The fair value of a BB1 token — or what should be your maximum price for it?
Last year the Berlin based crypto company bitbond issued the security token BB1 (ITIN: 8WR5-AKBG-X) in Germany’s first, completely regulated STO (security token offering). BB1 is structured like a bond of the issuer Bitbond Finance GmbH, with a fixed coupon of 4.00% p.a. (frequency: quarterly), and a floating coupon of 60% of the pre-tax profit of the issuer (frequency: annually). By the time of writing this article, the issuer already succeeded to pay the coupon for three quarters. The BB1 token is now tradeable on Stellar. Which ultimately raises questions about the fair value of a BB1 token.
If you want to buy a BB1 token at the Stellar DEX you have to pay it with Lumen (XLM). Which makes the equation a bit more tricky.
But let’s start with the structure of the BB1. While issuing the BB1 token, an investor had to pay 1 EUR per BB1. (Early subscribers etc. profited from additionaly discounts, which I will be ignored in the following for simplification reasons). Each token represents an 1 EUR bond, with a duration of 10yr. By 1. July 2029 the issuer promises to pay back 1 EUR to an holder of the BB1 token. Both, the coupon and the final payment are done in XLM. For these payments, a real-time exhange rate between XLM and EUR is used. (Remark: I didn’t find any conrete information about the rate the EUR-based payments are converted into the XLM amounts being paid to the investors. Please see as endnote my update 2020–07–02 to that remark.)
If we assume, that the investors can exchange the received XLM into EUR for a similar price (the real-time rate), the investment into BB1 is still strongly tied to EUR.
Let’s bring all these facts together. If we compare the BB1 token with a similar bond at the bond market, we had to look at corporate bonds in EUR with moderate ratings, a term to majurity of a bit less than 10yrs, a fixed coupon of 4% (let’s ignore the success based coupon for further simplification). A conservative estimation of the price for such a 1 EUR bond is around 1 EUR, at least as long there are no bad news from the issuer, or something worse like a default in the coupon payment. Consequently, 1 EUR might be a fair price for a BB1 token as well. Or at least a price which you assume as fair value of such a structured bond.
Let’s go back to the Stellar exchange. Given the valuation above, the price of a BB1 should fluctuate with the XLM/EUR rate. If you have to pay 10 XLM for one EUR, the price of a BB1 should be around 10 XLM as well. And if the price of EUR rises and you have to pay 20 XLM per EUR, the price of a BB1 should rise to around 20 XLM. Interestingly, the historical BB1 prices doesn’t behave in that strict correlation.
The figure above shows the historical rates of BB1 in XLM since July 2019. And the figure below the historical rates of XLM in EUR in the same time.
As you can see, both are not totally in sync. There were already a lot of opportunities for arbitrage, especially with the large spreads for BB1/XLM which are currently at the Stellar DEX.
Within this article I can’t answer the question about the real value of the BB1 token. This will be answered by the market. But by looking at the fundamentels, the fair value of a BB1 should somhehow correlate to the XLM/EUR rate as discussed above. If you have to pay 10 XLM for a EUR, a similar price for a BB1 should be fair, as long there are no bad news from the issuer. And if someone sells at this moment the BB1 for only 8 XLM, you get a 10yr 1 EUR bond with a 4% coupon for only 80ct. This could be a good deal for the buyer. And even the issuer might be interested in bying back it’s loan for a good price.
Update 2020–07–02
On my written requests bitbond clarifies the question of the applicable XLM/EUR exchange rate:
Concerning the EUR/XLM exchange rate, as described in the prospectus section C.8: “the EUR value at 12:00 CET (Central European Time) corresponding to the due date of an interest payment or the redemption of the bonds will be converted into XLM using the EUR — XLM exchange rate displayed on the website www.cryptocompare.com (or a comparable platform selected by the Issuer as described in Section C.2 of this Summary) and then immediately paid to the Stellar address of the holders of the BB1-Token”
Update 2021–02–17
You can observe (the very inliquid) direct market between EURT and BB1 at Stellar DEX.
