Summary I recommend buying COIN for growth and CONY for income, as CONY generates high-yield income from writing covered calls on COIN stock. Despite COIN's price volatility, CONY's monthly high-yield distributions offer a compelling income opportunity, especially for those reinvesting distributions as prices drop. Single issuer risk is a concern, but CONY's strategy of generating income from options premiums mitigates losses, making it suitable for income-focused investors. Positive Wall Street ratings and potential regulatory clarity in the crypto market further support my bullish outlook on COIN and CONY. Now that I am back from a short vacation to my niece’s wedding in Carmel-By-the-Sea, paid for by the passive income that I get from my Income Compounder portfolio, I am catching up on some of my investments. One of my mentors on Seeking Alpha is fellow contributor Steven Bavaria , who writes about income investing being like a horse race, where you only need to choose the horses (stocks or funds) that will finish the race. You don’t have to pick the winners by guessing right (i.e. guessing the right price at the right time to both buy and sell the stock) like you have to do with growth stocks that may or may not keep going up in price after you buy it. As long as the stock/fund (horse) keeps on paying income each month (runs the race) you will come out a winner in the long run. And there is no need to “eat your seed capital” by selling shares of a growth stock (i.e. capture capital gains) in order to collect that income, as Bavaria explains in his recent article . One pony that I have placed my bet on for the income it generates is a high-yield income fund, YieldMax COIN Option Income Strategy ETF (CONY). Like other YieldMax funds including YieldMax NVDA Option Income Strategy ETF (NVDY), which I previously covered in July, CONY generates option income from writing covered calls against a single underlying security, which in this case is Coinbase Global (COIN). The biggest risk to funds like NVDY and CONY is the single issuer risk, as described on the fund website. Single Issuer Risk. Issuer-specific attributes may cause an investment in the Fund to be more volatile than a traditional pooled investment which diversifies risk or the market generally. The value of the Fund, which focuses on an individual security COIN, may be more volatile than a traditional pooled investment or the market as a whole and may perform differently from the value of a traditional pooled investment or the market as a whole. The Fund’s strategy will cap its potential gains if COIN shares increase in value. The Fund’s strategy is subject to all potential losses if COIN shares decrease in value, which may not be offset by income received by the Fund. The Fund may not be suitable for all investors. Like NVDY, the CONY fund does not own shares of COIN directly. As a result, the price action of CONY follows the COIN stock price up and down but rises less during growth periods and falls further during downside moves. For example, in the past six months COIN has declined by -31%, but the price of CONY has declined by -52%. Seeking Alpha However, the difference in total return between the two over the same period is reversed when you account for distributions paid out by CONY over that 6-month period, with CONY down only -22% compared to COIN at -31%. Seeking Alpha That is because CONY pays out monthly high-yield distributions based on options premiums from writing covered calls. At the current price and distribution rate based on the most recent payout, the yield for CONY is over 100%. The distributions paid over the past 6 months amount to $10.3958. So as long as you did not sell any shares of CONY over the past six months, instead of losing 30% of your value, you would have gained over $10 per share in income. YieldMax This is a concept that does not fit well with many conservative investors who never wish to see an unrealized loss in their portfolio, but for income investors such as myself who live off of the passive income and are able to reinvest a portion of that monthly distribution into more shares as the price drops, CONY now offers an opportunity to buy or add while the price is down. Derivative Risk and Bitcoin Some analysts caution that CONY is a derivative investment that invests in a stock that it does not own and the reference stock, COIN, is essentially a derivative investment too, dependent on the cryptocurrency market . My thesis is that even if the price of COIN should continue to fall from its current levels, CONY will continue to generate income each month that it can distribute to shareholders as long as traders are still buying and selling COIN stock. The forward yield is likely to drop a bit due to variations in monthly call premiums, but even if the distribution gets cut in half from current levels, it still justifies the investment in CONY in my opinion. Because unless COIN files for bankruptcy and the stock becomes worthless (the horse fails to finish the race), CONY will continue to pay out distributions each month even if the price keeps dropping. To be a responsible analyst, I should include some additional background information regarding Coinbase, cryptocurrency risks and opportunities including Bitcoin, Ethereum and others, and other background information that may be pertinent to a CONY recommendation. Clearly, Bitcoin (BTC-USD) is the leading cryptocurrency and the one most closely followed. Anyone following BTC knows that it has struggled to maintain the $60k level for the past few months. In fact, as I am writing this article on September 17, 2024, BTC has just breached the $60k level again for the first time in 3 weeks, lifting other crypto-tied stocks like COIN. As the price of BTC and other cryptocurrencies rise again once the Fed announces the long-awaited reduction in interest rates, my belief is that the COIN will also reverse its downward price trend as it closely follows the price action of BTC. In fact, we are already starting to see that reversal in price action as can be seen in the 6-month price comparison of BTC and COIN. Seeking Alpha Coinbase Ratings and Outlook Wall Street analysts generally give a Buy rating to COIN, and those ratings have improved since July as the price of COIN has retreated. Seeking Alpha This further solidifies my belief that CONY will be able to continue to generate high-yield income for the foreseeable future based on options premiums from call writing on COIN stock. Other SA analysts have a more mixed opinion of COIN; however, one recent review suggests that COIN is now a Strong Buy and a great stock, no matter who wins the election. In addition to the positive Wall Street ratings, the SA Quant system gives COIN an A- in Profitability. Seeking Alpha Past Performance Is No Guarantee of Future Results Although the past performance of any investment is important to understand and should be reviewed, there is no guarantee that it will continue into the future. In the case of CONY, the past performance is shown on the fund website and is worth reviewing if you are considering an investment in the fund. Since inception in August 2023, CONY has generated a cumulative return of about 75% at market price and about 76% over the past one-year period, although that one-year return has been tempered by a barely positive 6-month return (as of the end of August). YieldMax This really demonstrates to me that it is important to look for good buying opportunities if you are interested in a fund like CONY. You must also be willing to accept the risk that the price that you paid for CONY may decline substantially and may not recover. An investment in CONY does assume that BTC and other cryptocurrencies will continue to appreciate, however, the income generated from options writing is not dependent on further price increases. Another potential catalyst for COIN (and thus CONY) is the potential for additional crypto legislation in the US, similar to what is already enacted in Europe and other parts of the world. According to Coinbase CEO Brian Armstrong, more legislation will lead to more capital flowing to COIN. When we meet with our institutional clients, and they're holding 1% to 2% of their portfolio in crypto and we say, what would it take for you to get to 10% or 20%, they all say, regulatory clarity. Concerning legislation, Armstrong stated: “If we get legislation passed in the US similar to how it's already been passed in Europe and other places. I think we'll see a huge inflow of capital,” speaking at the Goldman Sachs Communacopia + Technology conference. This bodes well for the future of the COIN, no matter who wins the election, because more legislation is inevitable as bitcoin and other cryptos mature. The approval of Bitcoin ETFs by the SEC in January of this year stimulated the crypto market initially, followed by later approval of Ethereum ETFs in July (which had less of an impact). It would appear that uncertainty over the US election results along with a lack of clarity around interest rate reductions has led to fear in crypto investing in August and September, causing the price of COIN to drop back to prices below where the stock traded at the beginning of this year. However, it appears now that COIN has consolidated around the $160 level and CONY has bottomed out at about $12. Recommendation: Buy COIN for Growth and CONY for Income I started a position in CONY in my own Income Compounder portfolio a few months ago and have been adding as the price has dropped. It has now become one of my largest income holdings, along with NVDY. I remain convinced that COIN has good potential for long-term growth and price appreciation, and I look forward to collecting monthly high-yield income based on the options premiums that CONY collects based on its call writing against COIN stock.
