This weekend El Salvador’s President Nayib buckle revealed an ambitious plan to build the first in the world “Bitcoin City.” Created at the foot of Conchagua Volcano, Bitcoin City is being advertised as a utopian community. There are no tariff on capital gains, income, or property, nor any other municipal taxes whatsoever. Nirvana will be entirely financed by a VAT of 10.
El Salvador’s Bitcoin Bond would be structured as a 10-year note worth $1 billion with the 6.5 percent coupon. The proceeds will be used for buying bitcoin and the other half to construct Bitcoin City infrastructure. The bond is arranged in collaboration with Blockstream. Additional dividends, financed by gains from the sale of bitcoin, are expected to be paid to investors in the following five years. At first bounce, this idea appears to be too ambitious and accurate, as some think, but the critical issue is how much of the bond is related to FinTech or has to do with financial engineering.
The initial questions one needs to be asking about this security will depend on the security’s structure.
As of the 27th of October 2021, El Salvador owned 1,120 bitcoin. To meet their goal of holding bitcoin, they’d need to buy seven times the amount they currently have.
In 2020, El Salvador’s National debt stood at $21.71 billion. The launch of a USD bond of $1 billion will mean that the debt would be increased by 21 percent. Remember, El Salvador’s GDP dropped by 21.9 percent in 2020.
At 6.5 percent, the cost of servicing the bond would amount to $65 million that is funded by a 10% VAT. To be fully funded, Bitcoin City would need to generate a significant amount of income.
Although El Salvador’s Bitcoin Bond story sounds excellent, there are various hurdles prospective investors must overcome to be convinced by the concept. It will be difficult for investors with fixed income to trust the story using only traditional financial indicators.
Blockstream’s models demonstrate this is a practical trade.
After ten years or 10, the year the bond matures, the annual percent return will reach 146 percent. If Bitcoin comes $1 million after five years, I believe it will. El Salvador (El Salvador) will then sell Bitcoin in two quarters and recover that $500,000. In just three and a half months, they’ll be able to repay the whole bond. I’d say that’s pretty decent.- Samson Mow, Chief Strategy Officer, Blockstream
A part of the analysis that is not covered in most articles on bitcoin bonds Bitcoin Bond is the hopes of a series of issues. Samson Mow, chief strategy chief of blockchain technology provider Blockstream, said that if ten bonds similar to the Bitcoin Bond could be issued at a rate of $5 billion in bitcoin would disappear from the market during the holding period, increase the frequently discussed bitcoin scarcity premium. “And when you have 100 more countries to make these bonds, that’s a quarter of bitcoin’s market value just there.”
It’s up to you to decide Is El Salvador’s Bitcoin Bond Financial Technology or Financial Engineering?