Bond markets held two informal referendums on cryptocurrencies recently. The results weren’t pretty.
El Salvador’s government bonds nosedived in mid-September after the Central American nation became the first country to adopt bitcoin as a national currency. A few days later, cryptocurrency trading platform
issued $2 billion of corporate bonds, some of which have since lost about 4.5%.
The spread of blockchain technology from retirement accounts to the art world has stoked optimism about a “decentralized finance” revolution. Investors remain lukewarm, however, on debt issued by cryptocurrency evangelists. Investors buy bonds for relatively safe but stable returns—the inverse of cryptocurrencies, which are subject to meteoric rises and equally extreme declines.
“There’s so much uncertainty in this space and it’s not a level of uncertainty that bond markets are accustomed to,” said
Lisa Ellis,
an analyst at MoffettNathanson LLC who covers Coinbase. “Bond markets are risk-averse.”
Coinbase tapped bond markets in part to reduce its own risk, analysts said. The digital exchange wanted to bolster cash reserves against cryptocurrencies’ wild swings, they said.
“It’s not unheard of, every four years or so, to see a pullback of as much as 75% in bitcoin,” said
Rich Repetto,
a stock analyst at Piper Sandler & Co. “You want to be shored up for that rainy day.”
sold the bonds to investors on Sept. 14 at 100 cents on the dollar, but prices immediately fell amid regulatory scrutiny of a lending program that Coinbase ultimately abandoned. The bonds due 2031, which pay a 3.625% coupon, are now quoted around 95.50 cents. In contrast, an index of comparable high-yield bonds fell about 1% over the same period, and bitcoin posted a slight gain.
While bond investors are exposed to losses, their potential gains are limited. Shareholders aren’t guaranteed repayment of their investments, but their returns can rise indefinitely as long as earnings and valuations trend higher. Coinbase’s owners chose to sell bonds rather than stock to raise money because issuing new shares would have diluted their stakes in the company, Ms. Ellis and Mr. Repetto said.
A spokesman for Coinbase declined to comment.
El Salvador turned bitcoin into legal tender in early September, saying the move would promote financial inclusion of the country’s poor in a move that crypto enthusiasts called an important test case. The government’s bond due in 2035 lost about 6% of its value the next day and has fallen a total of 17% since the adoption to 75 cents on the dollar, according to data from FactSet.
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The bitcoin adoption smacked of desperation to investors, who sold El Salvador bonds in recent weeks on concerns that political and economic instability could erode the country’s willingness to repay its obligations, analysts said.
Some questioned the idea that a cryptocurrency would draw cash into the economy. ”How is El Salvador going to attract [bitcoin] related foreign direct-investment inflows when the autocratic policy risk is typically a deterrent?”
Siobhan Morden,
a strategist at Amherst Pierpont Securities, said in a report.
A spokeswoman for El Salvador’s Ministry of Finance didn’t respond to a request for comment.
Write to Matt Wirz at matthieu.wirz@wsj.com
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