El Salvador’s announcement of plans to issue a ten year $1 billion Bitcoin Bond has attracted skepticism from mainstream media. That’s in part because it carries a 6.5% coupon, whereas other ten year El Salvador bonds currently yield 13%. But we think a few key points are being missed, like the big picture objective of a Bitcoin supply squeeze.
We’ll briefly explore the bond, but the focus is on three other aspects. This is a brilliant marketing campaign for a new asset class of tokenized bonds. It also highlights how some first world regulated entities are starting to interact with some controversial ones. And one of the motives behind the bond issue is to reduce the available supply of Bitcoin. Some might view that as an attempt at market manipulation.
Half of the bond’s proceeds are meant to go towards building a Bitcoin City and Bitcoin mining infrastructure. The other half will be invested in Bitcoin, which will be locked for five years. Part of the gain on Bitcoin will go to investors as the Bitcoin is sold on a quarterly basis from the five year point onwards. These gains were the argument given for why a 6.5% coupon is not comparable with existing bonds.
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