Financial technology or financial engineering?

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Over the weekend, the President of El Salvador, Nayib Bukele, announced an ambitious plan to create the world’s first “Bitcoin city”. Created at the base of the Conchagua volcano, Bitcoin City is presented as a utopian society where there would be no taxes on income, capital gains, property or any municipal taxes to speak of. Nirvana will be financed only on 10% VAT.

El Salvador’s Bitcoin Bond would be structured as a 10-year $ 1 billion note bearing a 6.5% coupon. Half of the proceeds would go to buying bitcoin and the other half to building Bitcoin City’s infrastructure. Structured in partnership with Blockstream, additional dividends, funded by gains on the sale of bitcoin, will be paid to investors after the fifth year. At first glance, this plan seems ambitious, too good to be true, some would say, but the real question is how much this link has to do with FinTech and how much has it to do with FinTech. financial engineering.

Math

The first questions that we must ask ourselves about this security depend on the structure.

Bitcoin holdings

As of October 27, 2021, El Salvador had 1,120 bitcoins. To reach their goal of holding bitcoin, they would have to buy almost 7 times their current holdings.

Outstanding Debt

In 2020, El Salvador’s national debt stood at $ 21.71 billion. Throwing in a $ 1 billion bond would mean increasing that debt by over 21%. Keep in mind that El Salvador’s GDP fell by 21.9% in 2020.

Debt service

At 6.5%, the debt service on the bond would be $ 65 million to be generated on a 10% VAT alone. To be fully funded, Bitcoin City is expected to generate substantial revenue.

FinTech vs Financial Engineering

While El Salvador’s Bitcoin Bond story sounds great, there are a number of hurdles that potential investors must overcome to truly buy into the story. It would be difficult for bond investors to buy history solely on the basis of traditional financial metrics.

Blockstream’s models, however, show that it will be a winning trade.

But at the end of the 10 years, or in the 10th year of the bond, your annual percentage return will be 146%. . . If Bitcoin at the 5-year mark hits $ 1 million, which I think they [El Salvador] will sell Bitcoin in 2 quarters and get that $ 500 million back. In three and a half quarters, they will have enough to reimburse the entire deposit. I think it’s pretty good.

– Samson Mow, Strategy Director, Blockstream

Part of the analysis that is not seen in most Bitcoin Bond stories is the serial issue hopes. Samson Mow, chief strategy officer for blockchain technology provider Blockstream, said if 10 similar bonds were issued, $ 5 billion in bitcoins would be taken off the market during the suspension period, adding to the bitcoin scarcity premium. often mentioned. “And if you get 100 more countries to do these bonds, that’s half the market cap of bitcoin there.”

Your be the judge, is El Salvador Fintech or Financial Engineering Bitcoin Bond?


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