BitCoin Debt Issues
Is BitCoin the American dream at work? It is always exciting to see market makers rolling the dice with a new idea and using equity to make it happen. A new piece of this dream appears to be owned by an online business called Overstock. It has entered the BitCoin game and decided to invest in BitCoin debt. This debt will likely be unrated debt by S&P or Moody’s. Will any overseas financial rating institution be brave enough to post a rating on the first issue? Will Russia be the first country to rate BitCoin debt? It will be interesting to watch market forces move to control and master this new financial asset class.
Overstock recently announced that they will issue a $25 million private bond using the block-chain. The bonds will be traded a regulated exchange called Pro Securities (Overstock recently bought shares in the exchange). This may lead to the creation of a liquid Bitcoin or cryptocurrency debt market.
Bitcoin lacks investment grade companies issuance of Bitcoin debt or government issued BitCoin currency. It is illiquid. Can we envision an outcome which is not yet predictable? There are no firm answers at this time. BitCoin gold and silver coins can be seen in the marketplace. Is this part of the BitCoin currency? The BitCoin Euro and other denominations are a bit confusing. Does this present an element of collectible coin issuance? Will they trade as an ounce of silver, gold or platinum?
Investment grade bonds trade at attractive rates due to our current environment of low Libor rates and low cost of currency. This is a moment in time and rates fluctuate. This data point is utilized in the creation of interest rate derivatives. The BitCoin debt will have a significant premium over LIBOR which may be as high as 800 to 1000 basis points over LIBOR for eight to fifteen-years. A high premium is commanded in unrated debt with a high level of risk.
If Overstock is able to create an exchange where reputable Bitcoin and other cryptocurrency firms offer debt, a new basis for a BitCoin market forms and credibility enters the game. This new market will not develop overnight.
A large pool of creditworthy debt securities allows the creation of many new types of products. $25,000,000 is fairly small in this arena, but it is a decent start. Bond futures, interest rate swaps, swaptions, credit default swaps, and other products will now be possible.
BitCoin derivatives are currently traded in a small tight-knit anonymous group. A BitCoin bank application is underway overseas. BitCoin is used in America to purchase goods and services. This is a force of another type in the universe: people want options and privacy. The underground may have its fingers in this pie, but credible security forces at work include FBI and other law enforcement agencies stopping forces of blackmail and other illegal payment streams as the market matures. The market is being monitored.
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