Mainstream Calls El Salvador’s $1 Billion Bitcoin Bond ‘Memes’

Bitcoiner Dennis Porter tweet that El Salvador has raised $500 million for a bitcoin lending program.

According to Blockstream’s Chief Strategy Officer (CSO) Samson Mow, the $500 million raised was an oral commitment, so it’s not a definitive commitment.

Additionally, the amount raised to date is below the $1 billion figure proposed when the plan was first announced in November 2021. However, details of the progress are still unclear. At the moment it is only known that it will take place in 2022.

Despite this, some institutions, including US credit union Fitch, remain skeptical about the success of this BTC lending program.

How will Bitcoin “Volcano Bonds” work?

Shortly after being made legal tender in El Salvador, President Nayib Bukele also announced the issuance of $1 billion worth of bitcoin bonds to create a “Bitcoin City.”

Bitcoin City will have a circular shape to represent a coin. It will be built in the area south-east of La Unión, at the foot of the Conchagua volcano, to use geothermal energy. According to Bukele, it will contain “everything for bitcoin.”

“Residential, commercial, services, museums, entertainment, bars, restaurants, airports, ports, railroads – everything for Bitcoin.”

Source: Designboom.com

Explaining how the “volcanic bonds” work, Mow said the first 10-year issue will total $1 billion and feature 6.5% coupons, all backed by Bitcoin. Half of the funds will be converted into bitcoin, the rest will be used to build infrastructure and mining operations.

After the 5-year lockup period, El Salvador will sell a portion of the BTC s it originally bought to give investors “an extra coupon.” There is currently no information about the value of this additional voucher.

For this to work, the bitcoin price needs to be higher 5 years from now than it was when investors bought the bond. While it’s possible, it’s still a risky project.

Forbes said that while the 6.5% coupon is somewhat attractive compared to current interest rates, the risks of inflation will make investors nervous. They asked if the ratio could be adjusted to reflect a changing economic landscape.

“This nominal interest rate may not be as attractive as it first appears. Rising inflation rates around the world will further impact those coupon payments.”

The mainstream thinks otherwise

Given the uncertainty surrounding BTC bonds as a sophisticated product, Fitch called Are you concerned that El Salvador can raise its overall rating?

This was a factor in the company’s decision to downgrade El Salvador’s credit rating to CCC earlier this month, which poses significant credit risk.

“The CCC Country Rating represents a very high risk of default compared to other issuers or obligations within the same country or currency union.”

A CFO chimed in and offered a buoyant compliment, saying that while the Vulcan bond lacks fundamentals, it still has new appeal as a “meme” bond.

Mow dismissed the story, saying El Salvador had no problem raising funds.

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