With crypto-assets becoming increasingly mainstream as the financial instrument and Bitcoin making significant dominance, its potential was never challenged fully. As a result, it was quickly surpassed by Stablecoin and Central Bank Digital Currencies (CBDCs for transactional purposes. However, the recent announcement relating to issuing a $1 billion bond for purchasing Bitcoin is certainly making narratives in the crypto market. Additionally, it has created room for several questions and considerations which shall be timely addressed to ensure better sustainability of the Bitcoin bonds.
Bitcoin Bonds: Debt Financing
Despite the significant rise of blockchain and crypto-assets in several domains, the concept of Debt Financing remained unaddressed for a long time. Hence, with the announcement, Bitcoin seems to intersect and integrate with the financial market functions in the form of Bonds as the calendar transitions into 2022. These Bitcoin bonds are collateralized and supported by El Salvador to permeate the fixed income space. As a result, the announcement seems to make the headlines among potential investors for understanding its related implications to facilitate Debt Financing.
Pricing Structure for Bitcoin Bonds
The $1 billion bonds planned to be issued by El Salvador are expected to pay a coupon interest rate of 6.5% p.a. However, this nominal interest does not seem appealing to investors as the rising inflation tends to eat such coupon payments. As a result, every person (corporation or nation) planning to issue/invest such Bitcoin bonds shall consider if the interest rate payable will be adjusted per the change in the business environment.
Collateral standings for Bitcoin Bonds
Besides the bond pricing, the other key aspect that requires the investor’s attention is the fact, “How will these bonds be collateralized?” Crypto assets are developed beyond Bitcoin and related instruments. As a result, the emerging array of crypto assets is believed to support the issuance of more traditionally inclined crypto bonds in the name of Bitcoin.
Can Bitcoin Bonds with Reinvested?
The reinvesting norm of the Bitcoin bonds issued by El Salvador is the most notable aspect. Approximately 50% of the proceeds ($500 million) is planned to be used for purchasing additional Bitcoins. This additional 50 % of bonds will be brought to use for financing and constructing the Bitcoin city. Isn’t that an exciting and unique idea? However, some potential investors believe that the concept of reinvestment in Bitcoin bonds might complicate the Crypto bonds operations.
Dividends against Bitcoin Bonds
The first-ever dividend denominated in Bitcoin and fondly called “Dividends” has been issued to BTCS stakeholders. However, the idea of paying the dividend is a well-known financial practice that was either paid in fiat currency or equity shares. What stands notable here is that it was the first time such an event has occurred in financial history while reinforcing Bitcoin as an institutional asset class. There remains a lot to observe before this practice gains widespread momentum from institutions and public financial markets.
Potential of Bitcoin Bonds
The zest with which the world has welcomed Bitcoin Bonds makes it the trending component that does not seem to be fading in the dark. Also, the merging of such crypto-assets with traditional financial instruments is a unique blend with different upsides and downsides for policymakers. Hence, all it needs for now is patient understanding and a well-researched approach before allowing crypto bonds to mark their long-term existence.