Cryptocurrency pseudo bonds

Abstract

A growing number of firms are acquiring large positions in Bitcoin and other digital assets, raising questions about how cryptocurrency exposure affects financial risk. We develop a framework to evaluate the credit risk associated with holding cryptocurrency on corporate balance sheets. Using Bitcoin prices and option-based valuation, we construct pseudo-bonds, synthetic debt instruments backed by digital assets, to calculate yields, leverage ratios, and default probabilities. Cryptocurrency pseudo-bond yields are extremely high and volatile, reflecting cryptocurrency price dynamics. Using daily data from annual samples from 2020 to 2024, we examine correlations between changes in pseudo-bond yields and changes in corporate bond yields across leverage levels. Correlations are generally small once leverage approaches one and above, indicating weak short-run co-movement between crypto-linked credit risk innovations and traditional credit conditions at economically meaningful leverage levels. Our pseudo-bond framework is intended as a transparent screening and comparison device for expressing crypto exposure in credit-market terms.