Bonds issued by cryptocurrency exchange Coinbase and business intelligence firm MicroStrategy fell to historic lows as interest rates soared and institutional confidence in the cryptocurrency industry plummeted.
Coinbase, one of the leading cryptocurrency exchanges in the United States, has seen its existence Warranty Due to the 2031 decline of 15% in November. The bond is now trading at around 50.5 cents on the dollar, indicating that investors believe there is a high probability of default. The yield, which moves opposite bond prices, jumped to 13.5%. The yield on Coinbase’s bond due 2026 jumped higher, to 17%.
A bond issued by MicroStrategy, a business intelligence firm owned by bitcoin fanatic Michael Saylor, also took a hit. The price of its 2028 notes fell to a record low of 72.5 cents on the dollar, and yields rose to 13.35%.
MicroStrategy originally issued these bonds to fund their investments in Bitcoin. Currently, the company owns about 130,000 bitcoins, which is equivalent to about $2.1 billion. Last quarter, the company lost approx $3.4 billion due to the decrease in the price of bitcoin.
Rising prices, collapse of FTX push bonds higher
The Fed rate hike has affected high-growth and risky assets such as technology and cryptocurrencies. Higher interest rates push bond yields higher across the board, making investors less likely to achieve high returns in speculative projects.
However, Coinbase and MicroStrategy’s bond prices are disproportionately high and cannot be explained by interest rates alone. The two companies’ bonds currently carry a premium of about 1,000 basis points over the Treasury notes. The current 10-year US Treasury yield 3.78%.
Higher premiums (and lower bond prices) are likely to be affected by lower institutional confidence in cryptocurrencies. The collapse of FTX was a huge blow to institutional crypto adoption, as many institutions saw it Cut off exposure to digital assets.
Bonds are trading lower when investors believe there is a high chance that the issuing party will not be able to repay. This could happen because of anticipated liquidity issues, or if investors think the issuer is likely to go bankrupt.
Markets seem to think we haven’t seen the end of FTX infection.
High discounts on cryptocurrency bonds may indicate that the cryptocurrency market is about to experience more pain.