Stone Ridge Asset Management LLC, which is based in New York, notified the U.S. Securities and Exchange Commission (SEC) of its plan to make Bitcoin part of the seven strategies for the Stone Ridge Diversified Alternatives Fund.
Stone Ridge notified the SEC by filing Form N-1A, which is “the primary document used to communicate information about the fund to the SEC and the public.”
According to the funds’s prospectus, this fund “seeks returns from diverse investment strategies”, which include “Reinsurance, Market Risk Transfer, Style Premium Investing, Alternative Lending, Single Family Real Estate, Healthcare Royalties and Bitcoin.”
With regard to the Bitcoin strategy, Stone Ridge says:
“[The] Bitcoin [strategy] seeks to generate returns by gaining exposure to the price of bitcoin by selling put options on bitcoin futures contracts. This strategy may also invest in pooled investment vehicles, such as registered or private funds, that themselves invest in bitcoin.“
It then went on to say:
“The Fund intends to gain exposure to the price of bitcoin by selling at-the-money or out-of-the money exchange-traded cash-settled put options on bitcoin futures contracts. This means that the strike price of the put options the Fund sells will be at or below the current price of the underlying bitcoin futures contract when the options are sold.
“In pursuing its put writing strategy, the Fund receives premiums from the purchaser for selling exchange-traded cash-settled put options on bitcoin futures contracts in exchange for providing the option purchaser with the right to exercise the option at a pre-specified price (the strike price) and at a pre-specified time in the future (the expiration date).
“If the market price of the underlying bitcoin futures contract is above the strike price at expiration, the option expires unexercised, in which case the Fund retains the premium it collected when it sold the option and has no further obligations.
“In the reverse scenario, if the price of the underlying bitcoin futures contract is below the strike price at expiration, the option buyer has the right to exercise the option and to require the Fund to pay the option buyer an amount in cash equal to the difference between the strike price and the market value of the underlying bitcoin futures contract, which would result in a loss to the Fund to the extent that such payment exceeds the value of the premium the Fund received for the option.
“In this way, the Fund seeks to generate positive returns but with less participation in market declines relative to what an investor might experience by holding the underlying bitcoin futures contracts, or bitcoin itself, directly.
“Bitcoin has historically generally exhibited high price volatility relative to more traditional asset classes.“
Stone Ridge also mentioned that the Fund “may also seek exposure to the price of bitcoin by investing in other pooled investment vehicles, such as registered or private funds, that invest in bitcoin directly.”
On 13 October 2020, Stone Ridge Holdings Group LP (also known as “Stone Ridge” or SRHG), announced that it has bought over 10,000 BTC (currently, worth over $100 million) “as part of its treasury reserve strategy.”
This news followed the announcements from MicroStrategy Inc. on September 15 that it had “purchased 38,250 bitcoins at an aggregate purchase price of $425 million” and from Twitter, Inc. on October 8 that it had “purchased approximately 4,709 bitcoins at an aggregate purchase price of $50 million.”
Robert Gutmann, co-founder and CEO of NYDIG, said at the time:
“As Bitcoin transitions to a predominantly institutionally-owned asset, NYDIG is better positioned than ever to be the leading provider of Bitcoin solutions to corporations, institutions, and banks.
“NYDIG grew out of the core capabilities we developed in 2017 to manage Stone Ridge Holdings Group’s investment and treasury holdings in Bitcoin, and today we serve our clients with the same platform.
“We are proud to have facilitated one of the largest commitments of treasury assets to Bitcoin announced to date, and see demand for our full suite of corporate treasury and investment solutions accelerating.”
Ross Stevens, founder of SRHG and founder and Executive Chairman of NYDIG, had this to say:
“We started NYDIG in 2017 because Bitcoin is an accelerant to the Stone Ridge mission of Financial Security for All. I view Bitcoin as a border-agnostic, uniting force for good. Bitcoin can propel global citizens that opt in towards a brighter, and fairer, financial future.
“From an investment perspective, we’ve long viewed Bitcoin as superior to cash. And now with unchecked – and unbacked – global paper money printing and real yields increasingly negative, SRHG’s more than 10,000 BTC are the principal component of our treasury reserve strategy.
“NYDIG’s corporate treasury solutions will be invaluable to other companies as they follow suit adopting the Bitcoin Standard for part or most of their treasury strategy. As the Fed’s balance sheet has increased $3 trillion since the beginning of 2019, the U.S. dollar has depreciated 70% against BTC.”
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.