Bond investors are cautious of cryptocurrency’s high volatility
Bond markets recently organized two informal cryptocurrency referendums.
The results? Nothing worth writing home about. That’s because of high uncertainty and volatility of cryptos — a level of uncertainty that bond markets aren’t familiar with.
In mid-September, El Salvador’s government bonds dipped after the country adopted Bitcoin as a legal tender. Days later, Coinbase — one of the world’s best crypto exchanges — issued corporate bonds worth $2 billion.
Some have since lost nearly 4.5% of their estimated value.
However, investors are on the fence about crypto, and for a good reason.
Investors buy government bonds for safe and stable returns. It’s a different ball game for cryptocurrencies, which can steeply rise or strangely dip at any time.
Bonds are ideal for a rainy day
Market analysts intimate Coinbase bought government bonds to avert potential risks. The crypto exchange said they did so to strengthen their cash reserves against the wild volatility of cryptocurrencies.
Rich Repetto, a stock analyst at Piper Sandler & Co., alleged that it’s common for digital currencies such as Bitcoin to nosedive as much as 75%, every four years or so. “You want to be shored up for that rainy day”.
Last month, Goldman Sachs sold bonds to investors at 100 cents on the dollar. Then prices immediately dipped thanks to regulatory scrutiny of the Lend product — a Coinbase program that the exchange canceled after SEC issued lawsuit threats.
The bonds, which are due in 2031 — and which pay a 3.625% coupon — now have a 95.50 cents valuation. At the same time, another high-yield bond lost about 1% over the same period. Bitcoin, on the other hand, slightly soared.
Government bonds attract limited potential gains
While bond investors are likely to experience losses, their potential gains are limited. There’s no guarantee that bond shareholders can get returns from their investment, but as long as their earnings and valuations soar higher, returns will steeply rise.
To boost their cash reserves, Coinbase sold their bonds instead of stock. By doing so, they saved the company’s stakes from being diluted — which is what happens when a company issues new shares. Coinbase is yet to comment on the matter.
Though El Salvador adopted Bitcoin as a national currency, their government’s bond depreciated the following day to nearly 6%.
Currently, the bond has depreciated to new lows of about 17% (75 cents on the dollar) since the Central American nation adopted Bitcoin. El Salvador’s bond is due in 2035.