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27th November 2021 > > El Salvador and its BTC bond.


tl;dr

El Salvador's mooted BTC bond is lacking some important details.


Market Snap









Market Wrap

Oh gosh, here we go. Lockdown is coming. I am supposed to be skiing in France 13th December. What are the chances?


Stock markets suggest I won’t be able to travel, but the one thing we have learnt in the last decade is that the wall of money from quantitative easing (QE) means that however harsh the sell-off, the rebounds are even swifter. The last time Wall Street December 2021 futures was this cheap was 14th October 2021 when BTC was at $58k.


Another day of panic this Monday with another near 1,000 point drop would set us up nicely for a very strong rally soon after. I have the buy button poised ready to be pressed as soon as stock markets show they have turned.


Occasional Series – Not technical analysis (TA) but a very nice chart. Enjoy this sell-off

Note: the x-axis is non-linear.


Curious Cryptos’ Commentary – El Salvador and its Bitcoin bond

On the 23rd of November the CCC reported on El Salvador’s plans to issue $1bn of bonds, half of which would be invested in BTC, and half would be used for the infrastructure for a city built around a geo-thermally driven BTC mining operation.


These bonds are mooted to be USD denominated, with a 6.5% coupon and a maturity of 10 years.


With 2-year bonds trading at a yield of over 15%, and short 5-year CDS spreads implying a probability of default of 25% (obviously depending on your recovery assumption), the terms of this BTC bond would appear to be desperately unattractive on any economic analysis.


But there are some wrinkles that potentially change the dial for that top-down analysis.


The first one relates to the ownership of the $500mm BTC to be bought. The question is whether bondholders have collateral rights over that BTC. If they do and given that buyers of this bond are believers in both BTC and El Salvador, then a doubling of the BTC price would give 100% protection from default. A 6.5% yield may not sound very much in crypto terms but has value in the context of a diversified portfolio.


There is also a suggestion – and again, this issue would need some careful analysis of the bond documentation when it is released – that after the initial five years, each year 20% of the BTC will be sold and gains made will be returned as additional coupon to bond investors.


It is impossible to predict the net yield with any accuracy, but if say 25% of gains are returned to investors, then suddenly these bonds look almost too good to be true. Ten years of 6.5% coupon, 25% of BTC gains, and no BTC price downside, all in exchange for collateralised El Salvador credit risk looks pretty tasty on the face of it.


Like I say, the detail in the documentation is key here, and we do not yet have that.


These new Bitcoin Bonds will be sold via Bitfinex in $100 lots.


Apart from rational investors, who might view this as appropriate credit and crypto risk for the upside, I think there will be additional, irrational, emotional demand for these bonds.


Crypto enthusiasts who want this experiment to succeed may well get involved on a point of principle, without necessarily understanding the whole gamut of risks and rewards involved.


Natural libertarians, who abhor the workings of the International Monetary Fund (IMF) – on whose goodwill El Salvador currently relies – will naturally want to help El Salvador escape the clutches of this supranational controlling body.


As an aside, I do not necessarily agree that the IMF is as inherently evil as it is sometimes made out to be, but the impact of its policies and procedures is often highly detrimental to underdeveloped nations.


With the exception of the FT (whose core editorial policy includes hating cryptos and loving the IMF which is a perfectly legitimate stance to take) the financial press seems generally interested and neutral to positive on this development.


If it is successful, we can expect to see this financial innovation replicated by many of the poorer countries around the world. That’s a very exciting prospect – BTC enabling countries to directly access capital for their own development without the direction and control of the IMF nor the intermediation of investment banks.


I should also point out that this potentially brings a whole new investor base to the crypto world, causing yet more upward price pressure.


A shining example of the crypto revolution taking place right here, right now.

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