Crypto Bonds Are Coming – What Potential Investors Should Consider

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The announcement of a billion dollar bond issue – with significant proceeds to be spent on buying bitcoin – certainly grabbed the headlines, but against the backdrop of wider adoption of the blockchain and cryptoassets, it also raises several questions and considerations that should be addressed.

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Cryptoassets, and bitcoin in particular, have become mainstream financial conversation topics and have burst into mainstream conversation over the past year or so. That said, and even with the rise of blockchain and crypto-assets permeating financial markets and other aspects of society, one aspect of this technology has not been addressed; debt financing. Debt financing is integral to how most, if not all, organizations and nations finance ongoing operations. The intersection and integration of bitcoin (and crypto in general) with traditional financial markets and market functions is expected to continue unabated as the timeline moves to 2022.

There are certainly quite a few headlines and stories that will invariably accompany such an announcement, but there are several considerations that any potential investor or decision maker should take into account before proceeding.

Price. The billion dollar bond that is going to be issued by the nation of El Salvador will pay an interest rate of 6.5% when issued, which may look attractive given the interest rate levels current. Peeling through the layers reveals, however, that this nominal interest rate may not be as attractive as it first appears; rising inflation rates around the world will continue to weigh on these coupon payments. For any business or nation looking to issue debt backed by crypto assets, this is an important factor to consider; could the payment of the interest rate be adjusted according to changes in the business environment?

Like any other financial instrument, several components and factors should be considered prior to issuance, but – especially given the current interest and inflation environment – particular attention to the interest rates offered on this instrument should be a priority.

Collateral. Apart from the price of a bond or other financial instrument, there is also the question of how this obligation will be guaranteed, i.e. how this instrument will be taken care of. Bitcoin bonds and other related financial instruments might attract the most attention in today’s market, but are only an option for interested parties going forward. Crypto-assets have grown far beyond simple bitcoin and bitcoin-related instruments, and this range of crypto-assets are also available to support the issuance of more traditional financial assets such as bonds.

For policymakers looking to issue or govern crypto covered bonds or other financial instruments, the decision as to the specific crypto asset that will support the bond is important.

Reinvest. One of the most notable and interesting aspects of the bitcoin bond that will be issued by El Salvador is that approximately 50% of the proceeds, or roughly $ 500 million, will be used at any given time to purchase additional bitcoins. . The remaining 50% of the bond’s proceeds, estimated at around $ 500 million, will be used to fund and build the much-discussed bitcoin city, but there’s no reason every crypto-secured bond should run out of business. the same way.

One question that should always be asked – and evaluated – is what exactly the proceeds of the bond issue (or whatever) will be used for. Obviously, using the proceeds for capital construction should be considered, but adding the additional potential aspect of reinvestment can further complicate the situation.

The issuance of bonds and other financial instruments with a component of cryptoassets is a trend and a direction that does not appear to be fading. On the contrary, the merger and integration of crypto assets with traditional financial instruments seems well placed to continue to grow and develop in the future. That said, and aside from the hype and excitement that so often accompanies any institutional conversation regarding crypto, it’s important to remember that financial instruments should be valued on an objective basis. Crypto bonds offer a unique and differentiated advantage for policy makers and their issuers, but also need to be well researched and understood.

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