Expert calls El Salvador’s Bitcoin volcano bonds, ‘Michael Saylor playbook for a country’

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El Salvador’s “Bit­coin City” and the pro­posed $1 bil­lion Bit­coin vol­cano bond have ignit­ed a range of reac­tions across the world. These are ambi­tious plans, no doubt, but they come as the cryp­to mar­ket is see­ing a down­turn and major economies are fight­ing inflation.

Dur­ing an episode of the What Bit­coin Did pod­cast, host Peter McCor­ma­ck spoke to macro­econ­o­mist Lyn Alden about El Salvador’s Bit­coin vol­cano bonds and whether they make sense.

Fire up the oven

To be issued in 2022, the first vol­cano bond will have a BTC boost­er coupon rate of 6.5% and a decade-long dura­tion. Inter­est­ing­ly, $500 mil­lion will report­ed­ly be used for Bit­coin min­ing, while the oth­er $500 mil­lion is ide­al­ly for buy­ing BTC, which will be stored for five years. If it goes up in val­ue, investors stand to make gains.

Alden called the vol­cano bonds the “Michael Say­lor play­book for a coun­try,” and said,

“It’s a very sim­i­lar play to what a lot of enti­ties do with real estate, where you nev­er sell the real estate, you just keep refi­nanc­ing it over time as it goes up in val­ue. And, Bit­coin is basi­cal­ly a more volatile ver­sion of that. Obvi­ous­ly, it’s got less track record – 13 years. But the poten­tial gains, if you’re right, are massive.”

How­ev­er, Alden stressed the need for experts in the Bit­coin min­ing process. She said,

“Now, my under­stand­ing is that obvi­ous­ly, geot­her­mal is very attrac­tive ener­gy to use. The cli­mate [in El Sal­vador] is not super ide­al for Bit­coin min­ers. And, so over­all, you gen­er­al­ly would want to have experts there who make sure that it makes finan­cial sense at the end of the day…”

But what if…

McCor­ma­ck asked if gen­er­at­ing $65 mil­lion per year was enough to pay investors. For her part, Alden was cau­tious and remind­ed view­ers to con­sid­er cred­it risks, inter­est pay­ments, and the market’s reac­tion. How­ev­er, she not­ed,

“And this is kind of the game the­o­ry of, say, dif­fer­ent coun­tries, where El Sal­vador has less to lose in some sense. They, you know, they basically..have already had eco­nom­ic issues.”

McCor­ma­ck and Alden agreed that the suc­cess of the vol­cano bond hinged on Bit­coin ral­ly­ing for the next five years.

Bitcoin below $60,000

El Salvador’s Pres­i­dent Nay­ib Bukele might be bull­ish, but the mar­ket has been see­ing bear­ish momen­tum, as Bit­coin fell to $54,729.53 at press time. What’s more, the mar­ket was hov­er­ing around the fear or neu­tral ter­ri­to­ry for sev­er­al days.

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