Bonds issued by cryptocurrency exchange Coinbase (COIN) and by MicroStrategy (MSTR), a business-intelligence company and investor in bitcoin, have slumped as investor confidence in the industry slid in the wake of FTX's collapse.
Coinbase's bond due 2031 has dropped 15% this month to 50 U.S. cents on the dollar, according to data source Finra-Morningstar, sending the yield – which moves in the opposite direction to price – to a record high 13.5%. The decline comes after nearly three months of consolidation and marks an extension of the bearish trend seen early this year. The yield on the company's bond due in 2026 jumped to 17%.
Bonds tied to MicroStrategy have taken a similar beating. On Friday, the yield on the company's 2028 notes, issued last year to finance bitcoin (BTC) accumulation, climbed to 13.35% as the price dropped to a record 72.5 cents on the dollar. MicroStrategy holds about 130,000 BTC worth approximately $2.08 billion on its balance sheet.
The companies' bonds carry a premium of around 1,000 basis points – or 10 percentage points – to the U.S. 10-year Treasury note yield, as of Friday. In traditional markets, a premium of that level is taken to represent credit stress. The 10-year Treasury was yielding 3.80% at press time.
"High bond yields are reflective of sharply higher rates but also of genuine skepticism about the long-term viability of crypto amongst institutional investors after the high profile collapses of Terra/LUNA, Celsius [Network], 3AC [Three Arrows Capital], Voyager [Digital], BlockFi and FTX," Mike Alfred, a value investor and founder of digital assets investment platform Eaglebrook Advisors, said.
Rich Rosenblum, co-founder of crypto trading firm and liquidity provider GSR, said the uptick in bond yields represents heightened credit risk.
"Especially for Coinbase, there is an argument that it benefits from FTX’s demise, solidifying their position in the U.S. So the narrative is improving on a micro level, whereas the crypto credit environment has deteriorated," Rosenblum told CoinDesk.
The Sam Bankman-Fried-founded digital assets exchange FTX filed for bankruptcy on Nov. 11, triggering concern of a market-wide contagion. Prominent venture capital firm Multicoin, one of the many exposed to FTX, told investors its net performance had dropped 55% this month and said FTX's collapse would wipe out many firms in the coming weeks, according to CNBC.
"Those bond yields were actually the first sign of weakness in the space. It was the canary in the coal mine, a sign of stress in the crypto space even before all the blowups this year," Darius Sit, founder and chief investment officer at crypto options trading firm QCP Capital, said. Sit said his firm would monitor the yields as a "possible leading sign of recovery."
While Coinbase may be insulated from direct fallout of the FTX collapse, its vulnerability to other adverse effects, such as reduced trading levels, may make investing in Coinbase bonds or stocks unappealing. That's certainly what many in the investor community seem to be thinking.
Last week, Goldman Sachs maintained a sell rating on Coinbase shares and slashed its 12-month price target to $41 from $49, saying that once FTX-induced volatility subsides, the lower level of crypto prices and the potential for reduced investor confidence will weigh on trading volumes. Shares in Coinbase have dropped 31% this month, ending Friday at $45.26.
"If you have capital at Coinbase – do your counterparty risk assessment now," Lawrence McDonald, the author of the popular Bear Traps report, tweeted on Sunday after noting the spike in bond yields and the share-price decline.
Some investors believe bonds tied to Coinbase and MicroStrategy are a safer way to bet on a crypto bull revival. While that's true, bonds are likely to underperform spot bitcoin.
"Bonds are a safer route since usually there is some recovery, even in the event of bankruptcy. But the upside is also far more muted," GSR's Rosenblum noted.
UPDATE (Nov. 21, 9:54 UTC): Adds FTX collapse, investor comments, Goldman Sachs report on Coinbase below chart.
UPDATE (Nov. 21, 12:14 UTC): Adds comments from GSR's Rich Rosenblum in the seventh paragraph and at the end.