Ethereum (CRYPTO: ETH) has outperformed Bitcoin (CRYPTO: BTC) since its inception. The world’s second-most popular cryptocurrency is still small enough to avoid the law of large numbers. It also has more utility than its larger rival, which could make it more valuable. In short, Ethereum seems like a better bet for a growth investor.
But what if you’re trying to augment that growth with a little bit of passive income? What if you could hold your Ether tokens and earn a yield on them over the long term? Now, with a few clever tricks, this seems possible and even easy to pull off. Here’s how.
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Ethereum ETF
Crypto exchange-traded funds, or ETFs, are not new. Several of these were approved in the last year alone. What is new, however, is Purpose Ether Yield ETF (TSX: ETHY.B). This recently launched ETF holds ETH in reserves but also offers unitholders a dividend yield.
This yield isn’t derived from staking ETH or using cutting-edge Decentralized Finance (DeFi) tools. Instead, the fund deploys a simple and traditional strategy — writing covered call options.
Put simply, Purpose sells the right to buy a portion of its ETH reserves for a certain strike price in the near future. These prices are usually higher than the current market price of ETH. Purpose collects the option premium traders pay for this call. That premium is distributed to the ETF investors as a dividend.
At the time of writing, the dividend yield ranges from 21.45% to 21.62% depending on the type of ETF you pick.
Is this safe?
Trading options based on cryptocurrencies intuitively seems risky. But if you take a closer look, you can see why this strategy is better than simply betting on ETH directly.
Firstly, Purpose stores the ETH. That means investors can avoid the cybersecurity risk of maintaining custody of their cryptocurrency independently. Secondly, the Purpose ETF qualifies for government savings programs such as the Tax-Free Savings Account (TFSA). That means triple-digit capital gains and double-digit dividends are all tax-free if held in a TFSA.
Finally, the covered call options strategy is relatively safe. Purpose has capped its downside risk. If the value of Ethereum surges, the company must sell a portion of its ETH holdings to the call option holder. If the price drops, the call option is never exercised, and the premium collected offsets some of the capital losses. It’s a win-win.
The Purpose Ethereum Yield ETF isn’t exposed to unlimited losses or debt. In fact, it benefits from the market’s volatility since premiums expand under such conditions.
That’s why this Ethereum ETF should be on your watchlist in 2022.
Bottom line
In my view, Ethereum is an ideal bet for any growth investor. However, the Purpose ETH Yield ETF adds an income component to enhance potential gains. It generates this yield with a relatively safe options strategy. If you’re looking for an aggressive tech bet in 2022, this one should certainly be on your radar.
