Market Analytics and Technical Considerations
As investor confidence in the sector dipped following the collapse of FTX, bonds issued by cryptocurrency exchange Coinbase (COIN) and bitcoin investor MicroStrategy (MSTR) have both fallen.
According to data source Finra-Morningstar, Coinbase’s bond due in 2031 has dropped 15 percent this month to 50 cents on the dollar. This has brought the yield, which moves in the opposite direction of price, to a record high of 13.5 percent. The decline is an extension of the bearish trend that began this year and comes after nearly three months of consolidation. The company’s bond, which is due in 2026, now has a yield of 17%.
The same has happened to MicroStrategy-related bonds.On Friday, the yield on the organization’s 2028 notes, gave last year to fund bitcoin (BTC) collection, moved to 13.35% as the value dropped to a record 72.5 pennies on the dollar. On its balance sheet, MicroStrategy has approximately 130,000 BTC worth approximately $2.08 billion.
As of Friday, the bonds of the companies are worth more than the yield on a 10-year U.S. Treasury note by about 1,000 basis points. A premium at that level is considered to represent credit stress in conventional markets. At the time of writing, the 10-year Treasury yielded 3.80 percent.
Higher treasury yields are an indication of sharply rising rates but also of genuine skepticism according to valuation investor and Eaglebrook Advisors founder Mike Alfred, about the long-term viability of crypto among institutional investors after the high profile collapses of Terra/LUNA, Celsius [Network], 3AC [Three Arrows Capital], Voyager [Digital], BlockFi, and FTX.
The rise in bond yields, according to GSR liquidity provider and co-founder Rich Rosenblum, indicates an increase in credit risk.The narrative is improving on a microlevel, whereas the crypto credit environment has deteriorated,” the argument goes, “especially for Coinbase, there is an argument that it benefits from FTX’s demise, solidifying their position in the United States.
On November 11, the digital asset exchange FTX, founded by Sam Bankman and Fried, filed for bankruptcy, raising concerns about a market-wide contagion.CNBC reports that Multicoin, a well-known venture capital firm that is one of the many businesses that are affected by FTX, informed investors this month that its net performance had decreased by 55% and that the collapse of FTX would wipe out many businesses in the coming weeks.
In fact, those bond yields were the initial indication of weakness in the market.It was the canary in the coal mineshaft, an indication of stress in the crypto space even before every one of the blowups this year,” Darius Sit, pioneer and boss speculation official at crypto choices exchanging firm QCP Capital.
Even though the FTX collapse may not have a direct impact on Coinbase, its vulnerability to other negative effects, such as lower trading levels, may make investing in Coinbase stocks or bonds unattractive. That certainly seems to be the sentiment of many investors.
Goldman Sachs maintained a sell rating on Coinbase shares last week and lowered its 12-month price target from $49 to $41, stating that once FTX-induced volatility subsides, trading volumes will be impacted by lower crypto prices and the possibility of lower investor confidence. This month, Coinbase shares fell 31% to $45.26 at the close on Friday.
Bonds tied to Coinbase and MicroStrategy, according to some investors, are a safer bet on a crypto bull market revival. Even though that’s true, spot bitcoin is likely to outperform bonds.
Bonds are safer because, even in bankruptcy, there is typically some recovery. However, there is also a much smaller upside.
