The leadership of the US Federal Reserve (Fed) is known to be skeptical of cryptocurrencies, but it was recently revealed the central bank could ironically be one of the early adopters of the first bitcoin (BTC)-linked junk bond through its investment in an exchange-traded fund (ETF).
Following the pandemic outbreak last year, the Fed intervened in the markets by injecting cash into bond exchange-traded funds, among others. The bank’s investment made it the SPDR Bloomberg Barclays High Yield Bond (JNK) ETF fourth-largest owner, of the crypto-linked bond, as of late March, per Bloomberg data.
On June 9, MicroStrategy offered USD 500m worth of junk bonds to pave the way for its further investments in BTC, attracting investors who are seeking more exposure to the cryptocurrency but cannot buy them directly for various reasons.
ETFs are financial instruments that trade on an exchange like stock, but track a specific market or asset, such as bitcoin. As some 0.01% of the SPDR Bloomberg Barclays High Yield Bond ETF is dedicated to the MicroStrategy junk bonds, this technically means that the FED, provided it still holds the bonds, is facilitating the software company’s future investments in bitcoin.
In other words, taking into account Fed Chair Jerome Powell’s statement from last April when he said bitcoin should be considered “a highly speculative asset,” this would mean that the US central bank contributed to speculation.
Additionally, the iShares Broad USD High Yield Corporate Bond ETF (USHY) is reportedly another Fed holding that also owns "a small sliver" of the MicroStrategy debt.
Commenting on MicroStrategy’s inclusion in the fund, Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said he was “surprised to see it in there so soon” even though it “was a pretty small amount”.
“Fixed-income portfolio managers have a bit of discretion of which bonds they can have in the portfolio, so they could be adding a small potion ahead of a possible index inclusion,” Psarofagis said.
The junk bond’s buyers are to obtain a 6.125% coupon on their investment which cannot be repaid early for the first three years.
“Bitcoin has arrived to Wall Street,” Michael Saylor, CEO of MicroStrategy, told Bloomberg earlier this week. “My mission is to carve a channel between the [USD] 400 trillion ocean of conventional assets and the [USD] 1 trillion Bitcoin pond.”
This said, some market observers claim the bond does not provide its buyers with benefits that are equal to direct investments in the cryptocurrency.
“A bond has a fixed return, so you’ll never get the upside of bitcoin, the issuer will,” said Christopher White, CEO of financial services company ViableMkts, so those investors who are bullish on the cryptocurrency “might as well just buy the bitcoin.”