Demand from bitcoin “whales” — investors holding large quantities of the world’s biggest cryptocurrency — is likely to be crucial to fundraising for the bond, according to people involved with the effort.
Paolo Ardoino, chief technology officer at Bitfinex — which is set to provide the tech platform for the deal — said the crypto exchange has received “half a billion dollars” of interest from its users. Important details of the bond would need to be ironed out, requiring the passing of new securities laws in El Salvador, before potential buyers firmed up their interest, he added.
“Some of our users have proactively reached out to us to express their interest. They are definitely interested in participating in this but they are waiting for the details to be published,” Ardoino said. He added that the exchange would not be involved in marketing for the bond.
The issuance of El Salvador’s debt product comes just over a year after the country became the first to adopt bitcoin as legal tender, with the enthusiastic backing of President Nayib Bukele.
The so-called volcano bonds — which will have half their proceeds invested in bitcoin while the rest go towards constructing a “bitcoin city” at the foot of the Conchagua volcano — could offer a financial lifeline to Bukele’s government, as doubts grow over the sustainability of its finances.
The optimism in the crypto community for the offering, which is the first of its kind from a sovereign borrower, sharply contrasts with most large traditional investors, who have said they are highly sceptical of the deal.
Buyers of the 10-year bitcoin bond — which offers an annual interest rate of 6.5 per cent along with a share of any upside from the proceeds invested in bitcoin — would be offering financing on favourable terms to El Salvador, whose existing 10-year dollar bonds currently yield in excess of 20 per cent.
After a five-year lock-up period El Salvador will sell bitcoin until it recoups its initial investment and then share half of any profit with investors.
Those yields have climbed sharply as most investors took a dim view of Bukele’s experiments with cryptocurrency, warning that the bitcoin bond could push El Salvador further from access to traditional debt markets and hurt its relationship with the IMF.
“The impact of bitcoin in El Salvador so far, in our view, has been to increase macroeconomic potential risks rather than introduce any material change in how economic transactions are conducted,” analysts at Barclays wrote last week.
Potential buyers of El Salvador’s bond are also still lacking basic information around the legal framework for the tokens, or which entity will issue them.
People close to the project are betting that big entities in the crypto community will see the bonds as an attractive investment despite the relatively low returns and uncertainties surrounding them.
El Salvador has suggested it may also open up the bond issues to retail investors, but the scope of the marketing is among many details still up in the air.
“There is a ton of wealth that is outside the banking system and wants to remain outside it,” said one industry executive who has experience of working with Bitfinex. For these investors, accessing government debt in a crypto-friendly manner is attractive, “even if you make less in terms of returns”.
Potential investors were attracted by the bitcoin bond’s status as a “world first”, people involved in the project said. “There is a desire to be part of something so groundbreaking,” said one.
Yet the bitcoin bond fundraising faces daunting hurdles, after the government announced a delay that puts the timeline and future of the issuance in doubt — with important details still unclear. The sale was initially expected in March but has been delayed.
Bukele blamed the delay on the need to press ahead with pension reforms, while his finance minister Alejandro Zelaya maintained last week that market conditions were responsible and that the issuance remained ready to launch. Zelaya also confirmed that the government planned to issue the bond through La Geo, a state-backed thermal energy company.
“There seems to be little chance of a transaction any time soon,” the Barclays analysts said.
According to Ardoino, fuller details of the terms of the bond will have to wait until the government has passed its securities legislation.
“The timeline for that could be from one week to a couple of months. That’s the main blocker for us to move forward,” he said.
Even as many traditional investors bet that Bukele’s bitcoin push is driving El Salvador further from the IMF and closer to the brink of insolvency, some are hoping that crypto traders will offer the country a lifeline.
“The bitcoin community does some bizarre things,” said Bradley Wickens, founder of Broad Reach, an emerging markets hedge fund that holds some conventional El Salvador bonds. “If they end up providing an avenue of financing without the IMF, that could totally change El Salvador’s fortunes for the next few years.”
social experiment by Livio Acerbo #greengroundit #bitcoin – original source here