Grayscale has submitted an application for a Zcash ETF designed to distribute payouts to shareholders on a bi-weekly basis. These cash distributions would originate from option sales rather than direct ownership of the cryptocurrency.
The submission was delivered to the U.S. Securities and Exchange Commission (SEC) on September 25 and could go into effect 75 days later during the early part of December.
How Grayscale’s Zcash Income ETF Would Pay Investors
The planned ZCSH High Income ETF will not actually store Zcash (ZEC), the privacy-centric digital currency. Rather, the filing notes that it trades options linked to Grayscale’s current spot fund, known as The Zcash ETF (ZCSH).
An option functions as an agreement granting a purchaser the privilege to buy or sell an asset at a predetermined price. The party selling the contract receives an upfront payment designated as a premium.
To mirror the price fluctuations of ZCSH, the fund combines purchased call options with sold put options. It subsequently sells short-term call options—typically expiring in a month or less—to gather premiums, which in turn finance the distributions.
A minimum of 80% of net assets must be allocated to options on Zcash exchange-traded products. Nonetheless, the regulatory paperwork clarifies that the phrase “high income” does not guarantee a specific yield, and certain disbursements may merely hand back a portion of an investor’s principal.
What’s the Catch for Zcash ETF Investors?
Issuing call options limits potential profits. Should ZEC surge past the selected strike price, the fund forfeits those profits while still enduring the entirety of any downward price movement.
Furthermore, this options market is in its infancy. ZCSH launched its trading activity on August 25, with its corresponding options debuting shortly after on September 8.
Grayscale additionally points out a potential conflict of interest. An affiliate belonging to the fund’s adviser acts as the sponsor for ZCSH and collects its fee, which is noted by Yahoo Finance at 2.50%. According to the filing, the trading activity of the new fund might boost demand for ZCSH and consequently raise the fees collected by that affiliate.
Zcash ETF Demand Sets Up the Income Play
ZCSH has experienced consistent capital inflows. The vehicle transitioned from a 2017 Grayscale trust holding approximately $260 million in assets.
By the conclusion of the week ending September 18, total assets climbed to $914.5 million following cumulative inflows of $271 million. BeInCrypto noted that the single week’s haul of $98.2 million outpaced all other cryptocurrency ETFs.
Comparable income-generating vehicles already exist for Bitcoin (BTC). Grayscale manages a Bitcoin covered call ETF, and Goldman Sachs submitted paperwork for a Bitcoin premium income fund during April.
Information regarding the forthcoming fund’s ticker symbol, trading exchange, fees, and sub-adviser was left blank within the documentation.