The launch of bitcoin bonds in El Salvador is relying heavily on retail investors for its imminent launch, but institutional skepticism threatens the success of the project.
One entrepreneur Jose Pais is planning to buy approximately $200 of the bitcoin bond to support the nation, and because “it’s a big, attractive bet.” Indeed it does seem like President Nayib Bukele is counting on individuals like Pais, and on retail investors worldwide, for the success of the bitcoin-backed bonds, set to go live this week.
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He is hoping to raise $1B for the country to buy more bitcoin and to fund a “bitcoin city” powered by geothermal energy, with any excess funds going to pay off debt
The Central American country’s sovereign bonds have languished in junk status since last year, and the government is struggling to pay existing debt. The International Monetary Fund has urged Bukele’s administration to revoke Bitcoin’s six-month-old status as legal tender, fearing that the country’s budget deficit could reach five percent this year.
“If this is a failure, a lot of doors close,” opined Carlos Acevedo, a former executive of the country’s central bank, even as institutional investors have been observing the bond from a distance.
Mixed results for bitcoin bets so far
Bukele’s bets on bitcoin have largely gone unfulfilled, as just two percent of remittances in January were sent from digital wallets, even as the government had earlier pegged costly overseas remittances in fiat as a reason to pursue bitcoin as legal tender.
It does seem that many citizens do not trust bitcoin, or are unfamiliar with it. Alejandro Jimenez, an employee at a call center said this, “I’m not really sure of how to use it, it scared me that it goes up and down, it’s very volatile.”
Outside of remittances, 0.01 percent of the debt was being paid in bitcoin says a senior bank executive, while a competitor said that it had processed an “irrelevant” number of transactions. The government maintains, though, that November and December of 2021 saw 20% of transactions in the tourism sector involving bitcoin.
Opacity a problem, says whistleblower
Bukele’s secrecy surrounding the purchase of bitcoins for the city has irked some. “The clearest government policy is opaqueness with public money,” says Ruth Lopez, a senior official at the anti-corruption non-profit Cristosal.
The bonds will be issued by thermal energy company La Geo, say bankers and investors, and Americans will not be allowed to purchase bonds using Bitfinex, as they are banned from using the company’s services. Salvadoreans will be permitted to purchase the bonds through Bitfinex
Analysts believe that the benefits of the bond are limited, due to sovereign bonds yielding a higher return than the bitcoin bond’s 6.5% coupon.
“If El Salvador had solid public finances…it [the bitcoin bond] could be just a different story,” said Acevedo. “Anyone who does a cold analysis will just buy bitcoin directly.”
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