A Look At El Salvador's Volcano Bond

So El Salvador is moving forward with their continued Bitcoinsation of the country. Hot off the news of the legal tender laws and the launch of the Chivo wallet and airdrop, we then saw El Salvador launch its volcano mining operation.

Setting up a Bitcoin mining operation that leverages the countries abundant geothermal energy.

El Salvador is sitting on a potential electricity goldmine with it having 20 volcanos within its boundaries, and two of them are currently active. Now that's a lot of energy to harness that could, in their case, be used to convert that stranded energy into Bitcoin.

The more Bitcoin they can mine, the more of the global supply they can own as it continues to monetise. Since it's a legal tender currency, they would need to increase their treasury reserves to manage the country on a Bitcoin standard.

Moving fast

What I am concerned about is how fast things are moving; governments NEVER move this fast. Bukele clearly has a lot of power to push things forward, and he doesn't have much time as his term will come to an end. He cannot run for another term due to the constitution of the country, which also remains to be seen if that rule will remain intact.

If anything goes wrong, you can be sure; Bitcoin will be the scapegoat. Not that I mind if Bitcoin takes a temporary hit and I can continue to acquire satoshis well below their usual trading value, but still, it may set Bitcoin adoption back.

For one there's very little talk about how their Bitcoin is stored and this to me is always a potential fuck up that needs to priced in.

Additionally, this move naturally burns ties with the IMF, now I am no fan of the IMF they can fuck off for all I care. But they are still a primary liquidity provider for countries that need to raise funds.

If these Bitcoin raises go wrong or Bukele is ousted and replaced with a more traditional guy, the IMF could make El Salvador an example. By giving them shitty terms for access to capital so everyone sees why you don't flip the bird to them.

What is the Bitcoin bond?

Together with Blockstream and Bitfinex, El Salvador has launched their first tokenised bond. The Volcano bond will trade as a token on the Bitcoin Liquid Network a side chain of Bitcoin.

The terms for the bond are reportedly to raise $1 billion denominated in U.S. dollars, with a 10-year maturity in, apparently, January 2032. El Salvador would pay the holders of the bond 6.5% annual interest.

Once the bond has been fully subscribed, El Salvador will invest half of the proceeds in "infrastructure build" to improve the country and its mining operations and put the rest into Bitcoin.

It will hold those Bitcoins for five years and then sell them over the remaining five years. If it makes money on those sales, then "50% of Bitcoin investment proceeds returned to investors once initial $500M Bitcoin investment is recovered.

So the bond is backed by market buys of Bitcoin plus future mined Bitcoin, making it a far more attractive option for institutions desperate for a return.

What makes this bond so attractive is that it is U.S. dollar-based and offers a return of 6.5%, and with reported inflation at 6.25% in the U.S., this bond, in theory, offers bondholders a positive interest rate, which is far superior to a lot of bonds available today.

Refinancing their old bonds

El Salvador's traditional bonds trade with an interest rate of 7.75% - 13%, but they are junk status bonds. This means that debt is more expensive than the ones from the Bitcoin bond. What El Salvador could do, in theory, is issue more Bitocin bonds at the lower rate, then purchase back these old bonds.

They could then consolidate their current sovereign debt into these Bitcoin bonds at a lower rate. They are reducing the countries future debt obligations.

Bonds are KYC

The bonds are not only for institutions; retail can purchase them too, as the lowest buy-in will be around $100. To trade these bond slices, you will need to be KYC'd with an exchange like Bitfinex and have your wallet whitelisted.

Bitfinex hasn't had the best reputation in recent years, having been hacked and being the primary backer of USDT.

You could trade your Bonds, or you could hold them in your liquid wallet then get your dividend paid to you in Bitcoin as the coupons mature.

What makes this bond attractive?

The bond is attractive to institutions that have been looking for Bitcoin exposure but cannot purchase Bitcoin directly due to fund requirements. They might not be able to purchase Bitcoin, but sovereign bonds are pretty much in their realm of purchase.

Additionally, retail investors could also purchase them as a way to support El Salvador or work towards that minimum allocation for residency by investment in the country. There have been rumours about residency costing 25k- 100k or 3BTC, so we'll have to see how the rules change as the price of Bitcoin changes.

The bond is also a way for Blockstream to try and provide that the Liquid Network has potential use cases as a bond or security insurance service. Sometimes it feels a little "shitcoiney" in the narrative they're using, but at least they open that it's not decentralised.

It would also bring more liquidity to Bitfinex and fund USDT's treasury, and put more demand on USDT and Bitcoin to subscribe to this bond. I am really not a fan of either Bitfinex or Tether personally, and I don't use either, But I get the use case.

I just wouldn't be comfortable centralising anything around entities like that, but that's just me.

I prefer to hodl Bitcoin

The creativity around these bonds are great to see, and it shows that Bitcoin is starting to make its play to eat up the fixed income market. If this bond is a success, many other countries may copy the model to fund their next projects or expansions into Bitcoin.

In addition, these bonds provide massive liquidity that claws supply off the market and would, in theory, push up the price of Bitcoin.

My concern is you're taking on 3rd party risk for a 6.5% return when I can take no risk, hold my keys and enjoy 200% CAGR. Sure, if this bond plays out and Bitcoin appreciates, people could make off like bandits, but I think the market isn't mature enough for us to make those kinds of calculations.

I do think Bitcoin bonds have a future, but until we reach a point where the CAGR of Bitcoin would be lower than the bond offerings return to tack on 3rd party risk, I see no reason why retail would want to be involved from a pure investment standpoint.

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, "I am a Jessie."

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