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Finally, El Salvador has just approved legislative changes that allow it to issue Bonds that will be backed by Bitcoin. These bonds are known as Volcano Bonds. Let us analyze the characteristics of these Bonds that are scheduled to be issued.
Specifically, the first issue has the following characteristics
- The total debt to be issued will be 1,000 million dollars.
- The coupon that will pay this debt initially stood at 6.5%
- The duration of this debt will be 10 years, therefore the maturity date would be in 2033
- The interest on the debt would be paid in January of each year.
- The capital would be invested in this way; 500 million in infrastructures (Bitcoin City) and 500 million in Bitcoin purchase
- It would be aimed at professional investors
- He will keep those Bitcoin for 5 years, at which point he will sell the necessary ones to be able to recover 500 million dollars. The additional benefit will be shared with the bondholders in equal parts.
- After 5 years, the bonds will be sold every quarter and those benefits will be distributed together with the 6.5% coupon.
- Investors who exceed an investment of 100,000 dollars may apply to obtain residence in El Salvador
It is one of the most interesting financial experiments in Crypto Assets and that can become an important boost for the reduction of the country’s debt if Bitcoin behaves favorably over the next decade. What are the scenarios of this bond and what implications would it have for El Salvador?
El Salvador could find a sharp drop in Bitcoin that would prevent it from being able to recover the investment in this asset in 5 years. Depending on the structuring of the operation, it could force El Salvador to pay those 500 million to the holders of the Bonds, in addition to the coupon that must be paid each year. Another alternative is that this loss could be assumed by the holders of the bonds, which in that case the negative impact would be diluted.
The rest of the investment dedicated to Mining would also suffer significant losses, although this electricity could be consumed by other types of activities in the country and therefore be recovered if these facilities are connected to the grid. It is even possible that the initially expected income from Bitcoin mining could even be exceeded.
Infrastructure investment for Bitcoin City could potentially generate revenue if those buildings allow companies related to crypto assets to set up.
For a Bitcoin investor, these bonds offer higher returns in this scenario as long as the country can meet its commitments. Since the loss would be limited by the coupons.
If the scenario is a rise of Bitcoin to Historical Highs, this would imply multiplying your investment in Bitcoin by 5. This would imply recovering 2,500 million in those 5 years. Of this amount, 500 million would go to repay the debt and the benefit, when shared with the bondholders in equal parts, would generate an additional return of 1,000 million for El Salvador in this part of the bond. This would make it possible to pay coupons that would amount to 325 million, leaving a surplus of 775 million dollars.
In the infrastructure part, assuming an investment in mining of half and assuming a mining margin of 500% with respect to the investment, it would mean a benefit of 1,250 million dollars to pay the 500 million of the debt plus the 325 million of the coupons, leaving a benefit of 425 million dollars
I wanted to estimate the profitability of the infrastructures and the contribution that this investment project could generate, which is something complex to estimate.
The investor in this scenario would earn significantly less than having invested directly in Bitcoin, although he would have a 6.5% annual bonus, which means 65% in 10 years, plus an additional return of 25% of the Bitcoin rise of the amount you initially invested.
With respect to traditional financing, El Salvador would have obtained a lower interest rate than it currently has that is quoted in markets at default prices. In fact, El Salvador has made debt purchases at really significant discounts.
If the price of Bitcoin were in your favor, these bonds would be practically free and would leave you in your treasury more than 1,000 million additional dollars. El Salvador’s debt is currently around 23,000 million.
It will be necessary to finally see the details of the Volcano Bonds and if they manage to gain acceptance in the capital market or among professional investors. It will not be easy due to international pressure to avoid issuing this type of product. Success in this type of issuance would have a strong financial impact on the country. A negative scenario would put more pressure on its debt, especially if it supported the entire issuance and did not share that impact with bondholders.