Bitcoin is getting closer to looking like a traditional financial product.
Japanese financial information firm Fisco announced Monday it is experimenting with the country’s first bitcoin-backed bond. The news follows other announcements in the last several weeks for bitcoin options, futures and an exchange-traded fund tracking bitcoin derivatives in the U.S.
“I think it’s a very healthy and natural progression of the space,” said Adam White, Coinbase vice president and general manager of its GDAX exchange, told CNBC in a phone interview.
Derivatives products will allow for greater liquidity, better price discovery and lower volatility, White said. “I think products like derivatives or an ETF effectively allow traders to do two things: speculate and hedge risk on the price speculation.”
Bitcoin price 12-month performance
Bitcoin has more than quadrupled in price this year, hitting a record above $4,500 Thursday and notching a market value of $74 billion amid growing institutional investor interest in the digital currency. Many governments and financial institutions see enormous potential for improving transaction security and efficiency using the blockchain technology that supports bitcoin.
But the surge in investor demand has also revealed access issues with third-party storage systems and trading platforms that fall short of the more established Wall Street markets.
Bitcoin’s price is also prone to massive swings of several hundred dollars within a day. With bitcoin futures in the works, investors will be able to protect themselves from potential sharp drops in prices through hedging.
The ability to hedge bitcoin investments paves the way for other products, such as bonds.
Fisco’s three-year bitcoin bond was issued by its digital currency exchange unit for an internal trial on Aug. 10, according to a Google translate of the press release.
The bond has a three percent annual interest rate and returns bitcoins when it matures, the release said. The total worth of the bond was 200 bitcoin, or $900,000 at Thursday’s prices.
The bitcoin bond “brings digital currencies into the world of high finance,” said Dan Doney, chief executive officer of Securrency, which plans to launch a platform at the end of the year to allow investors to buy stocks using bitcoin. Doney was chief innovation officer at the U.S. Defense Intelligence Agency before co-founding Securrency in 2015.
The biggest challenge is “it is very difficult to predict the price of bitcoin tomorrow, let alone a year from now,” Doney said.
A bitcoin-backed bond would allow large institutions to store value using the digital currency and potentially be more open to accepting bitcoin as payment, analysts said.
“It is interesting financial firms are trying to get their arms around the currency and what it can be,” said Brian Patrick Eha, author of “How Money got Free: Bitcoin and the Fight for the Future of Finance.”
In early August, the Chicago Board Options Exchange said it planned to launch bitcoin futures as soon as the fourth quarter of this year. That paved the way for VanEck, which sells gold ETFs and other investment products, to file last Friday with the U.S. Securities and Exchange Commission for a “VanEck Vectors Bitcoin Strategy ETF” that proposes to initially invest in bitcoin futures.
The U.S. Commodity and Futures Commission in late July also approved a digital currency trading platform called LedgerX to clear derivatives.
Historically cryptocurrencies “were very much a domain for crypto anarchists and tech-savvy people, and that has changed in the last couple years,” said Niklas Nikolajsen, CEO of Swiss-based digital currency broker Bitcoin Suisse. “This means a whole new ballgame of people are going to get access to the market.”