What is the new gameplay in El Salvador? Bitcoin-based “volcano bond” hopes the giant whale pays

El Salvador issues Bitcoin- based “volcano bonds”

On the evening of November 20, local time, President Nayib Bukele of El Salvador announced at the Bitcoin Conference LABITCONF that El Salvador will issue a $1 billion bond with a ten-year bond period and an annual interest rate of 6.5%. The funds raised from the bond issuance will be used to build a city called the “Bitcoin City”. Since the city mainly uses volcanic heat to generate electricity, the bond is also known as the “Volcano Bond.”

At the same time, El Salvador reached a cooperation agreement with Blockstream and iFinex (ie Tether and Bitfinex). The bond will be issued on blockstream’s liquid chain and sold by iFinex’s newly established BitFinex Securities.

Half of the funds raised through the sale of bonds will be used for the construction of Bitcoin City, and the other half will be used for the purchase of Bitcoin. Therefore, half of the bond is “backed” by Bitcoin assets. These bitcoins will be locked for five years, and the income from selling these bitcoins in the future will be divided equally between the government of El Salvador and the bond buyers. In other words, if an investor buys a volcano bond worth $100,000, assuming that the price of Bitcoin doubles in the future, it means that the investor will not only receive 6.5% of the annual interest, but also share the investment. Half of Bitcoin’s profit is the other $25,000.

Volcano bonds have amazing interest rates

In an era of zero interest rate or negative interest rate, the interest rate of volcano bonds can be described as attractive. The annualized interest rate of 6.5%, through compound interest calculation, the 10-year interest rate can reach 146%, compared with the US Treasury bond, which is almost equivalent to cash, the 10-year interest rate is [1.63%] (1).

Of course, cheap things have their own reasons for being cheap. On July 30 this year, the famous rating agency adjusted the credit rating of El Salvador from [B3 to Caa1](2). Part of the reason for this downgrade came from El Salvador’s “Bitcoin Act”. “, and Caa1’s rating means that the bonds issued by El Salvador have been included in the ranks of “junk bonds.” The so-called junk bonds refer to those bonds that have a very high risk of default. If a bond is rated as junk debt, it will largely restrict the entry of institutional funds.

The “Bitcoin City” is a city that is completely exempt from income tax, capital gains tax, property tax and individual tax. Its only source of tax is 10% value-added tax. It is conceivable that the economy of the Bitcoin City must be comparable Only when El Salvador is developed can it be possible to pay the interest on volcanic bonds through taxation.

“Volcano Bond” is not a good product

In fact, there are a large number of El Salvador’s undue treasury bonds in the market, and the annual interest rate of 10-year treasury bonds is often as high as 13%. The reason why El Salvador can offer such high interest rates is still because of its high default risk.

At present, the most similar product on the market to the “Volcano Bond” is a 10-year bond maturing on April 10, 2032. The bond is listed on the Luxembourg Stock Exchange with an annual interest rate of 8.25%. Much higher than the volcano bond.

Not only that, this 10-year bond is far cheaper than the Volcano bond. Its current net value is 72.54 US cents. In other words, if investors are not worried about losing their principal, they can currently buy it at a price of 30% off. A bond of the same grade (also issued by the government of El Salvador) with a much higher interest rate than the volcano bond.

However, the characteristic that half of the Volcano Bond is “backed” by Bitcoin makes it more speculative, because investors still have potential gains from the appreciation of Bitcoin. According to one of the Volcano Bond partners, Blockstream’s chief strategy According to official Miu Yongquan, the price of Bitcoin will reach 1 million US dollars within five years.

If the price of Bitcoin can rise to 1 million U.S. dollars within five years, there is of course no problem in repaying the debt and interest of the volcano bond. However, the higher the price of Bitcoin, the harder it is to rise. In the past four years, it has only tripled. If it needs to reach 1 million US dollars in the next five years, it needs to rise nearly 20 times in a similar cycle.

Of course, it is not impossible for Bitcoin to rise to $1 million in five years. Investors will obviously consider another question: Why not just buy Bitcoin? Someone has calculated that if Bitcoin really rises, it is also 100,000 U.S. dollars, with 72,000 buying El Salvador’s 10-year Treasury bonds worth 100,000, and the remaining 28,000 buying Bitcoins, it’s better than using all 100,000 U.S. dollars. The yield on Volcano bonds is much higher.

In other words, if the volcano bond is regarded as a speculative product, its return is not high enough; if it is regarded as a low-yield financial product, its risk is too high. According to Coindesk author Omkar Godbole’s [speculation](3), many countries with poor credit ratings have difficulty borrowing money from the market even if they offer high interest rates.

In June of this year, the International Monetary Fund (IMF) expressed [objection] to El Salvador’s use of Bitcoin as its legal currency (4), so most people think that it is difficult for El Salvador to borrow money from the IMF. However, the facts are likely to be the opposite: due to the deterioration of credit and political conditions over the years, El Salvador’s President Nayib Bukele has predicted that it will be difficult to borrow money from the IMF, so he came up with a “trick” to use Bitcoin as a legal currency, and this time The volcano bond is another trick that El Salvador came up with in order to borrow money.

El Salvador’s goal is still to pin its hopes on the giant whales in the crypto world. As the president said, “You know Bitfinex has a lot of whales, so I don’t think there is a problem with filling the $1 billion bond”.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-is-the-new-gameplay-in-el-salvador-bitcoin-based-volcano-bond-hopes-the-giant-whale-pays/
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