-linked options and U.S. Treasury bonds, the actively managed CBOJ fund aims to open the floodgates for cautious institutional investors to gain exposure to the world’s largest cryptocurrency by market cap.
Bridging the Bitcoin Adoption Gap
Bitcoin’s meteoric rise from obscure cryptographic experiment to trillion dollar asset has made it impossible for professional money managers to ignore. However, the cryptocurrency’s stomach-churning price swings, with drawdowns sometimes exceeding 80%, have kept many institutional investors watching warily from the sidelines.
Calamos’ innovative ETF could be the missing piece of the puzzle, providing a level of downside protection that cautious institutions crave. By dynamically allocating to U.S. Treasury bonds and bitcoin options, the fund engineers 100% principal protection over any rolling one-year period.
We believe this ETF could be a game-changer for bitcoin adoption among risk-averse investors like pension funds and endowments. It addresses their number one concern, which is the potential for catastrophic losses.
– John Calamos Sr., Founder and Global CIO of Calamos Investments
How the Downside Protection Works
The core downside protection mechanism rests on two key pillars:
- Treasury Bond Allocation: A portion of the fund’s assets are invested in U.S. Treasuries sized to grow back to the initial investment amount over a one-year horizon, irrespective of bitcoin’s price path.
- Bitcoin Options Exposure: The remaining capital is deployed into bitcoin options in a manner that provides capped upside participation.
This barbell strategy of risk-free bonds and asymmetric options exposure seeks to entirely eliminate bitcoin’s famous downside risk, which the Calamos team views as the key psychological barrier to wider institutional adoption.
The Tradeoff
Of course, limiting downside risk to 0% comes with a tradeoff in the form of capped upside participation. For the CBOJ product, the upper bound is set at 10% to 11.5% over the one-year horizon. Calamos will also offer two companion ETFs, CBXJ and CBTJ, with respective downside protections of 90% and 80% and commensurately higher upside caps of 28% to 30% and 50% to 55%.
Even with constrained price appreciation potential, many institutional investors may find the ability to “Bitcoin without tears”, as one hedge fund manager described it, a highly attractive proposition. For those able to tolerate a modicum of loss in a worst-case scenario, the higher upside caps of the CBXJ and CBTJ variants may prove appealing portfolio additions.
A Liquid Alternative to Private Placements
The new offerings can also be viewed as liquid, regulated alternatives to the restricted private placement vehicles that many larger institutions have utilized to date for gaining controlled exposure to bitcoin and other digital assets. Compared to the bespoke structured products issued by crypto-friendly investment banks, an ETF provides far superior liquidity, transparency, and accessibility.
With the launch of this product family, we’re democratizing institutional-caliber exposure to bitcoin. Investors can access this strategy directly in their brokerage accounts, with the flexibility to trade throughout the day.
– Calamos Co-CIO and Head of Strategies Matt Freund
Amid a challenging regulatory environment that has thus far stymied the issuance of a pure-play spot bitcoin ETF in the U.S., Calamos’ protected products are positioned as the next-best thing from the perspective of a fiduciary bound by the prudent investor standard. While not providing direct ownership of bitcoin itself, the funds’ engineered muting of downside volatility may resonate with the legions of professional investors who have long been bitcoin-curious but unwilling to risk the potential career damage that could result from an outsized drawdown.
Validation and a Path Forward
The ability to secure this downside protection using only U.S. Treasury bonds and bitcoin options can be seen as a strong validation of the maturation of bitcoin’s derivatives markets and its continuing financialization. The rapidly expanding menu of regulated, liquid instruments linked either directly or indirectly to bitcoin’s price makes strategies like Calamos’ possible on an efficient, scalable basis that would have been unimaginable just a few short years ago when bitcoins still primarily traded peer-to-peer or on unregulated offshore exchanges.
Looking ahead, it will be fascinating to see if Calamos’ innovative approach to harnessing the bitcoin options market to deliver precise, tailored risk-reward profiles kickstarts a new wave of increasingly sophisticated crypto-linked ETF products. One could imagine a future proliferation of funds further segmenting the downside protection spectrum at even finer gradations, or dynamically shifting their risk postures in response to market conditions or investor sentiment.
Should Calamos’ offerings find receptive audiences and inspire imitators, the knock-on effect in terms of legitimizing and destigmatizing bitcoin among mainstream institutions could prove substantial. Few events would herald bitcoin’s final arrival as a permanent feature of the global financial landscape more decisively than its widespread adoption by the most risk-averse of investment fiduciaries. With the advent of Calamos’ genuinely novel approach, that previously far-fetched prospect may have just taken a significant leap forward.
