What exactly are bonds? Why do people in the crypto world need to understand them?

People often say that “bonds are safe-haven assets”, but what does that actually mean? To put it simply: a bond is an IOU, issued by the government or a company. When you buy it, you're lending them money, receiving interest periodically, and getting your principal back at maturity.

How are bonds classified

• Government Bonds: US Treasury bonds, UK gilt-edged securities, these are the most stable.
• Municipal Bonds: Issued by local governments to build schools and roads.
• Corporate Bonds: Money borrowed by Apple and large enterprises.
• Savings Bonds: Small bonds purchased by retail investors

How to Make Money with Bonds

There are two sources of income from buying bonds: one is regular interest (called “coupon”), for example, a $1000 bond with an annual interest rate of 5% will give you $50 each year; the second is the price difference, bonds can be traded in the secondary market, and when interest rates drop, bond prices rise, allowing you to profit from the difference.

Key Point: Interest rates and bond prices move in opposite directions. Central bank raises interest rates → bond prices fall; central bank lowers interest rates → bond prices rise. This is why the direction of the bond market serves as a barometer for the economy.

Why the Crypto Community Should Pay Attention to Bonds

There are several important signals in the bond market:

1. Inverted Yield Curve = Signal of Economic Recession. Short-term bond yields are higher than long-term bonds, which has historically foreshadowed the arrival of a recession, often accompanied by significant fluctuations in the stock and cryptocurrency markets.

2. Interest Rate Trend = A barometer for the flow of funds. In a low-interest rate environment, money flows to high-risk assets (stocks, cryptocurrencies), attracting FOMO buyers; in a high-interest rate environment, traditional financial yields rise, and funds withdraw from the cryptocurrency market.

3. Investor sentiment switch. When the economy is good, everyone sells bonds to buy stocks and coins; when the economy is bad, everyone rushes to bonds seeking safety, and coin prices often drop simultaneously.

Benchmarking

Bonds vs Coins:

• Bonds: stable returns, low volatility, clear regulation, but yields are typically between 2-5%.
• Currency: High growth potential, high volatility, uncertain regulation, price increase may start from 10 times, or it may be cut in half.

The practice of smart investors is balanced allocation: bonds as the bottom line, stocks as the core, and using spare money for cryptocurrencies to pursue high returns. When bonds rise, it often means increased economic uncertainty, at which point one can consider reducing exposure to cryptocurrencies.

Core Insights

By focusing on the bond yield indicator, one can perceive changes in market sentiment in advance. When there are movements in the bond market, the cryptocurrency market often follows.