Bitcoin Bonds

[jamietheframe]

I have been thinking about how bitcoin bonds & bond market could be structured. I don't think this would need to compete with or replicate the current government bond markets, but rather offer some kind of fixed income option/asset that is tied to BTC that would be able to be treated as a bond type asset. This could act as an alternative fixed income asset over long periods that would give stability and security to large portfolios (like government bonds are supposed to do now). I will explain what I came up with and would be more than happy for some criticism.

Because BTC is disinflationary by design then creating an inflationary interest paying bond would be difficult to imagine. In fact I think that any kind of financial debt or credit based system would be difficult to construct with BTC without a second layer that includes an inflationary secondary asset.  So the closest thing I could image to a fixed income government bond would be a "100% coupon bond" that would have no principal value to be redeemed at the completion of the bond's term. It would work rather like an options contract with an agreed purchase dates at various set dates in the future.

Let me try to explain with this example:

Image that BTC has a current market price of $50k for 1 BTC on Jan 1st. A 5 year bond contract could be created between two parties where one side agrees to sell one BTC and the other agrees to buy the BTC at an agreed price of $50k. The bond contract would have 5 coupon redemption dates, on Jan 1st each year for the next 5 years. On these dates $10k dollars and 0.2BTC are exchanged between the two parties. After8the fice years one BTC and $50k dollars will have been exchanged.

If the price of BTC increases or decreases then the value of either side of the contract agreement would increase or decrease proportionately. Also, this could act as a hedge against volatility in the market and ensure a fixed income stream from static assets like BTC. It is also worth considering the premium that would be paid either in USD or BTC for this type of contract. If someone thinks that the price of BTC is likely to increase in the coming years then he would be inclined to bid up the USD side of the contract, whereas someone who is convinced BTC will fall in price will bid up the BTC side. It is also worth considering how risk premiums would be integrated into the price. It is worth mentioning that of course the other side of the agreement doesn't need to be limited to a fiat currency like USD.

Does this kind of thing already exist? It would be very possible to implement as a smart contract, probably even on the BTC network using Lightening or Liquid.

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[jackg]

I don't think there would be enough trust in a system like this. Either for the bond issuer or the bond buyer, what happens if there's a problem along the way for selling the bond and how is this much different than what can already be done manually (or perhaps with some simple automation)? It's recommended you hold an investment in bitcoin for more than 5 years to make a profit (if you're going to hold) I think one year would bring too much volatility that it could completely crash out an asset like this - especially if the expiration dates are all on the same day or a lot coincide...

El Salvador tried making a bitcoin bond that works like a normal fiat bond but was collateralised by bitcoin but was unable to sell any of them (at least that was the news last time).

[adaseb]

Interesting concept but I don’t think it’ll work.

If there are any types of bond related to crypto it can be like corporate bonds such as the ones that banks issue to raise funds. Obviously a bank wouldn’t issue a bond like this but say Coinbase might.

Coinbase obviously won’t since they went public already to raise funds but they can issue some Bitcoin bonds and pay coupons based on some agreed upon rate.

It’s possible however I don’t think it will happen.

[Tytanowy Janusz]

1- bonds are issued by company/government not to create "fixed income asset" for others but to collect founds. So we would need someone who would like to borrow against the strongest asset of last decade instead of fiats that are going down day after day. Gambler/speculant would do that but not big companies/government
2- bonds are popular with fiats because every fiat owner needs to fight inflation 24/7. Average home in US in 1920 cost 6000$! With bitcoin you don't need to fight.
3- "If someone thinks that the price of BTC is likely to increase in the coming years then he would be inclined to bid up the USD side of the contract, whereas someone who is convinced BTC will fall in price will bid up the BTC side." - why not simply short/long using futures?

[rokok lokal]

Bitcoin was never just a currency or a transaction system, or even just a new financial system. It has always been the way to solve the problem of collective action at the global level.

Decentralized systems always have their drawbacks, but they also allow for much better scaling and power distribution than systems that rely on a central figure or node. As such, we expect that use cases for bitcoin will continue to evolve over time to include new types of contracts and agreements that were never possible before in the physical world.

We cannot be certain that this will happen in the future. but if you think about it. It would be a revolutionary innovation if we could open a trustless decentralized bond platform.

The technology is here, but it's not clear what the government's regulatory status will be like in the future. Regardless, people would definitely flock there.

[DVlog]

I do not care if this idea worked or not but it is charming to know that Bitcoin getting its deserved attention. The way everything going on it won't be too long before everybody must or wants to jump into cryptocurrencies. Probably this idea won't succeed because basically value of the bond doesn't change much. Bitcoins volatility is the bearer but this could lead to a new innovation.

[jamietheframe]

I would like to add some thoughts on why someone would buy this type of product. Thinking out loud here...

1) For the BTC buyer it is equivalent to dollar cost averaging at an agreed price over the duration of the bond. If the price of BTC rises in USD during the period then you would be getting a great deal for the BTC, if it falls you would be overpaying. This is also like saying you have a fixed income in bitcoin at an agreed USD price which would remove the volatility and the risk associated with the purchase. You would also have the value of the bond that could be traded to return the remaining capital if the price moves against you.

2) For the USD buyer (BTC seller) it is nice way to guarantee USD income over a period of years. If I had done that last November I would be selling my BTC for $60k now. It is a good way to have a fixed income over a period of years, particularly if my BTC is likely to fall in price over the short term.

3) The payment period and dates can be whatever is agreed, like one year term with 4 payment dates for example. There would subsequently be a likely differential between term lengths and premiums paid for the BTC (like the yield curve in gov. bonds). I would for example demand a much higher USD payment for my BTC over a 30 year period, somewhere over $200k at least - for 1/30th of BTC each year for 30 years that would be $6.66K per year. This would need to reflect the long term weakness in the USD compared to BTC.

[Hydrogen]

OP you're describing something similar to bitcoin futures contracts.

Bitcoin futures: What are they and how do they work?

The world of bitcoin – and by extension, the world of cryptocurrency – has been given a lift by the US Securities and Exchange Commission (SEC) recently giving its seal of approval to allow a new bitcoin futures contract exchange-traded fund (ETF) to start trading.

But what are bitcoin futures contracts, and how will this affect the price of bitcoin? Let us explain.

Bitcoin futures contracts explained

A futures contract is an agreement to carry out a transaction at some point in the future at a price that is agreed today.

In other words, if the value of something goes up before the sale is completed, then the person buying the item – whether it a fiat currency, stocks, commodities or, in this case, a cryptocurrency – gets a good deal. If the price goes down, however, then the person selling the item gets the better end of the bargain.

https://currency.com/bitcoin-futures

BTC futures contracts can trade with 100x leverage in addition to the other benefits mentioned. Making them a boon for savvy traders and a massive liability for everyone else.

The way you describe "bitcoin bonds" is closer to put and call options trading than treasury bond markets, if I remember correctly.

I think crypto futures ETFs are legal in the united states. Wheras spot based crypto ETFs are not.