As I pen this piece, I cannot help but think of a high speed car chase with a Bond girl in the passenger seat, anyway I digress.
You may have seen recently on the Forbes website an article about Bitbonds, an idea following the announcement of the U.S. Crypto Reserve and subsequent Digital Assets White Paper. We at Moneybrain have decided to break it down for you into simple terms, as we understand all this talk of Bitbonds is not the most intuitive to the layman in traditional finance
What Is a Bond?
A bond is effectively a bet on the country’s debt and the country’s ability to service the debt over time, paying interest for the liquidity bonds afford the government. It is like borrowing from the people and financial institutions with a promise to repay and a good credit score. For the most part, these bonds are risk free, as sovereign governments can print money and use quantitative easing to steady the ship and service the debt. Which is relatively easy to understand, so I hear you shouting at your screen: how can you do a Bitbond if it is government debt!
Well, the idea behind Bitbonds is the government borrows less for whatever means it issued the bonds for and in turn invests 10% of that bond’s value into Bitcoin, creating a revenue generating asset for both the government and the bond holder. So perhaps the idea is not so crazy?
Gold Standard Liberty Bonds
In fact, back in war times from 1917 to 1919, the government issued bonds similar to this using gold. The U.S. Federal Government Gold-Standard Liberty Bonds had the idea that gold would offset any potential issues with repayment concerns in wartimes. The fourth Liberty Loan of 1918 raised $6.99 billion. So the concept of such bonds is not without precedence, but these bonds are generally used when the government’s ability to service the debt it is taking on is under question. These bonds may seem smart, but they have often left bond holders high and dry, as they are at the mercy of policy, and the U.S. Gov chose to rug pull the gold promise via policy banning private gold ownership in 1933 through Executive Order 6102, forcing bond holders to instead redeem paper equivalence which was eroded greatly by inflation. So the concept of asset backed bonds has legs, but it is vulnerable to policy rug pulls!
Modern Day Evolution: India’s Sovereign Gold Bonds
Anyway, let’s circle back to present day, shall we! In present day, the risk of rug pulls by policy has been greatly decreased with India introducing Sovereign Gold Bonds, or SGBs, back in 2015, mixing debt with gold exposure. This worked well and offered attractive returns with 2.5% to 2.75% per annum of Gov debt on the value of your investment, plus exposure to the potential upside of a gold hike! Buy a gold bond with us and we will give you a steady annual return on your bond, which is a no brainer, as buying gold right out would not give you the debt return component.
Back to Bitbonds
So you may be starting to understand what a Bitbond might look like and why the idea that could seem fanciful may actually have legs to run the marathon. The Bitbond suggests a cautious component of just 10% of the bond invested into Bitcoin, offering returns as follows:
• 1% annual return
• Full $100 principle at maturity relative to investment
• 100% Bitcoin gain paid to investor until return reaches 4.5%, then a 50/50 split on returns with Uncle Sam.
With the White Paper, co-authored by Andrew Hohns and Matthew Pines, eyeing up $2 trillion issuance, the Bitbond seems to be the next evolution of the U.S.’s Gold Standard Liberty Bonds! With times having worked out the kinks and those cheeky loop holes from policy makers through executive orders.
Critique? These hybrid bonds, whether gold or Bitcoin backed, sound brilliant on paper, a sly way for governments to incentivise through flashing asset upside, but history shows they can backfire if policymakers flip the script. Still, with Bitcoin’s transparency baked in, Bitbonds might dodge the old rug pulls, though volatility could leave conservative bond holders sweating. If it launches, it is far punchier than plain bonds, but be aware of the downsides.