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Finally, El Salvador has just approved legislative changes that will allow it to issue bonds that will be backed by Bitcoin. These links are known as volcano links. Let us analyze the characteristics of these bonds to be issued.
Specifically, the first problem has the following characteristics
- The total debt to be issued will be $1,000 million.
- The coupon that will initially pay off this debt is 6.5%.
- The term of this debt will be 10 years, so the maturity date will be in 2033
- The interest on the debt will be paid in January every year.
- Capital will be invested in this way; 500 million in infrastructure (Bitcoin City) and 500 million in buying Bitcoin
- It will target professional investors
- He would hold this bitcoin for 5 years, at which point he would sell the necessary coins to be able to recover his $500 million. The additional benefits will be shared with the bondholders in equal parts.
- After 5 years, the bonds will be sold quarterly and these interest will be distributed with a coupon of 6.5%.
- Investors whose investments exceed $100,000 can apply for residency in El Salvador
It is one of the most interesting financial experiments in Crypto Assets that could become an important impetus to reduce the country’s debt if Bitcoin behaves positively over the next decade. What are the scenarios for this bond and what are the implications for El Salvador?
El Salvador could find a sharp drop in bitcoin that would prevent it from recovering the investment in this asset in 5 years. Depending on the structure of the operation, it could force El Salvador to pay these 500 million to bondholders, in addition to the coupon that must be paid each year. The other alternative is that this loss can be borne by the debenture holders, which in that case the negative impact would be mitigated.
The rest of the investments dedicated to mining will also incur significant losses, although this electricity can be consumed by other types of activities in the country, and thus can be recovered if these facilities are connected to the grid. It is also possible that the initially expected income from bitcoin mining will be exceeded.
The Bitcoin City infrastructure investment could potentially generate revenue if these buildings allow crypto-asset-related businesses to set up.
For the Bitcoin investor, these bonds offer higher returns in this scenario as long as the country is solvent. Because the loss will be limited by coupons.
If the scenario is for Bitcoin to skyrocket to historic heights, that would mean multiplying your investment in Bitcoin by 5. That would mean getting back 2500 million in those 5 years. Of this amount, 500 million will be set aside for payment of the debt, and the benefit, when shared with the bondholders in equal parts, will generate an additional yield of 1,000 million for El Salvador in that portion of the bond. This would make it possible to pay coupons of up to $325 million, leaving a surplus of $775 million.
On the infrastructure part, assuming a mining investment of half and assuming a mining margin of 500% in respect of the investment, that would mean $1,250m in interest to pay off $500m of debt plus $325m of coupons. , leaving an interest of $425 million
I wanted to estimate the profitability of the infrastructures and the contribution that this investment project could generate, which is complicated to estimate.
The investor in this scenario will get a much smaller profit than directly investing in Bitcoin, although he will get a 6.5% annual reward, which means 65% in 10 years, plus an additional 25% return from the Bitcoin rally for the amount you put in. Start Invest.
In terms of conventional financing, El Salvador could have had a lower interest rate than it currently has in the markets with default rates. In fact, El Salvador has been buying debt at really big discounts.
If the price of bitcoin is in your favor, these bonds are practically free and will leave you with over $1,000 million more in your treasury. El Salvador’s debt is currently about 23,000 million.
It will be necessary to finally see the details of Volcano Bonds and whether they have managed 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 will have a strong financial impact on the country. An adverse scenario could put more pressure on its debt, especially if it backs the entire issue and does not share this effect with bondholders.