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Topic: Everything you wanted to know about ES Volcano Bond and were afraid to ask! - page 6. (Read 1560 times)

legendary
Activity: 1232
Merit: 1888
Hey fillippone, we're on a forum, it's not about writing books here, lol.

I see this as quite positive, and even if from an objective analysis it is supposedly a disaster, I am sure it will sell, just like GBTC or MSTR shares are sold which are objectively worse investment options than investing in Bitcoin directly. Even Bitcoin is sold by Paypal and systems that come to be more of a derivative product than Bitcoin itself that you can withdraw.

What has come to my mind is what would happen in 4 years if Bukele loses the elections. We will have to see how this evolves and I guess it will be crucial that the price of Bitcoin is significantly higher then for him to renew in power.



legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23
Thanks for the forum thread.It was a long and interesting text to read.
Governments can turn any idea or project into thrash.It doesn't matter how good the idea/project actually is.
Just get some government clerks to run the project and they will destroy it and steal the money in no time.
The level of corruption and bureaucracy is multiplied by 10,if we are talking about underdeveloped Latin American countries like El Salvador.
The best solution for this "Bitcoin city" was to allow foreign investors to build the city and give them tax benefits.If there's no interest among foreign investors to build such "Bitcoin city" then such project shouldn't be realized,because it is pointless from an economical point of view.

I think this point was well addressed in SLP I linked in the OP:

Quote
Samson Mow:

Would you say that most people are cautiously optimistic? Or are most people a little bit pessimistic about it?

Stephan Livera:

I would say in some communities, some people are sort of like, Oh yeah, nah, I don’t trust him because look at the history of politics in South America and Central America where some person comes out and says something and then it changes. And in their mind they could also be thinking, Well, if President Bukele’s term is—I don’t know exactly, but let’s say it’s another two years—what happens with the next? Does that mean we need multiple presidents to be aligned with the vision and the plan? Because what happens if let’s say some new guy comes in in the next term and he doesn’t like Bitcoin City and Bitcoin bonds, and he tries to step away from the program, doesn’t put in as many resources. You could understand that concern also. But I think certainly you see others who are very positive, like fully positive, right? The likes of Max Kaiser and Stacy, right? So they’re fully like, Yep, we’re doing it. We’re moving to El Zonte next year and they’re gonna buy it. They’re gonna do it. So I think you see the full gamut in the Bitcoin community there. I suppose you’ve seen that as well, right?

Samson Mow:

Yeah, I understand like the hesitance to trust in politicians. I’ve seen some blowback from some vocal people in the Bitcoin community saying, You guys are working with governments. But I think it’s a little bit different in this case where you need to factor in the people of the country too. And a government should represent the interests of its people. And I think in this case, it is actually true because they’re trying to lift the nation out of poverty, they’re trying to create a better future for everybody. And to do that, they’re adopting Bitcoin on a number of levels. If you were not looking out for the best interests of the nation and the people, you definitely would not do that. If you wanted to clamp down and rule with an iron fist, you wouldn’t give people Fuck you money. You’re giving them money that you cannot seize. And you’re trying to teach them something new and show them a path to the future. So I would give the benefit of the doubt here and say President Bukele is trying to forge a path forward. And it’s a difficult path to forge. And a lot of that has to do with everything that’s happened in the past, and the difficult situation they’re in right now. So they’re saddled with a lot of debt. And the debt that they’re saddled with really is keeping them effectively like a subservient state of Western nations. That debt that you were saying that they’re paying 13% on—I think the coupon on that is 9% or something, but because it’s trading at a discount, it is effectively like 13-15%. So how do you get out of that hole? You need the IMF to refinance you to give you more financing to service the debt. And that’s just a downward spiral. You’re borrowing more money to service old debts. That’s not really a way to get out of the situation. The only way to get out of the situation is to break the simulation—to ignore the imaginary paper money that they’re lending you to service other imaginary money that you’ve borrowed in the past—and to go with sound, hard money. So it’s a difficult situation: either you can say, We’re going to work with a government, or you can say, Just let the old system exist. And regardless of your opinions, I think to leave it as status quo is worse than helping a government. And yes, maybe he will not be in charge in a few years. Maybe the new person will be anti-Bitcoin—who knows—but that is somewhere in the future, and I think we have to deal with the cards that we have on the table today and try to steer things in the right direction. So, if the country becomes prosperous through Bitcoin adoption, through the Bitcoin bond program, I think it would be difficult for a successor to nullify all of that and just throw it off the table and say, Okay, no more Bitcoin City, no more zero cap gains, and no more property taxes—like, reverse all of those things. That would be very difficult—if it’s successful, right? If things are working and you want to turn it off, I think that’s far harder than if it’s not working and you want turn it off.

hero member
Activity: 2912
Merit: 900
Thanks for the forum thread.It was a long and interesting text to read.
Governments can turn any idea or project into thrash.It doesn't matter how good the idea/project actually is.
Just get some government clerks to run the project and they will destroy it and steal the money in no time.
The level of corruption and bureaucracy is multiplied by 10,if we are talking about underdeveloped Latin American countries like El Salvador.
The best solution for this "Bitcoin city" was to allow foreign investors to build the city and give them tax benefits.If there's no interest among foreign investors to build such "Bitcoin city" then such project shouldn't be realized,because it is pointless from an economical point of view.
legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23

Still, for us, individuals who already got to this forum, and can read the few words about buying bitcoin and keeping it safe, buying bitcoin related products instead of actual bitcoin makes no sense.

This.
There is no "diversification" thing.
You are just adding layers of potential problems to something that is meant to be trustless.

The reasoning is partially different for financial institutions but apart from liquidity concerns, sticking to physically-backed ETP is the best option.
I personally Blame AM going long MSRT...

legendary
Activity: 3500
Merit: 6205
Farewell LEO, you *will* be missed.
4. How this Bond compares to traditional investment.
[~snip~]
Cutting long story short: this bond is a financial disaster.

This was the part I was looking for.
I understand that certain entities prefer to invest into bitcoin related products instead of bitcoin itself because it may be easier from legal, accountancy and maybe also from tech/safety point of view.

Still, for us, individuals who already got to this forum, and can read the few words about buying bitcoin and keeping it safe, buying bitcoin related products instead of actual bitcoin makes no sense.
And yes, there's always the risk that some of such bitcoin related products, like these volcano bonds, are a "financial disaster". And in most cases those details are pretty well hidden.
legendary
Activity: 2114
Merit: 15144
Fully fledged Merit Cycler - Golden Feather 22-23
During the last event of “Bitcoin Week'', "Feel the Bit" in El Salvador, last November 20th, President Nayib Bukele announced a project for the first El Salvador Bitcoin Bond issue, nicknamed ESBB1.

The project is quite convoluted, having financial, technological, and practical implications. We will cover all of these, but I will try to focus more on the economical and technical aspects of this, leaving the discussion of the details of the Bitcoin City part of the citizenship project to other threads.



1. The MasterPlan.

El Salvador, the only country in which bitcoin is a legal tender, announced a debt issuance to raise capital in order to  "accelerate hyperbitcoinization and bring about a new financial system on top of Bitcoin," according to a blog post by Blockstream. Half of the Proceeds of the bonds will be used to build a new city, nicknamed “Bitcoin City”,in the Gulf of Fonseca, in the immediate vicinity of an active Volcano, whose geothermal energy will be used not only to power the city itself but also to mine bitcoins. The city would have no income, property, capital gain or labour taxes, but would be financed only by a 10% sales tax.



As only half of the capital will be used to build this “bitcoin infrastructure”, the other half of the bond sale proceeds will be used to pay a special “bitcoin dividend” to the bondholders, which would significantly raise the final bond yield. The plan is to use such capital to buy bitcoins on the market, hodl them for 5 years, and then subsequently return part of the appreciation of those to the investor across the last five years of the bonds in the form of an annual coupon payment financed by the sell of a corresponding amount of those bitcoins.
Thirdly, the investor who buys more than 100,000 USD of the bond, would have the possibility to apply for El Salvador citizenship.
The bond is meant to be fully tokenized on a fully digital form developed together with Blockstream. This would allow the decentralized exchange of the bond using the liquid sidechain. The purchase of the bond will be possible in USD, BTC, and USBt, and, given the special digital feature of this, the minimum amount of the purchase would be 100 USD only. This feature is going to help to “democratize access to the bond”.

If you want to discuss the masterplan of El Salvador and the construction of the bitcoin city, I suggest you this thread:

First Bitcoin City

 


2. The Bond details

Few details have emerged so far. The only details are those revealed at such a conference and a few later interviews with Samson Mow, as Nayib Bukele edidn’t attend a press conference that was meant to give out more details.

 
The term sheet of the bond was published on a presentation slide and reads as follow:



According to the Termsheet

  • The bond will be issued in January 2022. I will be US dollar-denominated (USD is legal tender in El Salvador) and with a potential size of 1 billion.
  • The bond will mature in 10 years, or January 2032 and will pay an annual coupon of 6.5%.
  • After the first 5 years, the bond will start selling each quarter an equal amount of bitcoin. The sale has been spread over multiple quarters to minimize market impact.
  • After the initial bitcoin purchase has been covered, the bond will start paying an additional “bitcoin dividend”. The bond will pay an additional coupon determined as he 50% of the potential Bitcoin gain from the sell of the 20% of the bitcoin held by the bond.  If the proceeds of such sale produce a profit, this will be shared in equal parts to the investor.
  • Remember that the bond will use only 50% of the funds to buy bitcoin. So the “bitcoin dividend” will pay to the investor 50% of the gain on that 50% investment.

In the following example you can see all the cash flow of the bond, according to the Bitcoin price in the second row:


 Spreadsheet

Blockstream, a Canadian blockchain solutions company, helped El Salvador to structure the bond, working in close connection over the last few months. In addition, the government is going to issue a few special laws in order Bitfinex to actually sell the bond:
Quote
El Salvador also aims to create a government securities law and grant a license to Bitfinex Securities to process the bond issuance. This could pave the way for other Liquid security tokens like the Blockstream Mining Note (BMN) or Exordium (EXO) token to be listed on a regulated El Salvadorian securities exchange.

This is probably going to take some time. Providing not only the issuer but also the arrangements of the operation a legal framework within which to operate is an incredibly demanding task. Above all, because this one is the first experiment with so many aspects to consider.

This bond will be the first fully-fledged digital bond in the world, to my knowledge. The bond will be traded on Blockstream AMP, a platform used to issue, trade, and manage digital assets issued on the Liquid Network. The trading activity would be fully digital, 24/7 (weekends and bank holidays included then) over a blockchain (albeit a permissioned one) on a fully digital form: not only the bond part of the trade will be digital, but also the “purchase “ part will be fully digital, through either FIAT, BTC or stablecoins. This would drive costs down for both the issuer and the investors.
The actual trading would be done with the interface of Bitfinex, which will provide onboarding, matching engine, and order processing the orders and trades.

In this spreadsheet you can find a copy of the termsheet


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:



As you can see there are only 12 bonds, maturing from 2023 up to 2052. Bear in mind that the US has more than a few hundred of available bonds to construct the same bond curve.

The yield curve is as follows:
El Salvador Yield Curve: it's inverted: shorter maturities require higher yield.
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