Bitbond is issuing a security token to raise up to 100 million Euro (minimum 3 million) for their platform. Should you buy it?
By now you guys know that Bitbond (BB) is one of my favorite platforms and I've invested small amounts there since I first opened my account back in 2015. They are the only survivor from the first generation of Bitcoin lenders that did lending and repayment completely in Bitcoin. They preceded the ICO and token issuance craze of 2017. Many of my posts from 2014-16 go over Bitcoin lending (like BTCJam, BitLendingClub/Loanbase, and BB) extensively if you want to search for some of these terms. You should read the investment prospectus if you are considering an investment.
But back to the big question, should you buy this token as an investment?
Why This is a Big Deal
One of the emerging trends in Blockchain is tokenization. It means many things. The simplest definition is to take an asset that is illiquid like real estate or a patent, then
- create a token for it
- sell it off in pieces
- use blockchain for security, verification, and proof of not selling 150% of an asset like many scammers do on projects.
What many people including me are hoping is that tokenization will become a fundraising tool. Tokenization allows retail investors like us more investment opportunities in different assets that either hasn't been available at all before or only were available for institutional and accredited investors.
So the BB1 is a tokenization deal and that's important. And the question of whether this token is a security or not is clear. It is. Lastly, German regulator BaFin, the German SEC, approved this token issuing meaning
- The token is compliant with a major European government (1st compliant token in Germany) AND
- Germany is signaling to our market, be compliant, follow this path, and you can issue a token as well
Both have huge implications for tokenization that are positive.
Why Bitbond Wants the Money
BB's use of funds (Lightpaper p.8) are 4 uses split up into a 40-40-10-10 split.
- 40% for investments in loans on the Bitbond platform
- 40% for the financing of junior notes to leverage available capital
- 10% for working capital for BB
- 10% for a bug and bounty program and administration
It's important to note (also on p.8) that new subsidiary Bitbond Finance is the issuer of the token while Bitbond stays the lending platform. BB Finance will provide working capital as well as invest in loans on the BB loan platform.
Bitbond accepts Euro through SEPA, Stellar (XLM), BTC and ETH for investments in the token. The BB1 is issued on the Stellar blockchain.
Payout Structure: How You Get Paid
A promise of part of a company's future cash flows is one important aspect that makes a token a security. It's very clear that Bitbond intends to do this making the clarity around the 'Is this a security?' question as clear as any example we have seen in cryptocurrency.
So how do you get paid if you invest?
Payment #1: Quarterly Interest Payments
A payment of 1% per quarter or 4% per year in interest will be paid to you as a token holder. Your payments will come in January, April, July, and October (Prospectus, p.10).
Payment #2: Variable Interest Payment
Along with the 1%, an additional payment of 60% of pretax profits for the year will be paid out to token holders (Prospectus, p. 10). This payment is variable and if the company loses money, then the variable interest payment is Zero. This payment starts in July 2020.
Payment #3: Return of Capital
The BB1 token has a 10-year maturity meaning Bitbond intends to return your capital at a value of 1 EUR=1 BB1 token. However, anytime after Dec 31, 2021, BB can redeem your tokens with 3 months notice at the same value.
When we look at these 3 payment structures, numbers 1 and 3 make this look like a bond as its a fixed income investment with no equity. There is a quarterly payment like a coupon on a bond. Yet, payment #2 which is often called an 'equity kicker' because it's like having equity in terms of profit participation puts this in the category of hybrid security with mostly bond-like features and an equity-like feature. This type of security is common in conventional finance but is brand new for the crypto-economy.
I think this is smart and savvy of BB to use a common security structure to help it get approved.
The bonds will not be traded in the conventional markets with an ISIN or CUSIP but the bonds are transferable on the Stellar blockchain so you can sell your bonds if you no longer want to hold the investment.
Discounts Available for Early Buyers
The raise is based on a 1 EUR priced BB1 token with discounts. Here is the discount chart in their 'light paper' (p.7) and account holders got this in an email as well.
As of today (March 15), we are still in discount tier 1 meaning you can buy your token for 0.70 EUR instead of 1 EUR, a 30% discount. The ROI for you if you do this on the quarterly interest payments increases from 4% to 5.7% (4/70). This is a pretty sweet interest rate for the same risk others are paying to get 4%.
It's going well for BB so far with lots of interest, as you can see by this first-day report on Twitter where they are @Bitbond
Happy to inform you that the 1st day of the #BitbondSTO was a success! From noon until midnight we reached an investment volume of 1M EUR!
— Bitbond (@Bitbond) March 12, 2019
BB has its risks that it's had from the beginning of loan performance, potential illiquidity, operational risks, and management risks. I've discussed these risks here on my blog (search Bitbond) at various times.
The question is, does the BB1 token itself or Bitbond have additional risks from issuing these tokens that they did not have before issuing the BB1 token?
Liquidity risk here is two types: Operational and Token market. On operational liquidity, BB could just run out of money. It's a common startup issue especially in an emerging market like Bitcoin/cryptocurrency lending. Token market liquidity means that there may not be enough buyers and sellers on the Stellar blockchain if you want to sell your bond or buy more of them.
While you maintain your rights to your interest payments and return of capital in 10 years, this token can be subordinated for other debt (Prospectus, p.15). This means Bitbond can borrow or issue new debt whose repayments come before your repayments do. Many bonds carry this risk and the BB1 token does too. You should be aware.
Securities NOT US Registered
The BB1 token is not registered under the US Securities Act of 1933. The token offer 'does not apply' to those subject to US or Canadian tax laws (Prospectus, p. 17). The bonds are subject to German laws.
Management/Key Man Risk
Personnel and management risks can affect performance especially for those with certain key qualifications (Prospectus, p.21). Since the market in cryptocurrency generally is changing so fast, executives can join other firms or areas that were once strengths for the company can erode quickly.
A key man is just what it sounds like, someone who is vital to the organization. The prospectus doesn't say this but I do. CEO and founder Radoslav (Radko) Albrecht is a key man. As managing director of both Bitbond and Bitbond Finance, there is a potential issue of conflict of interest with Radko (p.17). The more important factor to me is his importance to the company. Should he leave, the company will suffer, plain and simple. And this is a risk you need to understand.
Interest Rate Risks
It's hard to think that in a world where interest rates are so low throughout the world and negative in parts of Europe that 4% could be considered an insufficient return for the risk but it could happen. Interest rate environments change.
Stellar Lumens Risk
I'm a big fan of the Stellar Lumens project and hope it's successful. As a BB1 token holder, you have a risk in Stellar because XLM is the settlement currency (Prospectus, p.48). Your quarterly payments and your variable payment will be made into your wallet in XLM. As the settlement currency, a big move in XLM can affect your returns one way or another.
Conclusion: To Buy or Not to Buy
As an American, I can't buy into this offering (see Not Registered Risk above). And you also know that I like Bitbond and Radko. I've been a fan of what they are doing for a long, long time.
If you can get over the key man and the subordination risks, then I think this is as good a token to purchase as any I've seen in the crypto-economy. Why?
- It's compliant
- It's not promising equity or something else it has no intention of delivering. It's a clear bond/hybrid offering
- Radko and his team have very high integrity
- It's the longest running active crypto lending platform
- They are only issuing as many tokens as they sell so no dilution or unfixed amount of tokens issued
Bitbond is doing the first European compliant token offering and I hope it's just the first of many to follow. They made some smart decisions about the type of security to offer and are now carving a path for others to follow. I hope they are successful.