Bitcoin and Fixed Income

Fiduciary duty is the obligation to act in the client’s best interests at all times, prioritizing their needs above the advisor’s own, ensuring honesty, transparency, and avoiding conflicts of interest in all recommendations and actions.

This is something all advisors in the BFAN take very seriously; after all, we are legally required to do so. For the average advisor this is a fairly easy box to check. All you essentially have to do is have someone take a 5-minute risk assessment, fill out an investment policy statement, and then throw them in the proverbial 60/40 portfolio. You have thousands of investment options to choose from and you can reasonably explain how your client is theoretically insulated from any move in the ~markets~. From the traditional financial advisor perspective, you could justify nearly anything by putting a client into this type of portfolio. All your bases were pretty much covered from return profile, regulatory, compliance, investment options, etc. It was just too easy. It became the household standard and now a meme.

As almost every real bitcoiner knows, the 60/40 portfolio is moving into psyop territory, and many financial advisors get clowned on for defending this relic on bitcoin twitter. I’m going to specifically poke fun at the ‘40’ part of this portfolio.

The ‘40’ represents fixed income, defined as…

An investment type that provides regular, set interest payments, such as bonds or treasury securities, and returns the principal at maturity. It’s generally considered a lower-risk asset class, used to generate stable income and preserve capital.

Historically, this part of the portfolio was meant to weather the volatility in the equity markets and represent the “safe” investments. Typically, some sort of bond.

First and foremost, the fixed income section is most commonly constructed with U.S. Debt. There are a couple main reasons for this. Most financial professionals believe the same fairy tale that U.S. Debt is “risk free” (lol). U.S. debt is also one of the largest and most liquid assets in the market which comes with a lot of benefits.

There are many brilliant bitcoiners in finance and economics that have sounded the alarm on the U.S. debt ticking time bomb. I highly recommend readers explore the work of Greg Foss, Lawrence Lepard, Lyn Alden, and Saifedean Ammous. My very high-level recap of their analysis:

• A bond is a contract in which Party A (the borrower) agrees to repay Party B (the lender) their principal plus interest over time.
• The U.S. government issues bonds (Treasury securities) to finance its operations after tax revenues have been exhausted.
  • These are traditionally viewed as “risk-free” due to the government’s historical reliability in repaying its debts and the strength of the U.S. economy
• U.S. bonds are seen as safe because the government has control over the dollar (world reserve asset) and, until recently (20 some odd years), enjoyed broad confidence that it would always honor its debts.
  • This perception has contributed to high global demand for U.S. debt but, that is quickly deteriorating.
• The current debt situation raises concerns about sustainability.
  • The U.S. has substantial obligations, and without sufficient productivity growth, increasing debt may lead to a cycle where borrowing to cover interest leads to more debt.
  • This could result in more reliance on money creation (printing), which can drive inflation and further debt burdens.
  • In the words of Lyn Alden “Nothing stops this train”

Those obligations are what makes up the 40% of most the fixed income in your portfolio. So essentially you are giving money to one of the worst capital allocators in the world (U.S. Gov’t) and getting paid back with printed money.

As someone who takes their fiduciary responsibility seriously and understands the debt situation we just reviewed, I think it’s borderline negligent to put someone into a classic 60% (equities) / 40% (fixed income) portfolio without serious scrutiny of the client’s financial situation and options available to them. I certainly have my qualms with equities at times, but overall, they are more palatable than the fixed income portion of the portfolio. I don’t like it either, but the money is broken and the unit of account for nearly every equity or fixed income instrument (USD) is fraudulent. It’s a paper mache fade that is quite literally propped up by the money printer.

To briefly be as most charitable as I can – It wasn’t always this way. The U.S. Dollar used to be sound money, we used to have government surplus instead of mathematically certain deficits, The U.S. Federal Government didn’t used to have a money printing addiction, and pre-bitcoin the 60/40 portfolio used to be a quality portfolio management strategy. Those times are gone.

Now the fun part. How does bitcoin fix this?

Bitcoin fixes this indirectly. Understanding investment criteria changes via risk tolerance, age, goals, etc. A client may still have a need for “fixed income” in the most literal definition – Low risk yield. Now you may be thinking that yield is a bad word in bitcoin land, you’re not wrong, so stay with me. Perpetual motion machine crypto yield is fake and largely where many crypto scams originate. However, that doesn’t mean yield in the classic finance sense does not exist in bitcoin, it very literally does. Fortunately for us bitcoiners there are many other smart, driven, and enterprising bitcoiners that understand this problem and are doing something to address it. These individuals are pioneering new possibilities in bitcoin and finance, specifically when it comes to fixed income.

Here are some new developments –

• Private Credit Funds – The Build Asset Management Secured Income Fund I is a private credit fund created by Build Asset Management. This fund primarily invests in bitcoin-backed, collateralized business loans originated by Unchained, with a secured structure involving a multi-signature, over-collateralized setup for risk management. Unchainedo riginates loans and sells them to Build, which pools them into the fund, enabling investors to share in the interest income.
  • Dynamics
    • Loan Terms: Unchained issues loans at interest rates around 14%, secured with a 2/3 multi-signature vault backed by a 40% loan-to-value (LTV) ratio.
    • Fund Mechanics: Build buys these loans from Unchained, thus providing liquidity to Unchained for further loan originations, while Build manages interest payments to investors in the fund.
  • Pros
    • The fund offers a unique way to earn income via bitcoin-collateralized debt, with protection against rehypothecation and strong security measures, making it attractive for investors seeking exposure to fixed income with bitcoin.
  • Cons
    • The fund is only available to accredited investors, which is a regulatory standard for private credit funds like this.
• Corporate Bonds – MicroStrategy Inc. (MSTR), a business intelligence company, has leveraged its corporate structure to issue bonds specifically to acquire bitcoin as a reserve asset. This approach allows investors to indirectly gain exposure to bitcoin’s potential upside while receiving interest payments on their bond investments. Some other publicly traded companies have also adopted this strategy, but for the sake of this article we will focus on MSTR as they are the biggest and most vocal issuer.
  • Dynamics
    • Issuance: MicroStrategy has issued senior secured notes in multiple offerings, with terms allowing the company to use the proceeds to purchase bitcoin.
    • Interest Rates: The bonds typically carry high-yield interest rates, averaging around 6-8% APR, depending on the specific issuance and market conditions at the time of issuance.
    • Maturity: The bonds have varying maturities, with most structured for multi-year terms, offering investors medium-term exposure to bitcoin’s value trajectory through MicroStrategy’s holdings.
  • Pros
    • Indirect Bitcoin exposure with income provides a unique opportunity for investors seeking income from bitcoin-backed debt.
    • Bonds issued by MicroStrategy offer relatively high interest rates, appealing for fixed-income investors attracted to the higher risk/reward scenarios.
  • Cons
    • There are credit risks tied to MicroStrategy’s financial health and bitcoin’s performance. A significant drop in bitcoin prices could strain the company’s ability to service debt, increasing credit risk.
    • Availability: These bonds are primarily accessible to institutional investors and accredited investors, limiting availability for retail investors.
•  Interest Payable in Bitcoin – River has introduced an innovative product, bitcoin Interest on Cash, allowing clients to earn interest on their U.S. dollar deposits, with the interest paid in bitcoin.
  • Dynamics
    • Interest Payment: Clients earn an annual interest rate of 3.8% on their cash deposits. The accrued interest is converted to Bitcoin daily and paid out monthly, enabling clients to accumulate Bitcoin over time.
    • Security and Accessibility: Cash deposits are insured up to $250,000 through River’s banking partner, Lead Bank, a member of the FDIC. All Bitcoin holdings are maintained in full reserve custody, ensuring that client assets are not lent or leveraged.
  • Pros
    • There are no hidden fees or minimum balance requirements, and clients can withdraw their cash at any time.
    • The 3.8% interest rate provides a predictable income stream, akin to traditional fixed-income investments.
  • Cons
    • While the interest rate is fixed, the value of the Bitcoin received as interest can fluctuate, introducing potential variability in the investment’s overall return.
    • Interest rate payments are on the lower side

Admittedly, this is a very small list, however, these types of investments are growing more numerous and meaningful. The reality is the existing options aren’t numerous enough to service every client that has a need for fixed income exposure. I challenge advisors to explore innovative options for fixed income exposure outside of sovereign debt, as that is most certainly a road to nowhere. It is my wholehearted belief and call to action that we need more options to help clients across the risk and capital allocation spectrum access a sound money standard.

Additional Resources

• River: The future of saving is here: Earn 3.8% on cash. Paid in Bitcoin.
• Onramp: Bitcoin, The Emergent Asset Class
• MicroStrategy: MicroStrategy Announces Pricing of Offering of Convertible Senior Notes

Basilic LLC is a Registered Investment Adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for any individual. Listeners are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance. This is not tax, legal, or investment advice. Full Disclaimer.