El Salvador's Volcano Bonds

El Salvador's president Nayib Bukele, who has led the country's bitcoin adoption over the last year, has predicted a ‘gigantic’ increase in the bitcoin price, believing it is ‘just a matter of time’. The reason why it’s about to rocket? As Bukele announced via Twitter ‘There are more than 50 million millionaires in the world’ then ‘Imagine when each one of them decides they should own at least one bitcoin. But there will ever be only 21 million bitcoins. Not enough for even half of them’.  

I think our readers are pretty well versed on our thoughts about El Salvador’s decision to be the first country in the world to adopt bitcoin as legal tender, however we mentioned recently, the madness does not stop there. Ever heard of Volcano Bonds? No, neither had we. In an effort to advance the bitcoin market, El Salvador has struck a deal with crypto firms Blockstream and iFinex to issue USD1 bn worth of bitcoin bonds via Blockstream's Liquid Network. 

Volcano Bonds are a USD1bn bond, denominated in U.S. dollars, with a 10-year maturity. They pay 6.5% annual interest. El Salvador will invest half of the proceeds in ‘infrastructure build’ and put the rest back into Bitcoin. It will hold those Bitcoins for five years, and then sell them over the remaining five years of the bond’s life. If it makes money on those sales, then ‘50% of Bitcoin investment proceeds will be returned to investors once the initial $500M Bitcoin investment is recovered’.  
 
What could possibly go wrong I hear you ask. Well, nothing according to Blockstream Chief Strategy Officer Samson Mow. Blockstream’s models show at the end of the bond’s life, the annual percentage yield will be 146% due to Bitcoin’s projected appreciation, forecasting Bitcoin will hit the ‘$1 million mark within five years’.  

Why are they called ‘volcano bonds’? Well, the new city that the infrastructure build will create will be powered with geothermal energy from a nearby volcano. 

There are of course many, many questions to be asked away from the obvious, that being why would you? If you think Nayib Bukele’s, El Salvador’s President, is right and we are wrong, and his bitcoin bet will empower the South America country to bigger and better things you might be interested in the 5-year sovereign debt, currently trading at around 57 cents in the dollar, with a yield of over 20.5%. If El Salvador doesn't default and pays out, you never know, Bukele might just be on to something.  

Fixed Income Team