Imagine a Bitcoin mining rig powered by volcanoes… and then you can invest in that rig through the bond market!
Nayib Bukele has announced exactly that at the recent LaBitConf event in El Salvador. He proposed the creation of a new Bitcoin City, along the Gulf of Fonseca, near a volcano. This Bitcoin City will house a major Bitcoin mining rig. The whole thing will be powered from a geothermal power plant which harnesses the energy from the volcano. How will Bukele finance the building of this Bitcoin City? By issuing bonds linked to the Bitcoin price and to run on the Liquid network. He is calling them, wait for it, ‘volcano’ bonds. Bukele plans to issue $1billion worth of ‘volcano’ bonds of which $500million is to be spent on the infrastructure for the City and the other $500million on a Bitcoin purchase.
These ‘volcano’ bonds have a duration of 10 years, and the coupon pays out 6.5% per year for the first five years, during which time the purchased Bitcoins are locked away. After those five years, El Salvador will start to sell them on the open market and also use what appreciation it has earned to pay bonuses on the bond dividends. The idea is that, come maturity, the annual percentage yield would have added up to 146%. This calculation is based on Blockstream’s projection that Bitcoin would reach $1million by the end of 2026… a prophecy that El Salvador hopes will be self-fulfilling by locking away $500million’s worth of Bitcoin from the market in those ten years. By the way, President Bukele also promised that this Bitcoin City will have 0% income tax, 0% capital gains tax, 0% property tax and, for those investors that see out the term of the 10-year bond, citizenship.
El Salvador is expected to publish further details about the ‘volcano’ bonds in a prospectus. We will review it when it comes out.
El Salvador will become the “Singapore of Latin America”, according to Blockstream. It is certainly offering its investors a share in Bitcoin’s price growth. It remains to be seen whether Bukele’s lofty promises of 0% taxes and ‘volcano’ bonds will bear fruit. Who knows, maybe these ‘volcano’ bonds will become the Gamestop of the bond market as people pile into these bonds, anyway, regardless of El Salvador’s risk status. They pile in just because the ‘volcanoes’ have the Bitcoin brand stamped on them and they have been issued by the most rebellious government in the world.
Blockstream said that these bonds will appeal to any kind of investor: “cryptocurrency investors, investors seeking yield, HODLers, and ordinary people.” Its even fuelling a new word: “hyperbitcoinization”. And, remember folks, Lightning is riding on this hyperbitcoinization. Any excitement about Bitcoin always results in an uptick in Lightning usage. This means new customers for LQwD.