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Bitcoin Bond Moves the Cryptocurrency Closer to Legitimacy

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The popularity of Bitcoin is reaching a fever pitch, and the cryptocurrency seems to hit historic highs every other day. As more people learn about the wonders of cryptocurrency and seek to increase their exposure, the asset class’s king coin continues to amass value. Bitcoin currently has support at the $4000 level and peaked at $4500 briefly this week before modestly retreating.

Part of the fuel stoking Bitcoin’s fire is institutional. Governments, investment banks, and hedge funds all want a piece, and a Japanese company called Fisco is the latest to climb on the bandwagon by announcing their intention to create a bond backed with Bitcoin.

Fisco issued the first three-year bond to another company in their group earlier this month. Worth 200BTC, the equivalent of around $840,000 at current prices, this simple fundraising exercise is the next logical step for a country where cryptocurrency already enjoys widespread support.

As the mysterious digital asset moves towards the world of traditional finance, how will it behave? (See also: Bitcoin to Form a Third Currency. When Does It End?)

Past Efforts to Bring Bitcoin Into the Fold

The Winklevoss Bitcoin ETF was one of the first attempts to bring Bitcoin into the mainstream. Run by the Winklevoss twins of Facebook fame, the idea was for regular Americans to invest in Bitcoin through their IRA or 401(k) accounts, for example.

The SEC rejected the idea, stating that “it [did] not find the proposal to be consistent with Section 6(b) (5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices…” In other words, Bitcoin was unsound.

Since then, progress has been made in creating Bitcoin-denominated derivative assets. Many exchanges, such as BitMex, allow futures trading with as much as 100x leverage. The upcoming release of the ICNX (a cryptocurrency index) also has traders waiting with anticipation. Other ETFs are cropping up as well, and the SEC has even agreed to take another look at the Winklevoss’ product. As blockchain technology matures, its string of successes and adoption in countries like Japan have other governments rethinking their positions.

Governments have traditionally been extremely wary around Bitcoin and other cryptocurrencies, saying little and doing less. While some exchanges are insured by the U.S. FDIC, in practice this does little to protect a Bitcoin investor or speculator. After the ETF rejection, Bitcoin’s price dropped around 20% but quickly recovered.

Because governments have not adopted Bitcoin in any meaningful sense, hedge funds and other market makers have taken to buying it the traditional way—through exchanges. This has driven the price upwards dramatically, despite the “investment” itself being impossible to regulate. However, as more investors pour their money into cryptocurrencies, governments could feel increasing pressure to act, and the position they take will have an enormous influence on price.

‘The Man’ Is Coming, and He Wants Your Bitcoin

Why is Bitcoin hard to regulate? For one, it would literally require a new status quo in encryption to be established. The SHA-256 standards protecting Bitcoin’s blockchain are currently nearly impossible to break. This makes transactions close to anonymous and tax avoidance easy. By holding their Bitcoin in an exchange, even the most massive gains are made untouchable to entities like the IRS.

If governments can manage to incorporate Bitcoin into their national financial infrastructures and impose transparency standards, it will surely have a significant impact on price. Given the ability to invest in derivatives, indices, and other Bitcoin-based instruments, the market’s money might drain out of Bitcoin itself and move elsewhere. Widespread availability and increased liquidity may force people to compare Bitcoin to other liquid assets: a comparison that, currently, would see Bitcoin as the loser.

Bitcoin’s anti-establishment tendencies have made it attractive to many, and until now the market has largely been like the Wild West. These conditions have been price-positive, which makes sense because Bitcoin is designed as a decentralized currency. As Bitcoin centralizes and legitimizes with the help of governments, the corruption of its primary founding principle could collapse the cryptocurrency entirely, or see it finally hit its “moon.”

 

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