Worlds Collide: Bond Issuance and Bitcoin Buying

At last, my worlds have collided. No, not in the way they collided for social miscreant George Costanza, but rather in a beautiful and harmonious way. Software company MicroStrategy will soon issue a $400 million bond in order to purchase Bitcoin only weeks after it converted $250 million of its treasury reserves from dollars to Bitcoin. And with that, the bond markets and the Bitcoin market will merge, and the two parallel careers I’ve built for myself will suddenly become one.

Bonds and Bitcoin

I spent my youth aspiring to participate in the financial markets, learning how to analyze charts and observe linear trends before my teenage years. Eventually I realized my dream and became a US Treasuries trader for an institutional asset manager in 2016. I safely guided enormous client portfolios in and out of positions in the dollar’s “risk-free” asset on behalf of my former employer, trading over $100 billion notionally per year. Much of that volume occurred in Treasuries, which were treated as “cash” on the balance sheet of each institutional client. These Treasuries (T-Bills and T-notes with less than 2 years until maturity) lacked any quantifiable risk to us and our clients because Treasuries are still the safest way to store dollars in a broken dollar system. The volume I traded was personally staggering but existed simply because corporations, universities, and governments have so much cash they literally have nowhere else to put it. I didn’t mind: the volume I traded with the world’s largest investment banks gave me access to some of Wall Street’s finest minds. But the sheer volume of money sloshing around the financial system steered me toward an even more important path: it pointed me down the Bitcoin rabbit hole, a world previously unfamiliar to me that possessed a much stronger gravitational pull on my intellectual curiosity than any other macroeconomic market I had experienced prior. Little did I know, bonds and Bitcoin would be entirely joined at the hip only half a decade later.

Corporate New Issuance

One of the most interesting things I saw during my time on the fixed-income trading desk was massive corporate bond issuance to the tune of trillions of dollars annually. But what do those corporations do with all that cash once they issue bonds? Until they’re ready to spend it on projects, research and development, or share buybacks, a lot of the money ends up in Treasuries and other interest rate markets. I had a front seat to the flurry of fixed-income market activity revolving around corporate new issuance. Corporations and banks constantly place hedges via interest rate swap, foreign exchange swap, and Treasury futures markets in order to quantitatively manage their newfound balance sheet expansion. This finally brings us to MicroStrategy, which won’t need to hedge its interest rate position upon its new issue but instead will need to purchase an enormous slug of Bitcoin.

Anticipating Fireworks

When MicroStrategy successfully prints its debt issue and takes custody of $400 million later this month, it will bolster its cash position which it proudly denominates in bitcoin (BTC) rather than in dollars (USD). What ensues might be the most fascinating market activity in Bitcoin’s young history. While traditional economic and financial theory suggests that the news of an incoming $400 million purchase of Bitcoin in the open market has already been priced into the market, reality might tell an entirely different tale. Never before in Bitcoin’s history has such a gargantuan purchase been pre-announced, and never before has such a wave of buying hit the market all at once. Even the staunchest “efficient-market-hypothesis” adherents will eagerly observe the subsequent price action to see just how a purchase of 20,000 BTC is met by the readily available (or not so available) supply across Bitcoin exchanges. Acquiring it will certainly put pressure on the price, regardless of one’s opinion on the speed at which markets adjust to news.

graphic by https://twitter.com/YungGucciT

Even more interesting than the BTCUSD price impact of MicroStrategy’s bond issuance is the linkage between the bond and Bitcoin markets that will undoubtedly blossom as a result. Just as corporate new issue and interest rate swap markets are linked (a process called rate-lock explained here), corporate new issue and Bitcoin markets will now be linked going forward. Investment banking trading desks will be forced to offer clients financial products that allow Bitcoin hedging and conversion for clients looking to replicate MicroStrategy’s effort. By converting a balance sheet liability (its bond offering) into Bitcoin as an asset, the company is betting that its cost of borrowing will pale in comparison to the time value of money associated with holding Bitcoin. And the world will be watching to see the result.

Layered Money

MicroStrategy’s poetic and wildly enthusiastic-about-Bitcoin CEO Michael Saylor deemed the dollar an inferior cash instrument to Bitcoin in a flurry of tweets and media appearances over the past few months to justify the allocation. He might be the first CEO of a large corporation to engage in this type of treasury reserve allocation, but he definitely won’t be the last. In my forthcoming book Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, I examine how Bitcoin has already achieved legitimacy as a global reserve currency and will continue to drive corporations like MicroStrategy into a state of balance sheet denomination duality in which entities hold cash denominated in both USD and BTC. MicroStrategy’s share price, denominated in USD, has partially morphed into an expression of the BTC/USD price as a function of this duality because so much of its assets are held in Bitcoin. This enigma will leave executives and policy makers scratching their heads in the years to come as they try to decide how to denominate their reserves, especially if the Bitcoin price reverts to its parabolic roots.

I spent this year weaving both of my worlds into one because the blurred line between Bitcoin and macroeconomics frankly disappeared in 2020. I did this by writing a book about the international monetary system that includes a vision of the future with Bitcoin at the center. Bitcoin won’t replace all currency on this planet, but it will serve as the reserve asset of all digital currencies just as it serves as the reserve currency in the cryptocurrency world today. Central banks are about to launch their own crypto-competitors, and banks will certainly follow suit in order to stay relevant in the rapidly changing monetary environment. But all new digital currencies, from central banks and banks alike, will eventually face final settlement versus BTC as the only digital currency on our planet immune to supply manipulation. I am beyond excited to share my vision for our monetary future in only a few weeks: Layered Money will be available on Amazon worldwide on January 26, 2021. The Kindle version can be pre-ordered here, and print and audio versions will be available on the release date. Please visit my website LayeredMoney.com for more information and follow me on Twitter.

bitcoin-native financial theory, adjunct professor of finance and business economics @USCMarshall