Bonds are traditionally a low-risk play for investors.

Historically during times of stress, for example during a trade war, under slowing global growth, or during escalating geopolitical tensions, investors start to rebalance their portfolios into less risky investments. 

Bonds also provide secure cash flow to ride out times of wider market insecurity. You put your capital in as a lender, and receive a monthly payment in return from the borrower, as well as getting your initial payment back at the end of the term. 

Because cryptocurrencies are largely uncorrelated to wider equity markets they are considered a safe-haven asset. 

So it makes theoretical sense for a cryptocurrency bond to be a safe-haven of a safe-haven: a safe-haven squared, if you will. 

The first regulated zero-fiat Bitcoin bond garnered a huge number of headlines when it debuted on 3 July 2019. 

This joint venture comes from Luxembourg-registered Argento Access and London Block Exchange (LBX).  

Securitisation firm Argento say their main focus is on “allowing asset managers to cost-effectively package their assets in easily-purchasable investment notes”; that is, by rolling up a bunch of assets up into one basket and then putting them on the market, they can reach a wider investing audience.

LBX for their part trumpet their status with the UK market regulator, the Financial Conduct Authority (FCA). 

Even though cryptocurrency exchanges are not yet formally overseen by the FCA, LBX is registered with the regulator as an EMD agent. It means they can act on behalf of Argento as an e-money institution. 

As an aside, the FCA recently issued final guidance on how it sees the market more generally, noting that it does not plan to regulate BTC, ETH, XRP or other cryptoassets. Though some tokens may meet the criteria to be considered e-money, and therefore fall within the FCA's perimeter. 

The Bitcoin bond comes in three durations. Each has its own International Securities Identification Number and is available through a Bloomberg Terminal and as such is recognisable to the standards expected by professional investors. 

Having this ISIN number is not to be sniffed at: what it means in practice is that the instrument aligns with all other registered securities and meets the same criteria for clearing, settlement and professional custody. 

Each is named for a quaint phrase common to the cryptocurrency market.

  • FOMO (ISIN: LU2014382175) lasts 18 months and offers monthly growth of 0.55%, annual growth of 6.67%

  • HODL (ISIN: LU2014382902) lasts three years, with a monthly growth of 0.58% and an annual growth of 7%

  • LAMBO (ISIN: LU2014382258)

    has the longest term at five years, promising a monthly growth of 0.67% and an annual return on investment of 8%

The maximum investment across each bond is 10,000BTC, so these products are aimed squarely at the institutional market. 

One crucial aspect of the Argento-LBX bond is that it is denominated entirely in Bitcoin. It is priced in Bitcoin, it settles in Bitcoin, and pays monthly interest in Bitcoin. 

There are no fiat off or on-ramps to deal with, and hence no expensive conversion fees from fiat to crypto and back again. 

Essentially, investors get to keep a greater proportion of their gains. 

Volatile, fickle and capricious

Fixed income products like bonds help to minimise risk and reduce volatility in a portfolio. 

Speaking to CNBC, wealth manager Douglas Kobak notes: “The right portfolio can add more safety, since [bonds] have a stated maturity date when compared to a mutual fund.” 

Without a set date for an investor to receive his principal back, uncertainty creeps into calculations about future earnings and profitability.  

Kobak adds: “Investment grade bonds also have a low correlation to the stock market, which can lower volatility.”

The volatility of Bitcoin itself has been widely reported throughout its lifecycle. Standard deviation from the mean on calculators like BitVol show that the world’s largest cryptocurrency with a volatility against the US dollar nearing 6%. 

And, as Hargreaves Lansdown analyst Sarah Coles explains:  “If your bond is denominated in a volatile currency, unless all your outgoings are in that currency, you lose these benefits: the value of the bonds you hold, and the income they return, fluctuates wildly.” 

In short, a bond that is fully denominated in Bitcoin is just another way to minimise the potential impact of volatility on a portfolio. 

99 problems and Deutsche’s one

The regulator’s role is a difficult one. 

Protecting investors is key for confidence, but allowing new products to come to market is never more important than in economies with slowing growth or falling enthusiasm. 

Investors will still seek that crucial alpha to beat the average returns of a stock market that’s likely to turn bearish. 

Let’s consider Europe, and Germany in particular.

The negative interest rates that have become a staple of Eurozone banking since the European Central Bank crossed the threshold in 2014 are creating severe problems for investment banks and professional investors alike. 

And Germany is close to defaulting on its sovereign debt. According to analysts, investors are paying Germany more and more to lend the country money. 

Welt markets reporter Holger Zschaeptiz tweeted this week that “Berlin sold €2.345bn of 10-year debt at a record low yield of -0.41% versus -0.26% at the July auction.”  

German mortgage-backed bond yields also turned negative for the first time in history, while 10-year bonds in the country are yielding fresh lows of -0.466%.

With a German recession all but a certainty in the latter half of 2019, innovation has never been more important. 

The regulator, BaFin, has shown some willingness to allow cryptocurrency products to come to market. 

BitBond’s security token offering is one such example. 

In May BaFin gave BitBond its blessing for a €3.5m token sale open to international investors, excluding those in the US and Canada. BitBond initially promised to buy back the tokens after 10 years. 

BitBond’s bond-like security, called BB1, offered a coupon value of 4% annually and was handed its own ISIN number. As we mention above, this fact gave it the institutional credibility that it would be professionally settled and held in custody.

One point to make here is that inexpert custody of assets, whether they are cryptocurrency-related or not, makes market regulators wake up in a sweat late at night. 

Institutional-grade custody, with all the cybersecurity and insurance protections expected of it, is an absolute must before large institutions will allocate any kind of capital.

According to BitBond, the token is now tradable as an EU-regulated product. It reported in July that investors from 87 countries had put down €2.1m in the debt security.

As we note in this explainer on security tokens, these are asset-backed investment contracts that meet the definition of a security, promising a future increase in value.

That value is ever more important as the German markets become more jittery, and institutional investors seek gains in fewer and fewer places.

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