The launch of bitcoin bonds in El Salvador is heavily dependent on retail investors for its imminent launch, but institutional skepticism threatens the success of the project.
One entrepreneur, Jose Pais, plans to buy around $200 of the bitcoin bond to support the nation, and because “it’s a big, attractive bet.” Indeed, it appears that President Nayib Bukele is counting on individuals like Pais and retail investors around the world for the success of the bitcoin-backed bonds, which are expected to go live this week.
He hopes to raise $1 billion for the country to buy more bitcoins and fund a geothermal-powered “bitcoin city,” with any excess funds 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 off existing debt. The International Monetary Fund has urged Bukele’s administration to revoke bitcoin’s six-month-old legal status over fears the country’s budget deficit could reach 5% this year.
“If it fails, a lot of doors close,” said Carlos Acevedo, a former executive at the country’s central bank, even as institutional investors watch the bond from afar.
Mixed results for Bitcoin betting so far
Bukele’s bets on bitcoin are largely unsatisfied as only 2% of remittances in January were sent from digital wallets, even as the government previously identified expensive overseas remittances in fiat as a reason to pursue bitcoin as legal tender.
It seems that many citizens don’t trust bitcoin or don’t know about it. Alejandro Jimenez, a call center employee said: “I don’t really know how to use it, it scared me that it goes up and down, it’s very volatile.”
Apart from remittances, 0.01% of debt was paid in bitcoin, according to a senior bank official, while a competitor said it processed an “irrelevant” number of transactions. The government, however, maintains that November and December 2021 saw 20% of transactions in the tourism sector involving bitcoins.
Opacity is a problem, says whistleblower
Bukele’s secrecy surrounding the purchase of bitcoins for the city has annoyed some. “The clearest government policy is opacity with public money,” said Ruth Lopez, senior official of the anti-corruption association Cristosal.
The obligations will be issued by thermal power company La Geo, bankers and investors say, and Americans will not be allowed to buy bonds using Bitfinex because they are prohibited from using the company’s services. Salvadorans will be allowed to buy the bonds through Bitfinex
Analysts believe that the benefits of the bond are limited, as sovereign bonds offer a higher yield than the bitcoin bond’s 6.5% coupon.
“If El Salvador had strong public finances…it would [the bitcoin bond] could just be another story,” Acevedo said. “Anyone doing a cold scan will just buy bitcoin directly.”
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