Debt issued by Coinbase, El Salvador underperformed in recent weeks, prompting bond investors to warn about the volatility of cryptocurrencies
The spread of blockchain technology from retirement accounts to the art world has fueled optimism about the “decentralized finance” revolution. However, investors remain weak on debt issued by cryptocurrency campaigners. Investors buy bonds for relatively safe but stable returns—unlike cryptocurrencies, which are subject to meteoric rises and equally extreme declines.
“There is a lot of uncertainty in this area and it is not the level of uncertainty that the bond markets are used to,” said Lisa Ellis, an analyst at Moffett Nathanson LLC, who covers Coinbase. “Bond markets are risk-averse.”
Analysts said Coinbase used the bond markets to hedge its risk. He added that the digital exchange is looking to bolster cash reserves against the wild swings of cryptocurrencies.
“It’s not unheard of to see bitcoin drop by up to 75% every four years,” said Rich Repetto, stock analyst at Piper Sandler & Co. “You want to be on the sidelines for that rainy day.”
Goldman Sachs sold bonds to investors on September 14 at 100 cents on the dollar, but prices quickly fell amid regulatory scrutiny of a lending program that was eventually abandoned by Coinbase. Bonds payable by 2031, which pay a 3.625 percent coupon, are now quoted around 95.50 cents. In contrast, the index of comparable high-yield bonds fell nearly 1% over the same period, and bitcoin posted slight gains.
While bond investors are exposed to losses, their potential gains are limited. Shareholders are not guaranteed the repayment of their investments, but as long as earnings and valuation trends increase, their returns can increase indefinitely. Coinbase owners opted to sell bonds instead of stocks to raise money because issuing new shares would have reduced their stake in the company, Ms Ellis and Mr Repetto said.
A Coinbase spokesperson declined to comment.
El Salvador converted bitcoin to legal tender in early September, saying the move would promote financial inclusion for the country’s poor, in what crypto enthusiasts call an important test case. Government bonds lost about 6% of their value the next day in 2035 and have fallen a total of 17% since adopting 75 cents on the dollar, according to FactSet data.
Bitcoin adoption has disappointed investors, who have sold El Salvador bonds in recent weeks over concerns that political and economic instability could undermine the country’s willingness to repay its obligations, analysts said.
Some questioned the idea that cryptocurrencies would draw cash into the economy. “How to draw El Salvador” [bitcoin] When autocratic policy risk is usually a deterrent, are there related foreign direct-investment flows?” said Siobhan Morden, strategist at Amherst Pierpont Securities, in a report.
A spokesman for El Salvador’s finance ministry did not respond to a request for comment.
Write to Matt Wirz at [email protected]