Crypto craze doesn’t impress bond investors


Bond markets recently held two informal referendums on cryptocurrencies. The results were not pretty.

El Salvador government bonds plunged in mid-September after the Central American nation became the first country to adopt bitcoin as its national currency.

Days later, cryptocurrency trading platform Coinbase issued $ 2 billion in corporate bonds, some of which have since lost around 4.5%.

The spread of blockchain retirement account technology to the art world has fueled optimism about a revolution in ‘decentralized finance’. Investors, however, remain lukewarm on debt issued by cryptocurrency evangelists.

Investors buy bonds for relatively safe but stable returns – the reverse of cryptocurrencies, which are subject to meteoric rises and equally extreme lows.

“There is so much uncertainty in this space and it’s not a level of uncertainty bond markets are used to,” said Lisa Ellis, analyst at MoffettNathanson who covers Coinbase. “Bond markets are risk averse.

Coinbase has partly exploited the bond markets to reduce its own risk, analysts said. The digital exchange wanted to bolster cash reserves against wild swings in cryptocurrencies, they said.

“It’s not uncommon, every four years or so, to see bitcoin decline of up to 75%,” said Rich Repetto, stock analyst at Piper Sandler & Co. “You want to be supported for this day of rain . “

Goldman Sachs sold the bonds to investors on September 14 at 100 cents on the dollar, but prices immediately fell following regulatory review of a lending program that Coinbase ultimately abandoned. Bonds due 2031, which pay a coupon of 3.625%, are now listed around 95.50 cents.

In contrast, a comparable high yield bond index fell around 1% over the same time frame, and bitcoin posted a slight gain.

While bond investors are exposed to losses, their potential gains are limited. Shareholders are not guaranteed a return on their investments, but their returns can increase indefinitely as long as earnings and valuations tend to rise. Coinbase owners chose to sell bonds rather than stocks to raise funds because issuing new shares would have diluted their stakes in the company, Ellis and Repetto said.

A Coinbase spokesperson declined to comment.

El Salvador turned bitcoin into legal tender in early September, saying the move would promote the financial inclusion of the country’s poor, a move crypto enthusiasts have called an important test case. The government bond due in 2035 lost about 6% of its value the next day and fell 17% in total since adoption to 75 cents on the dollar, according to FactSet data.

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The adoption of bitcoin smacked the desperation of investors, who sold Salvadoran bonds in recent weeks over concerns that political and economic instability could erode the country’s willingness to repay its bonds, analysts said.

Some have questioned the idea that a cryptocurrency would attract money into the economy.

“How will El Salvador attract [bitcoin] influx of related foreign direct investment when the risk of autocratic politics is generally dissuasive? Siobhan Morden, strategist at Amherst Pierpont Securities, said in a report.

A spokeswoman for El Salvador’s finance ministry did not respond to a request for comment.

Write to Matt Wirz at [email protected]

This article was published by Dow Jones Newswires


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