Is El Salvador Singapore 2.0?

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  • Fri, Dec 03, 2021 - 11:58am

    #1
    VTGothic

    VTGothic

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    Is El Salvador Singapore 2.0?

Last month, El Salvador’s President Bukele announced plans to issue a “Volcano Bitcoin Bond.” To underscore his seriousness, he had with him Samson Mow – the Chief Strategy Officer at Blockstream. Blockstream is a provider of digital financial infrastructure to business and industry, primarily helping onboard bitcoin. Mow spoke about the ways Blockstream had served as the technical advisor to El Salvador as it conceptualized its upcoming bond issue; he and the company have also been advising on legislation the country needs to establish in order to provide for international investors the regulatory security they require, and Blockstream is responsible for bringing into the deal Bitfinex to handle the bond issuance.

In a December 1 conversation with veteran podcaster Preston Pysh, Mow and Blockstream’s CEO, co-founder Adam Back (one of the original cypherpunks who collaborated with the mysterious bitcoin creator, Satoshi Nakamoto), outlined the Bond.

El Salvador will float a $1 billion bond, and will accommodate investments as small as $100. The purpose of the low threshold is to assure that El Salvador’s citizens will not be excluded from the offering and its long-term benefits.

The bond’s proceeds will be divided into two parts. $500 million will be used to add more bitcoin to the current sovereign supply (currently El Salvador holds 1,142 bitcoin), and to beef up the nation’s current mining capacity. The other $500 million will be used to develop a new city, to be known as Bitcoin City, near a volcano; that volcano will be tapped for geothermal energy to enable the city to be powered by 100% green energy.

The project has already lined up $100 million in financial commitments, almost exclusively from bitcoin whales (people and institutions holding more than 1,000 bitcoin). Most of those whales see this proposed city as the first “Citadel” of many to come, and are eager to support its emergence. “Citadel” is a bitcoiner conception of a future independent city-state that operates on bitcoin and for bitcoiners. Many hard-core bitcoiners see citadels as the future of society, an inevitable “back to the future” that will (they believe) result from the collapse of Western and developed global societies. Integral to that collapse will be the failure of the fiat currency regime, caused by the persistent irresponsible and inflationary practices of central bankers.

Whatever the fate of the Citadel concept on the global stage, one such city is currently being planned for El Salvador. And tied to the idea of a bitcoin-centered city economy is an opportunity for foreigners to secure permanent resident status in El Salvador by investing in the emergent bitcoin economy. Remember: El Salvador has made bitcoin legal tender with all the rights and privileges of her other legal money, USD.

Back in June, President Bukele announced that permanent resident status could be purchased for the price of 3 bitcoins invested into the country’s economy and future. At the time, bitcoin’s per-coin price was in the mid-$30k range, so the USD equivalent price was around $100,000. It is unknown whether that offer still stands, and whether the purchase price is denominated in USD or BTC. Clarifying information will likely be provided as the details of the bond issuance are announced.

According to Back and Mow’s conversation with Pysh, the Volcano Bond will partly purchase bitcoin; that bitcoin will have a 5-year lockup period. During those years bond holders will annually receive 6.5% interest on their investment. When the lockup period ends, the bitcoin will be sold in quarterly installments over a period of 5 years. The initial sales will be used to retire the bond debt; thereafter, half of each quarterly sale will be shared proportionately with bond holders as a premium over and above the interest already earned. The other half of the proceeds will belong to the government of El Salvador.

Of course, the expectation is that the price per bitcoin will appreciate significantly over the 5-year lockup period, and will continue its growth over the subsequent payout period. That should allow El Salvador to easily retire the bond’s debt, and significantly enhance its national savings account. Indeed, the development team anticipates that the bond will be retired in the first 3 quarters of sales after the lockup period. If their overall projections hold, investors will receive significant value in the form of premiums paid over the subsequent 17 quarters.

One strong benefit: Salvadorans (and anyone else from anywhere in the world) who invest as little as $100 can potentially realize life-changing returns over a 10-year period. This is the populist idea behind President Bukele’s instance on a low entry point.

The Volcano Bonds are expected to be popular among fund, endowment, and business finance managers where those entities are restricted or barred from owning bitcoin directly for one reason or another (having to do with its designation as a risky and overly volatile asset). In the same way that entities have bought shares of MicroStrategy, and/or have purchased MicroStrategy’s bond issues to get exposure to bitcoin’s long volatility, the government of El Salvador expects to reap the same kind of investor interest, for the same reason.

If they are right, and if the bond issuance is subscribed quickly, I think we can expect El Salvador to follow in MicroStrategy’s footsteps and issue a second and even a third round of bond-based financing. In a recent interview with Tucker Carlson, MicroStrategy CEO Michael Saylor said his company has realized over $4 billion in net value appreciation since adopting the dual strategy of using bitcoin as the company’s savings account and selling bonds to add bitcoin to its balance sheet.

Considering that MicroStrategy implemented its strategy just over a year ago (Q3 2020), that the company’s average bitcoin purchase price (including the $441 billion worth just purchased) is around $29,500 per coin, and that the current price of bitcoin is about double that, MicroStrategy has done well by itself. Its first year’s strong result portends a far greater contribution to the company’s bottom line over 5 years.

Surely El Salvador noticed. It is why President Bukele, Samson Mow, and the teams supporting them, believe the country can retire the entire bond debt in less than a year – after the locked bitcoin has benefited from compounded appreciation for 5 years before withdrawals begin (the historic averaged rate of appreciation of bitcoin’s price has been over 170% per year).

By issuing bitcoin bonds, El Salvador looks to be setting its trajectory toward becoming financially independent of the IMF by 2030. At the same time, it is positioning itself as a friendly Bitcoin jurisdiction and development hub. The implication is stunning. Imagine the upset to come if El Salvador emerges as the future center of finance and bitcoin blockchain development in the Americas; or emerges as the 21st century iteration of Singapore.

  • Fri, Dec 03, 2021 - 02:55pm

    #2
    lpc19

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    Is El Salvador Singapore 2.0?

VT, this appears to be a brilliant move by El Salvador.

1) Borrow fiat money that is declining in value. 2) Turn around and use that money to buy an asset that is appreciating in value. 3) Pay back the loan in depreciated fiat currency.

According to Saylor, his only misgiving about El Salvador’s project is that they are encouraging citizens to spend their bitcoin. He thinks it would be preferable for everyone to HODL, to keep their Bitcoin as a store of wealth, and to use the dollar for their spending (but on Lightning rails, and not in the legacy banking system that has been exploiting them for generations).

If I’m not getting that right, let me know what you think. Saylor seems to think that a “Bitcoin standard” that replaces fiat, is a long way off. He sees Bitcoin as a replacement for gold/real estate/S&P 500 shares, more than as a currency, for now.

 

 

  • Fri, Dec 03, 2021 - 04:22pm   (Reply to #2)

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    VTGothic

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    Is El Salvador Singapore 2.0?

@lpc19,

Did you perchance see his interview on Tucker? In that interview, I thought Saylor clearly demonstrated that he does not and will not say anything, or even hint at anything, outside the center lane of current and emergent regulations about bitcoin.

If you haven’t seen it, pick up here (link to minute 55:30) and watch for about 10 minutes.

Notice how well he understands, and how carefully he articulates, the current discussion on capitol hill and where the preponderant thinking is currently located. He demonstrates – like a good law student – that he knows the law and the regulations and the thinking behind them.

Around minute 55:50 Tucker starts to inquire about ways to circumvent government awareness of how people use bitcoin. He wants to know if it’s possible to bypass kyc-aml, even stating that he doesn’t think the government needs to know everything about our transactions, and says he’s not opposed to undermining the authority of the government. He’s looking for some signal that Saylor feels similarly. Saylor does not bite.

Then, probing further, at minute 60 Tucker asks him, “By the way, when you use the terms terrorism and money laundering, can you use air quotes? Do you mind?”, Saylor responds with a small smile and says, “Yeah.” Meaning, he does mind.

It’s clear that’s what he means because he started shaking his head negatively as an answer to the first question, “can you use air quotes?, then stopped shaking his head at the second question, “do you mind?”, and responded “yeah.”

As Tucker chuckles an apology, Saylor underscores his objection to using air quotes, saying “It’s above my paygrade, Tucker. It’s all above my paygrade.” Meaning, he’s just not going to go down that subversive road. Then he leans forward, raises his volume and forcefully returns to safe territory, starting with: “Here’s my key point, right?” at minute 60:30, continuing: “You either own…”

What I saw is what I always see in him: a very disciplined CEO who knows he’s standing out from the compliant crowd, and therefore that he becomes a target of the full force of the US government the moment he indicates that he secretly thinks that what he is doing is attacking the integrity of the dollar.

Saylor will never say anything that hints he’s aware that his switch to bitcoin as a store of value is an intentional shorting of the dollar. Instead, he consistently equates bitcoin to assets like gold, equities, and real estate – all safe, approved stores of value that are denominated in USD and so don’t threaten the dollar regime. Saylor wants to signal, always, that in his mind all he’s doing is choosing bitcoin as his means of storing value because (as he often says) he thinks it is the hardest, most secure way to store value known to humankind.

To not compete with the dollar, to not put a target on his large and public back, he will never say he has switched to thinking in terms of a bitcoin standard. So, on the one hand he can applaud the power of the bitcoin network to bank El Salvador’s unbanked, and to cut the cost of transmitting dollars from the US to ES, but on the other hand he will not endorse El Salvador’s elevation of bitcoin to the status of a currency. When asked, he simply reverts to his stock answer: I think bitcoin makes an excellent store of value, I don’t think it’s a means of exchange.

What he really thinks is anyone’s guess. I guess that when bitcoin becomes an accepted means of payment in the US, and is no longer stigmatized as a threat to the dollar, Saylor will have no problem adapting his rhetoric.

But, I think he will always think it’s economically smarter to spend dollars and save bitcoin. Get rid of the dying money and hold tight to the increasingly-valuable money while it continues to rise through the S-curve of mass adoption.

He’s not wrong about that.

  • Fri, Dec 03, 2021 - 06:12pm

    #4
    lpc19

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    Reply To: Is El Salvador Singapore 2.0?

VT, thanks very much, I just watched the Tucker clips you referred to, and you’re “reading” Saylor 100% correctly. He is clearly, in every interview I’ve seen, not wanting to rock-the-boat.

For example, when he created that “Bitcoin Mining Council” back in the spring, to counter the energy FUD, it signaled that he doesn’t want the government to be an antagonist towards Bitcoin.

He surely realizes that Bitcoin is a threat to the Fed money printer, and to the banking cartel, but by presenting Bitcoin as an alternative to gold / real estate / art, etc.,  it can grow in adoption more stealthily.

He presents as an intelligent, non-threatening, confident ambassador for Bitcoin, rather than one of the toxic-maxis on Twitter. Bitcoin has no “leader” per se (one of its best qualities), but Saylor is a terrific advocate and educator for it. Thanks again for your regular BTC postings. I’ve been surprised at how little interest there is in this topic on PP. How about you? (It tells me that we are still really, really early in this process, and that I haven’t gotten in too late.)

 

  • Fri, Dec 03, 2021 - 11:29pm

    #5
    Thetallestmanonearth

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    Is El Salvador Singapore 2.0?

Love love love seeing this discussion on PP!!! Thank you VT. I have been reading about this bond but hadn’t considered until just now if it’s possible for me to participate in it.  I’m going to spend tonight researching that. How historic is this moment. We are living at the time of the first Bitcoin bond? A new monetary paradigm at the exact moment the world needs it the most. Investment as revolution! I would be beyond proud to tell my grandkids to that I was a part of it!

  • Sat, Dec 04, 2021 - 06:20am   (Reply to #4)

    #6
    VTGothic

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    Is El Salvador Singapore 2.0?

I’ve been surprised at how little interest there is in this topic on PP. How about you? (It tells me that we are still really, really early in this process, and that I haven’t gotten in too late.)


@lpc19
,

I agree with your take on Saylor and his role. I, too, think he knows exactly what he’s doing, and why. Smart guy, well seasoned in pr and politics by running a publicly listed, international company. Like Chris did during last spring’s PP website/business divorce, Saylor knows when to keep his mouth shut.

There is a strong btc contingent here, and it has broken out from time to time. Right now, I think everyone’s preoccupied with Covid’s soap opera programming. (I put topics like this up just for a respite, sometimes. Wall-to-wall Covid gets tedious.)

There’s also a strong gold & precious metals component here; my fellow Boomers. But neither pm nor btc looks like an existential threat to freedom and life, although folks hold either or both as a means to preserve freedom and support life. Threats get the emotions churned up.

  • Sat, Dec 04, 2021 - 06:32am   (Reply to #5)

    #7
    VTGothic

    VTGothic

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    Is El Salvador Singapore 2.0?

@Thetallestmanonearth,

I’m also intrigued by the bond. Partly, I just want to support El Salvador’s subversion. The wife and I were talking about possibly buying in a little bit, just for fun and to be encouraging.

Unfortunately, Bitfinex is not available to US citizens. Until it can get a US license it will not take me. <sniff! sniff!> If you find a work-around, do tell me.

Perhaps Blockstream will be able to offer US citizens access. We’ll see, I guess.

  • Sat, Dec 04, 2021 - 02:39pm

    #8
    lpc19

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    Reply To: Is El Salvador Singapore 2.0?

Yes, VT. Totally agree.

Bitcoiners and gold/silver bugs agree on the problem (inflation of fiat money supply). It’s not unwise to hold both BTC and PMs. Although I’m starting to believe that gold and silver behave more like commodities than as stores-of-value (recommend that you read Saifedan’s stock-to-flow analysis of PMs; when demand goes up, supply goes up – which is not an attribute of hard money).

Also am quite enthused about the El Salvador bond issuance, and would like to buy in and show support. Perhaps an ETF will be created that the plebes can partake in.

I can imagine lots of other small countries thinking the same thing. Borrow fiat (a melting ice cube), buy a deflationary hard money (e.g. it increases in purchasing power every year) with the proceeds, and then pay back the loan with increasingly debased fiat currency.

 

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