The Bitcoin Bond: El Salvador Makes History
El Salvador is planning to issue the world’s first Bitcoin bond and it’s a really big deal! This article will explain how the bond works, what El Salvador plans to do with the money and why other countries might start issuing their own Bitcoin bonds. Let’s dive in!
The Bitcoin Bond
El Salvador’s Bitcoin bond* will be worth $1 billion and it’s going to get split into two parts. Half the bond will be used to begin construction on a “Bitcoin city.” The second half of the bond will be used to buy $500 million worth of Bitcoin.
*A bond is a way for a country or corporation to take out debt. Investors give money to an entity which then makes interest payments on a predetermined basis. At the end of the bond’s duration the bond must be repaid in full.
Once El Salvador purchases the $500 million worth of Bitcoin, most likely sometime in early 2022, the coins will get locked up for five years. That Bitcoin will provide the collateral for the bond, ensuring that all of the investors get paid off.
Anyone who lends money to El Salvador is betting that five years from now Bitcoin will be worth at least twice as much as it is today. So long as that’s the case, even if El Salvador is completely broke they’ll still be able to sell the Bitcoin and repay the debt.
For El Salvador the Bitcoin bond is a great deal. After five years they’ll start selling the coins to offer bondholders a special dividend (determined by the price of Bitcoin). However, El Salvador presumably won’t have to give all of the returns to the investors. If Bitcoin is way higher in the future, El Salvador will also benefit from the price appreciation. Any Bitcoin left over after the bondholders have been paid off will go to the government’s treasury.
One question we might ask is: why would anyone invest in the El Salvador Bitcoin bond rather than just buying Bitcoin? One plausible explanation is that the Bitcoin bond can give investors a steady yield (the bonds are set to pay 6.5%) without exposing them to Bitcoin’s volatility.
One of Bitcoin’s main problems is it’s volatility. From the tip of a blow-off top, to the bottom of a bear market, Bitcoin often drops 80% or more. That’s fine for the hodl gang, and certainly a great buying opportunity, but for large institutions, it’s just too much volatility.
The Bitcoin bond is a way to bet on Bitcoin without getting exposed to all that volatility. The 6.5% return on the Bitcoin bond is well above the average market rate. While some have said that the bond is risky, so long as Bitcoin has doubled in price by 2027 there is not a significant amount of risk associated with this product.
To summarize, the Bitcoin bond is a good deal for everyone involved because:
Bondholders can get an above-average return given the perceived risk
As long as BTC doubles by 2027, it’s unlikely that bond holders will lose any money
If BTC more than doubles by 2027, El Salvador can also keep the additional Bitcoin after paying off the bond
Why the Bitcoin Bond is a Big Deal
When El Salvador first made Bitcoin legal tender, a couple of other countries in South and Central America announced that they might do the same. A few of the key advantages of Bitcoin as legal tender are:
- Significantly cheaper cross border payments and remittances. For countries like El Salvador or the Philippines, which rely heavily on foreign workers sending wages home, the difference between paying 2% or 15% on international payments is huge. Paying less in fees benefits the citizens of the country. It also benefits the government since more money flows into the country
- Bitcoin gives people the opportunity to save their money in an asset that can’t be inflated away. This is especially beneficial for anyone living in a country with a long history of monetary debasement, like Argentina
Although these are two very real advantages of making Bitcoin legal tender, in themselves they’re not huge reasons for most countries to go all in on BTC. However… being able to use Bitcoin to get a billion-dollar loan, that’s the type of incentive that could drive countries to adopt the world’s most popular digital currency.
While it’s almost nothing to the United States, $1 billion is still a lot of money to smaller countries. And who’s to say the next Bitcoin bond has to be $1 billion? The next bond could be $3 billion or $5 billion, there’s not really an upper limit so long as investors are willing to fund it.
Other countries are likely to look into how they too can get money without having to deal with the rapacious bankers at the IMF. A Bitcoin bond is a great way to secure funding outside the bounds of the traditional financial system.
El Salvador & the Bitcoin City
El Salvador plans to use the second half of the bond to begin construction on a brand new Bitcoin city. The city will be located in the La Union region of the country. The new Bitcoin city will have a wide range of amenities, from bars and restaurants to movie theaters and even an airport. The main focus, however, will be on finance.
According to president Bukele, “In Bitcoin City we will have digital and technological education. Geothermal energy for the entire city and efficient and sustainable public transport.”
Bitcoin City will be located next to a volcano which should serve two purposes.
The geothermal energy will be used to power the city, and president Bukele’s vision is for Bitcoin city to be powered 100% by renewables.
The geothermal energy will also be used to set up sustainably powered Bitcoin mining facilities.
Hence why Samson Mao, the chief strategy officer at Blockstream, has referred to this new deal as a volcano bond. Adam Back also does a good job of summarizing the situation.
Assuming that El Salvador’s Bitcoin mining operation is profitable, it could provide further assurance that the country will make all of its coupon payments and repay the bond when it matures.
Creating a city from scratch is a bold initiative and it would almost certainly not be possible without outside financing. Although the Bitcoin bond is set to be a great development for El Salvador, from a larger perspective the most exciting aspect of the bond is that it proves there’s a way for countries to get funding without having to grovel to the IMF or the World Bank.
It’s likely that in 2022 or 2023, another country is going to announce their own Bitcoin bond, and then another. Then the floodgates could really open, especially if El Salvador’s bond is successful. All of this is pretty bullish for the crypto community, and it shows how Bitcoin can work as the backbone for a new financial system.
Mon, 11/29/2021 – 15:00
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