All About El Salvador’s “Bitcoin” Bond
El Salvador announced on Nov 20th that they would be offering a Bitcoin Bond in 2022. It will be at 10 year bond in US Dollar at a coupon of 6.5% paid annually starting in January. It’s issued in US Dollars so that it can take advantage of any gains in the price of Bitcoin price vs dollar.
Of the $1 billion Bitcoin Bond, $500 million would be converted to Bitcoin and held for at least five years. After that time, part of it could be sold. If fully sold, this Bitcoin Bond will lock up 9,259 bitcoins for five years out of circulation.
The other $500 million would be used for infrastructure for “Bitcoin City” and Bitcoin mining operations. Theoretically, any profits from the mining operations could be used to pay annual coupons.
When it’s time for El Salvador to pay off the “Bitcoin” Bond at the end of 10 years, they do not necessarily need to sell it’s Bitcoin. One option would be to refinance the Bond, essentially issuing a new bond which pays off the original bond. If the Bitcoin price goes up at 10 years, the refinance rate can also be lower, since they have more collateral from the gain in the price of Bitcoin. Like all investments, biggest risk to the “Bitcoin” bond is the price of Bitcoin declining.
El Salvador “Bitcoin” Bond vs USD Bond
On the surface, a 6.5% bond is amazing, especially when compared against the current US bonds of 1.5%. Then factor in the October 2021 inflation rate of 6.2%, the El Salvador Bitcoin Bond of 6.5% is an attractive option.
But look a bit deeper and find that El Salvador’s 10 year USD bond yields a 13.5% interest rate. The the high rate is attributed to the risk of investing in El Salvador bonds is in part due to the fact that in July 2021, Moody’s downgraded El Salvadors rating to Caa1 from B3. Note that the rest of South America has similarly high bond rates.
And since half of the Bitcoin Bond will be used for infrastructure in El Salvador, the credit rating risk of the country needs to be factored into the yield.
El Salvador “Bitcoin” Bond vs Saylor Bond
This El Salvador Bond has been structured similarly to Michael Saylor’s bonds, which locked up Bitcoin for 5-7 years. By locking up the Bitcoin, it gives the country enough time for the price of Bitcoin to increase and see profits before it may need to be sold. Michael Saylor’s bond in June 2021 was for 6.125% for a 7 year bond, where the proceeds will be used to buy Bitcoin.
El Salvador “Bitcoin” Bond vs Spot Bitcoin
So if half of the Bitcoin bond will be used to buy Bitcoin, then does it make more sense for a Bitcoin maximalist to simply buy Bitcoin? That would assume that after 10 years, assuming a Bitcoin price of $54,000, a 6.5% yield would be $3510 per year. After 10 years that would be $35,000 gain meaning a total of $89,000 after 10 years. Granted that many Bitcoiners predict the price of Bitcoin to hit $100,000 by the end of 2021, you’d be much better off buying Spot Bitcoin.
Who will Buy the Bitcoin Bond?
Many institutional investor cannot directly invest in Bitcoin, and due to liquidity and regulations and/or charters are limited to fund formats, such as Grayscale’s Bitcoin Fund $GBTC. Making large institution sized purchases generally too large of exchanges, and occur on over-the-counter brokers. Therefore, with a Bitcoin Bond is another alternative for institutional investors.
Other buyers may be older retirees who don’t want to invest their money in riskier company stocks, which may be more volatile. A Bitcoin bond would be less volatile, and predictable for an individual without a working income. Best of all, this Bitcoin bond has a minimum investment of $100.
Lastly, investing $100,000 in El Salvador’s Bond will be qualifying purchase for a path to residency to to El Salvador. After five years, this can then lead to citizenship.