Everything you wanted to know about ES Volcano Bond and were afraid to ask!

[NeuroticFish]

So you are thinking that this will be another bubble like dot com that we have seen earlier in this century. It is true many countries have legal issues with BTC so people want to invest in products related to BTC. But as long as it has a working product behind it and it contains value there should not be a problem. Still, It is not the same as buying BTC and won't serve the purpose of BTC.

No. I didn't say anything about any bubble. All I said was that buying the real deal is the way to go, not derivative things that you don't know what they are and may get you fooled because of too many hidden details.
As simple as that.

It's not nice to put as other's saying things they didn't. And this bitcoin vs .com crap is so old one could have been reading more since it was "launched".

[fillippone]

So you are thinking that this will be another bubble like dot com that we have seen earlier in this century. It is true many countries have legal issues with BTC so people want to invest in products related to BTC. But as long as it has a working product behind it and it contains value there should not be a problem. Still, It is not the same as buying BTC and won't serve the purpose of BTC.

What I am saying is that I struggle to see a rationale, besides cheering for El Salvador, for buying this bond.

From an economic standpoint of view, it makes no sense.

I even tried to express my concerns to Samson Mow:



I think the answer is quite elusive.
I really cannot see anyone wrapping a digital bond in a traditional fund. Why anyone would do that?

Of course, this doesn't mean it's a bubble. But as you say, Bitcoin doesn't need that to succeed.

[aysg76]

I think the answer is quite elusive.
I really cannot see anyone wrapping a digital bond in a traditional fund. Why anyone would do that?

Of course, this doesn't mean it's a bubble. But as you say, Bitcoin doesn't need that to succeed.

Actually the case is bitcoin don't need them they need profits.They have seen so much profits simply by investing the people's funds into bitcoin and the example is they buying each dip and publicly giving statement about the same like they holds around 1120 bitcoins or more at this time so they planning something big to generate more profits for the state or say for themselves at rational viewpoint.

[fillippone]

El Salvador is adapting their legal system to ease the issue, circulation, and management of the Volcano Bond, according to Reuters:

El Salvador plans raft of legislation to cover bitcoin bond issue

SAN SALVADOR, Jan 4 (Reuters) - El Salvador's government will send to Congress about twenty bills covering financial markets and investment in securities to provide a legal foundation for issuing bitcoin bonds, Finance Minister Alejandro Zelaya said on Tuesday.

Zelaya said the government was drawing up the legislation to create a framework to cover corresponding market regulation and issuance of securities in crypto assets after the Central American country said in November it would issue bitcoin bonds.

"(This is) to provide a legal structure and legal certainty to everyone who buys the bitcoin bond," Zelaya said in an interview on local television, without saying exactly when the legislation would be submitted to lawmakers.

Of course, they are dotting the i's and crossing the t's to make sure they don't shoot on their own foot with this issue, which will be closely monitored from abroad, potentially setting up a new paradigm for other sovereigns.

[KingsDen]

@fillippone is one of the reasons I fell out of love with travelling.
You can be in your home country and be more informed than the citizens of another country with this kind of detailed research and information.

3. El Salvador as an Issuer in Traditional Finance

El Salvador Has a poor financial situation. The Country has a CCC+ rating, essentially their financial stability is rated as “junk”.
This condition precluded the country from accessing traditional financial markets, as many money managers cannot buy Junk Bonds, and those who can require high premiums to do so.
El Salvador has a few bonds outstanding:

The Bitcoin legal tender decision and the Bitcoin related bonds project if well managed will surely I no distance time raise the financial situation of El Salvador. They have taken the early spot on the queue, I am so much convinced that many giant countries will join pending the success of what I will  can El Salvador bitcoin experiment. The world is watching.

Exactly if you want to invest in something you should directly do the same instead of buying something related to it.They makes no sense to me as well because suppose you are having $2000 worth of bitcoin with you safely stored  in your hardware wallet the returns would be immense in short period of time if you have patience to hold over all those years...

Our presence and knowledge in this forum should not make us think that bitcoin is an easy investment. Starting from buying, securing to investment aspects of bitcoin is quite complicated. There are so many laymen in the society who wish to invest in bitcoin, but due to the lack of knowledge of it, they are restrained. It is not advisable to invest in what you do not understand.
This is the reason they can be comfortable to buy something related to it.

Take for instance;
I want to invest in Bitcoin but I am unsure how to go about it. Knowing too well the research prowess of @fillippone, I saw him open a bitcoin related bond or investment. I will simply trust him because of his deep knowledge in the project.
That is how the citizens trusts her government. There's a level of comfort when the government decisions fail than when an individual decision fails.
My major worry is that with the level of interference by the US, if president Nayib Bukele exists, will there be continuity of the bitcoin projects? Time will tell!

[cryptoQueez]

My guess is most of the majority of bond buyers will be in bitcoin

[lixer]

I guess that this "bitcoin city" thing has been tried so many times but usually since we are a global bunch and not something that is we do in just one place, that doesn't work. I mean usually there isn't enough population in just one city to build something like that, even when you consider a nation like USA, if you build a city somewhere, then you are expecting everyone around the USA to relocate there and why would they? Coinbase is fine in California, why would they leave? Gemini is fine in New York, they won't budge. So all in all when we are talking about even a much smaller nation then it becomes even harder to build something like this only because of lack of population.

[fillippone]

A few more information on the venue where the bond should be traded:

Bitfinex launches new exchange for trading tokenized equities and bonds

Bitfinex opened a new exchange dedicated to tokenised assets, both equity and bonds, named Bitfinex securities:

Bitfinex Securities will allow small and medium-sized companies to list their tokenized equities, bonds, or funds and raise capital. In turn, Bitfinex Securities' customers will be able to invest in and trade tokenized securities.

In the article it is well explained the unique feature of this platform is the possibility to issue new token, not only trade existing ones. This allows customers handle trough BS the whole life cycle of their digital tokens: issuance, trading, settlements, payments, redemptions.

One very important point of this is the fact that BS will be based in Kazakistan, and regulated by the local financial authority:

Bitfinex Securities says it is based in Astana, Kazakhstan, and is regulated by the Astana International Financial Centre (AIFC) Authority.

According to Paolo Ardoino’s statements, Bitfinex believe this is a positive choice:

When asked why Bitfinex Securities chose to be based and licensed in Astana, a relatively lesser-known jurisdiction, Ardoino said Astana is setting up as one of the financial capitals of Asia and has an "extremely thorough" regulatory process based on regimes in the U.K., Dubai and Abu Dhabi. "We had been working on obtaining this license for the last year and a half," said Ardoino.

I have some doubt about this statement. I think they had to apply to Astana because it the “best of the available countries” where to register.

The problem is many potential clients will have problems using that exchange:

As with its crypto trading platform, Bitfinex's securities platform will also be not available to residents of the U.S. and other prohibited jurisdictions. Citizens of Canada, Switzerland, Venezuela, Austria, and Italy are also on Bitfinex Securities' list of prohibited persons.

A lot of customers simply won’t be able to directly access that exchange. They will have to operate trough subsidiaries, risking sanctions from the regulators, or trough introducing broker-dealers, or even using wrapped bonds.

Then a couple of observations immediately raise to my mind:

• why on Earth a financial investor should embark on such a difficult task of buying that bond, instead of buying directly bitcoin and an USD bond?
  
• is the current turmoil in which Kazakistan has fallen recently hindering the plan for the issuance?

[so98nn]

Cutting long story short: this bond is a financial disaster.

There is a very good analysis of this concept from a Bloomberg article. Basically, buying an El Salvador Bond and using the residual amount to buy bitcoin currently produces a superior result. And this holds true in pretty much every possible future scenario. Even in a very unpredictable scenario of bitcoin going to zero, the payoff would be better for the traditional finance bond. In an environment where Bitcoin would go to zero, we are left wondering why we should buy a Volcano Bond in the first place.

I run a few computations in the spreadsheet, and even if in the ultra bullish case illustrated by Samson Mow, the Volcano Bond is inferior to the strategy of buying a traditional bond and investing the change left after the bond purchase in Bitcoin.

The logic says this could even get worst if bitcoin mining load goes to EL Salvador and all the other countries revoke from the mining operations or lets say they completely ban the use of bitcoin. There would be only one country left to mine the coins and use them and thats El Salvador. The thing is, they are using it as the legal tender which means whole thing is official and by few years they will have almost all of the population of their country using it.

Imagine for a sec if other countries started to pull of from the crypto space for X reasons then the whole money that is invested into crypto will be sold off and El Salvador would be buying it as there would be no other buyer of the same.

What will happen to their bonds by then? The value will decrease dramatically causing huge inflation in the country.

Seems terrific idea to go to the sink.

[KingsDen]

The logic says this could even get worst if bitcoin mining load goes to EL Salvador and all the other countries revoke from the mining operations or lets say they completely ban the use of bitcoin. There would be only one country left to mine the coins and use them and thats El Salvador.

The logic applied above is explaining bitcoin monopoly, which in actual sense is not practicable. All other countries cannot revoke from mining nor ban completely the use of bitcoin because of the nature of bitcoin. What majority of the country can do is to enforce extreme measures to regulate bitcoin, which will indirectly hinder bitcoin growth.

However, my major concern is about the Bitcoin City. This project might indirectly be promoting centralization of bitcoin or bitcoin users, miners etc.
The logic could be that whenever there is an attack on bitcoin, it will be easy to locate the city of bitcoin and unleash mayhem. The enemies of bitcoin will then intensify their efforts to hunt down the bitcoin city.
Remember, bitcoin is safe on blockchain but bitcoin users and hardwares are not secured by blockchain. They are prone to damages.

[fillippone]

A couple of days ago, I tweeted my concerns to Excellion and Paolo Ardoino.
The answer I got was quite reassuring:




I waited a little bit before reporting the tweet as I saw a like by Paolo Ardoino snd I hoped for another reply, which sadly never came....

So basically, no delays due to the disruption in Kazakhstan. I think it is good news for everyone!

[fillippone]

In the past days Moody's has been quite vocal on El Salvador:

Bitcoin Trades Add to El Salvador’s Sovereign Risk, Moody’s Says

El Salvador’s Bitcoin trades are adding risk to a sovereign credit outlook that was already weak and reflecting a growing chance of default, according to Moody’s Investors Service.

Tonight Moody's downgraded El Salvador Sovereign Bonds:
(actually looking for a direct headline of this)

Najyb Bukele wasn't impressed:


This is actually going to hurt the volcano bond, sending them even more on the "dear" side of the market. The market is currently closed, but I expect the USD bonds to fall significantly, thus making the combination Legacy USD bonds + Bitcoin purchase, even more compelling versus the simple bond holding.

The middle finger to the IMF crooks nocoiners is going to be a little bit more costly, to our fellow bitcoiner.

[fillippone]

Apparently the EL Salvador Bitcoin Bond 1 will be launched in February:




Al this source from this interview:

 ON THE GROUND IN EL SALVADOR WITH SAMSON MOW AND THE VOLCANO BITCOIN BOND

Samson Mow Stated:

“We’re closer to $500M in verbal commitments now but stopped tracking so we could focus on the actual issuance and all the steps still needed to be done to go live. We’re committed to Q1 2022 and it’s likely we could see the Volcano Bond launch in February,” he added.

As I already said, it's a sure hit from the "Bitcoin Community", but my doubt about institutional investors persist.

[fillippone]

According to Bloomberg the Launch of the Volcano Bond is nearing and being ready in March:

El Salvador to Sell Bitcoin Bond in March, Finance Minister Says
By Michael McDonald
(Bloomberg) --

El Salvador’s government expects to issue so-called volcano bonds on Blockstream’s Liquid Network in the first half of March, Finance Minister Alejandro Zelaya said during a local TV interview on Dialogo con Ernesto Lopez. 

• Government is finalizing details to make sure the issuance complies with all the regulations of a sovereign bond issuance, according to Zelaya Zelaya
  
• El Salvador continues talks with the IMF for an extended fund facility and is negotiating terms, he said, adding “it’s false” the IMF has urged eliminating Bitcoin as legal tender Zelaya
  
• “They say limit the risks related to Bitcoin. No multilateral organization is going to force to do anything. States are sovereign and make sovereign decisions about public policies,” Zelaya said Zelaya
  
• “If we continue talking with the International Monetary Fund while at the same time continue other strategies like Bitcoin, we can move the country’s economy forward,” the minister continued
  
• More than 4m people are using the government’s Bitcoin wallet known as Chivo wallet: Zelaya
  

This is a little later than initially prospected by Samson Mow, but I think it’s a fair timeline, given all the technical, legal and “external pressures” connected to this bond issue.

[fillippone]

Breaking news:

El Salvador Bitcoin Bond Issuance Coming as Soon as March 15: Finance Minister

El Salvador’s initial $1 billion bitcoin bond issue will take place between March 15 and March 20, Finance Minister Alejandro Zelaya said Tuesday.

This is pretty much in line with the expected launch date previously disclosed.
I wouldn’t lean too much on the 6.5% commitment.

[fillippone]

With an expected move, Fitch Lowered El Salvador sovereign rating.

Fitch lowers El Salvador’s rating due to Bitcoin adoption

American credit rating agency Fitch Ratings has lowered El Salvador’s long-term Issuer Default Rating from B- to CCC, mentioning “policy unpredictability” and the “adoption of Bitcoin as legal tender” as some of the factors that led to the downgrade.

As I said, the news was expected, so in a “buy the rumours sell the news” fashion, the price of USD denominated El Salvadorean Bonds actually junped.

	If you squint your eyes, you can see the pop in bond prices!

Please note that means that a bond maturing on the same date of the Vulcano Bond with a price of 62 now yields 15.90%.

[fillippone]

A few days ago Market Insider reported an update on the “verbal commitment” of the vulcano bond.
I missed that, nobody reported it, so I am adding it to the thread, as it is still relevant.

El Salvador already has $500 million in verbal commitments for its billion-dollar 'meme' bitcoin bond — and $5 billion in more bonds could follow

Samson Mow of Blockstream, the tech firm coordinating the bond, told the Journal the country has already gotten $500 million in verbal commitments for its bond.

<…>

El Salvador is even thinking about raising as much as $5 billion more in bitcoin-backed bonds in the future, the Journal reported.

So it appears the informal order book has just been upgraded to 500 millions and this bodes well for future issuances.
I bet this optimism has to be judged trough the lens of the person expressing it, but I think we can be sure more issues will follow, as I stated  before, and the “ optimism”lever it will be really important to determine the coupon issue, that I bet should quickly converge toward USD denominated Debt.

[fillippone]

Is this Reuters? The main news agency in the World describing the Volcano Bond in such elementary terms?

El Salvador's bitcoin bond faces more doubts as volatility spikes

I would say this is a misrepresentation of reality.
And factually wrong when they state investment is less appealing with a lower BTC.
On the contrary, lower Bitcoin levels mean a more attractive investment with lower entry point in the BTc market.

But of course, I am biased.

[Lucius]

This attitude reminds me of how a regular retail investor behaves when the price of BTC is in some kind of stagnation or bear market - then there is mostly some disappointment and pessimism and no one realizes that then is the right time to invest. But I'm not surprised that a news agency like this writes this way, because journalists have long since stopped being professionals, and more and more ordinary mercenaries who write articles the way someone tells them to.

Given that El Salvador and some other countries have refrained from condemning Russia's aggression against Ukraine and have practically sided with those who tacitly support it - does that perhaps mean that this project may not have the support it expected?

Cuba, Nicaragua, El Salvador and Bolivia joined several dozen other countries in abstaining during a vote to condemn Russia’s invasion of Ukraine and to demand Moscow withdraw its troops “immediately, completely and unconditionally.”  El Salvador’s abstention was telling, as well, mirroring the silence from the country’s leadership about the conflict since it began. The country’s president, Nayib Bukele, was extremely vocal in the days leading up to Russia’s invasion, mocking US assertions that an invasion was imminent. “The boy who cried wolf,” Bukele tweeted on Feb. 18, responding to US President Joe Biden, who said he believed Russia would invade in the next several days. Since Russia has invaded, however, Bukele has remained silent on the matter.

[fillippone]

Given that El Salvador and some other countries have refrained from condemning Russia's aggression against Ukraine and have practically sided with those who tacitly support it - does that perhaps mean that this project may not have the support it expected?
<…>

Putting political considerations about Bukele aside, I guess the bond will be affected by this events as acutely as every other financial instrument in the world: liquidity drain, increased volatility, increased inflation concerns, increased credit risk and scrutiny over crypto might affect negatively this bond sale, as much as every other happen isn’t at the same time.