Bitcoin bond ready for baptism of fire

The emission of government bonds is usually recorded with a little tamam-but that was not the case when the President of El Salvador, Nayib Bukele, announced plans for a Bitcoin-supported bond worth 1 billion USD last November.

by smoke, fireworks and neon lights, a jumbootone screen showed pictures of a volcano that breaks out and spits out Bitcoin, for the soundtrack of AC/DCS "You Shook Me All Night Long".

The so-called "volcanic bond", which was to be emitted last week at FTFM's editorial deadline, was marketed with a coupon of 6.5 percent and a "Bitcoin dividend" of 50 percent of the price gain after five years. Half of the expected income of USD 1 billion from the emission will flow into the construction of the "Bitcoin City", a development near the border with Honduras, which is dedicated to Bitcoin mining and is operated with geothermal energy from a nearby volcano. In the meantime, the other $ 500 million are invested directly in Bitcoin.

For many market observers, the Scheme El Salvador's unpredictable deviation from the discipline of the traditional markets for government bonds. However, others see it as a sign that cryptocurrencies quickly move into global mainstream financing.

At the beginning of this month, traders from emerging countries bond took part in a conversation with the Salvadorian finance minister Alejandro Zelaya to talk about security. "To our big surprise [Zelaya] said he had a demand of up to $ 1.5 billion for the Bitcoin bonds," says Kevin Daly, portfolio manager at the ABRDN investment company. Nevertheless, he sees the emission as a misstep.

The rating agency Fitch also added its voice to a growing choir of warnings. Recently, she classified the creditworthiness of El Salvador from B- to CCC and led the use of Bitcoin as a legal means of payment as an obstacle to an IMF's possible financing package in the amount of USD 1.3 billion.

But the Salvadorians are not the only ones who experiment with digital currencies. According to the blockchain research company Chainanalysis, Latin America together with South and Southeast Asia accounts for most of the website on cryptocurrency platforms- with Vietnam, India and Pakistan listing the index of global acceptance.

"El Salvador is a case study for other developing countries who rely on the World Bank and the IMF when financing," says Meltem Demirors, Chief Strategy Officer at Digital Asset Manager Coinshares.

Bitcoin advocates see the greatest opportunities for the introduction in countries with unstable Fiat currencies or dependence on transfers from abroad. While investors in industrialized countries treat Bitcoin as a speculative asset, this runs contrary to how cryptocurrencies are used in emerging countries, where the focus is on transactions.

"Our biggest and most lucrative export are our people: they make more money for us than any goods," explains Lord Fusitu’a, a Tongaian noble and former MP who tries to introduce a legislation that Bitcoin in Tonga could make a legal means of payment in February 2023.

According to the World Bank,

Tonga is one of the most strongest countries in the world dependent on transfers. Transfers made 39 percent of GDP in 2020, but this income caused average transaction costs of around 10 percent.

Inspired by Bukele's support of cryptocurrencies - 60 percent of Salvadorians have digital wallets in a country in which less than a quarter of the population has bank accounts - Lord Fusitu’a expects to reduce transfer fees by switching to Bitcoin.

In October 2021, only 4 percent of Salvadorians used Bitcoin for transfer transactions, as a survey by Central American University showed. However, the government hopes that the Lightning Network - a payment protocol that is supposed to solve Bitcoin's scalability problem will deliver faster transactions and further reduce the costs, which is currently a hurdle.

Mark Yusko, Chief Executive Officer of the asset management company Morgan Creek Capital, identifies El Salvador's autocratic government and unused or stranded energy resources as features that could be suitable for early introduction of Bitcoin on a broader level. In Paraguay, for example, the Senate recently passed a bill that should enable cryptocurrency mining-an energy-intensive activity-to better use the abundant hydropower capacities. The South American country consumes only a third of the energy produced.

However,

Analysts for fixed-income securities are skeptical about other emerging countries that follow El Salvador in Bitcoin bonds.

If you print $ 1 billion, we will all be amazed at the head

"elsewhere in Latin America there are broader checks and balances that would deter from an accelerated process to the introduction of Bitcoin, as we saw in El Salvador," says Siobhan Morden, managing director at Amherst Pierpont Securities.

She adds that other governments in the region were probably unsettled by the recent warnings in an IMF check of the Central American country in January. It claimed that the introduction of cryptocurrency "has great risks to financial and market integrity" and recommended El Salvador to immediately abolish Bitcoin's status as a legal means of payment.

But the prospects on similar emissions of crypto -based government bonds will depend more on the success or failure of this first offer. Paolo Ardoinino, Chief Technology Officer at the cryptocurrency exchange Bitfinex Securities, which is working on the introduction of the volcanic bond, says that this can be measured by "drawing, diversification of the investor base and trade after emission".

Representatives of the Meketa Investment Group and NEPC investment companies say that acceptance among institutional investors, including pensions and foundations, will probably be subdued. Instead, they predict that small investors and cryptocurrency enthusiasts will buy the lion's share.

restrictive investment guidelines prevent most institutions from keeping Bitcoin directly. However, some investors are committed to a small extent due to their shares in hedge fund and risk capital strategies or certain publicly traded stocks such as Microstrategy and Tesla. The decision of the large Depotbanken BNY Mellon and State Street, in 2021, also found the cryptocurrency trading platform Pure Digital could expand the basis of interested institutional investors, says Meketa Research consultant Alison Adams.

el Salvador "is still sausage," says Daly of Abrdn, who also finds that the principle of the volcanic bond is not guaranteed by the state - and is therefore separated from the country's conventional state debt. "A standard [On the Country’s $ 800mn Eurobond That Matures in January 2023] would cause further problems for the government one year before the election," he emphasizes, "and that is not what Bukele needs".

"The jury is very decided," adds Daly. "If you manage to print a billion dollars, we will all shake our heads."