There’s been a lot of innovation in the ETF marketplace over the past few years. In 2021, we got the first bitcoin futures ETFs, which was essentially the SEC’s first step at “test driving” crypto in an ETF wrapper. A couple years later, we got ethereum futures ETFs. That, of course, was just a precursor to the big launch of spot bitcoin ETFs in January 2024, the largest of which - the iShares Bitcoin ETF (IBIT) - has nearly $50 billion in assets.

Today, we’ve got a number of tangential crypto strategies to go along with the original ETFs. There’s bitcoin and ether together. There are bitcoin/Treasury rotation strategies. There are bitcoin covered call strategies. The development of new crypto-related products at this point seems potentially endless.

In March, REX brought the latest crypto innovation to the ETF marketplace - the REX Bitcoin Corporate Treasury Convertible Bond ETF (BMAX). Its objective is to provide total return through investments in convertible bonds issued by companies that hold bitcoin in their corporate treasury.

source: REX Shares

How Does BMAX Work?

To be clear, BMAX is not an investment in bitcoin. It’s, first and foremost, a fixed income vehicle with a built-in conversion feature into the equity of companies that hold bitcoin on their balance sheets. In that sense, it’s like any other convertible bond. It’s just that the issuers of these bonds are going to be heavily ingrained into the crypto space.

In REX’s own words:

The fund is actively managed and is intended to invest strictly in convertible bonds. However, it may contain equity holdings from time to time if those underlying bonds convert to equity. The fund anticipates a 20% cap on equity holdings at all times.

source: REX Shares

What’s In BMAX?

As you can probably imagine, there aren’t a whole lot of companies out there with significant bitcoin holdings on their balance sheets.

The most famous, of course, is Strategy (MSTR), formerly MicroStrategy. Even though it’s technically still a technology software company, it’s essentially just become a big bitcoin holding vehicle.

MARA Holdings (MARA) is another company that just in the past few days filed for a $2 billion stock offering in order to buy more bitcoin.

The world’s most famous meme stock, GameStop (GME), is trying to get in on the action in announcing a strategy shift that would see it buy up to $1.3 billion in bitcoin. The stock dropped around 20% following the announcement if you need to get a sense of what the market thought of the news.

Not surprisingly, BMAX’s portfolio has a very concentrated list of issuers. In fact, it’s only three right now - Strategy, MARA Holdings and Riot Platforms (RIOT). More than 80% of the portfolio right now consists of Strategy bonds.

source: REX Shares

Another nugget from BMAX’s prospectus:

A few thoughts on this:

• I’m happy to see that there’s a minimum threshold to qualify as a “bitcoin corporate Treasury company”. Sometimes, funds use a very loose qualifying criteria or low bar to entry in order to qualify for inclusion. That potentially allows those companies with little to no exposure to make it into the fund and ruin its pure play potential. The 15% floor helps to ensure you’re getting true bitcoin-exposed companies into the portfolio.

• I’m not sure the lack of a market cap minimum makes a big difference. Most of these issuers will likely be larger companies to begin with and the active management should allow some of the weaker or smaller players to be scrubbed out, if necessary.

• It’s not surprising that high concentration is to be expected. It may not necessarily be ideal, but there’s probably only going to be a limited number of companies that qualify for BMAX for the foreseeable future. Hopefully in the future, the universe will get a little larger.

Final Thoughts

In some sense, I think you could view BMAX as sort of a downside hedge on crypto exposure. If bitcoin (and, in theory, these stocks) go through the roof, the convertibles could be flipped into equities and shareholders could capture the upside. If bitcoin falls, the convertible can maintain its bond-like status and protect against some degree of downside risk.

The strategy makes logical sense and I can see it working. One potential issue could be that people who want bitcoin exposure will want to invest in spot bitcoin. They may not want a bitcoin-linked convertible bond fund. That, however, is a comment on investor behavior and not anything to do with the fund itself.

There are a number of variations of hedged downside strategies hitting the ETF market, so clearly there’s some demand there. The convertible bond strategy used by BMAX is unique and one that I think can have success over time. We just need a little more history to see how it plays out in practice.

Click HERE for more information on BMAX.