This Tiny U.S. State Continues to Deliver Huge News for Bitcoin Investors

The state of New Hampshire just made crypto history by announcing the first-ever municipal bond backed by Bitcoin (CRYPTO: BTC). That comes just months after New Hampshire approved the first-ever Strategic Bitcoin Reserve at the state level.

The big picture is the continued integration of Bitcoin into the global financial system. New Hampshire's Bitcoin-backed municipal bond is further proof that the worlds of traditional finance and blockchain finance are blurring, often in ways that nobody could have possibly predicted just a few years ago.

What might this mean for the future of Bitcoin?

Bitcoin-backed municipal bonds

A $100 million Bitcoin-backed municipal bond is exactly the type of innovation required to make Bitcoin a mainstream financial asset. The new debt instrument combines the high upside potential of Bitcoin with the low-risk appeal of municipal bonds.

Image source: Getty Images.

As might be expected, some financial wizardry is required to make this work. A New Hampshire government agency -- the Business Finance Authority (BFA) -- acts as a conduit, but not a guarantor, for the Bitcoin-backed bond. Private borrowers within the state can then obtain access to this new funding source, as long as they're willing to provide Bitcoin as collateral.

All loans made to private borrowers will be over-collateralized with Bitcoin, with the proviso that all Bitcoin held as collateral could be liquidated entirely if the price of Bitcoin falls significantly. This ensures that bond investors aren't left holding the bag if the price of Bitcoin tanks.

The funds raised will primarily be used to support small businesses, especially new start-ups. This, in turn, should fuel future innovation within the state. If all goes according to plan, the new Bitcoin-backed bonds should be a win-win for both the state and investors.

If so, other states could then follow suit, opening even more potential for Bitcoin to become a mainstream financial asset within the United States.

Are "Bit Bonds" next?

According to some experts, the same type of fintech innovation tying together the crypto market and the debt market might be adopted for so-called "Bit Bonds." These are Bitcoin-backed bonds issued by the U.S. Treasury Department that are similar to regular bonds, in that 90% of the proceeds are used to fund the government. However, the other 10% is used to purchase Bitcoin.

The goal of these "Bit Bonds" is to lower the cost of borrowing for the federal government. To make that possible, investors gain access to some (but not all) of the upside potential of Bitcoin being purchased. Meanwhile, they're holding a low-risk debt instrument backed by the full faith and credit of the U.S. government.

The concept of a "Bit Bond" might seem a bit convoluted, but it has a growing amount of support in Washington, DC. At a time when the U.S. government now pays $1 trillion per year in interest on its debt, anything that can be done to bring down the cost of borrowing is welcome.

As a result, Bit Bonds could potentially become a multitrillion-dollar industry at some point. If the Treasury Department is embracing Bitcoin, it would go a long way in making Bitcoin a mainstream financial asset around the world.

Potential impact on the price of Bitcoin

The sudden blossoming of Bitcoin-fueled innovation within New Hampshire is huge news for crypto investors everywhere. The creation of a state-level Strategic Bitcoin Reserve earlier this year was big news, but the launch of new Bitcoin-backed bonds could be even bigger. After all, the size of the global debt market is estimated to be $140 trillion.

Of course, all of this innovation is predicated on Bitcoin's continued rise in value. If the price of Bitcoin falls -- as it has been doing since early October -- then it's unclear what might happen next. The genie is already out of the bottle, and there might be no way to stop problems in the crypto sector from potentially spilling over into the traditional financial sector.

That being said, the future prospects of Bitcoin are still sky-high, even with the recent pullback. Over the long haul, financial innovation is going to drive more use cases for Bitcoin, and that's going to drive a higher valuation.

The world's largest cryptocurrency has already moved from being just a speculative digital asset to being a store of value. It's now being used as collateral for credit products and as a technological tool to create entirely new financial instruments. It's no wonder that some crypto investors are holding out hope that a single Bitcoin might be worth upwards of $1 million within just a few short years.

Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.