El Salvador fights crypto ‘whales’ as traditional investors shun Bitcoin bonds

El Salvador’s $1 billion bitcoin-backed bond could tap into deep wells of capital among crypto enthusiasts after several major international investors shunned the project.

Demand from bitcoin “whales” — investors who hold large amounts of the world’s largest cryptocurrency — is likely to be crucial to raising funds for bonds, according to people involved in the effort.

Paolo Ardoino, chief technology officer of Bitfinex — which is set to provide the technology platform for the transaction — said the cryptocurrency exchange has received “half a billion dollars” of interest from its users. He added that important details of the bonds need to be settled, which requires new securities laws to be passed in El Salvador, before potential buyers confirm their interest.

“Some of our users have proactively reached out to us to express their interest. Arduino said they are certainly interested in participating in this but are waiting for details to be released. He added that the exchange would not be involved in bond marketing.

The release of El Salvador’s debt product comes just over a year after the country became the first to adopt bitcoin as a legal currency, with the enthusiastic support of President Najib Bukil.

So-called volcanic bonds – half of the proceeds of which will be invested in bitcoin while the rest will go towards building a “Bitcoin City” at the foot of the Conchagua volcano – could provide a financial lifeline for the Bukele government, as doubts grow about the sustainability of its finances.

The optimism in the crypto community about the offer, which is the first of its kind from a sovereign borrower, contrasts sharply with most large traditional investors, who have said they are extremely skeptical about the deal.

Buyers of 10-year bitcoin bonds — which offer an annual interest rate of 6.5 percent combined with any higher returns invested in bitcoin — will offer financing on favorable terms to El Salvador, which has a current 10-year dollar. Bond yields are currently in excess of 20%.

After a five-year shutdown period, El Salvador will sell bitcoin until it gets its initial investment back and then share half of any profit with investors.

These returns rose sharply as most investors took a bleak view of Bukele’s experiences with cryptocurrency, warning that bitcoin bonds could push El Salvador more than access to traditional debt markets and damage its relationship with the International Monetary Fund.

“The impact of bitcoin in El Salvador so far has been, in our view, to increase potential macroeconomic risks rather than introduce any fundamental change in how economic transactions are conducted,” Barclays analysts wrote last week.

Potential buyers of El Salvador bonds also still lack basic information about the legal framework for the tokens, or the entity that will issue them.

People close to the project are betting that large entities in the crypto community will see the bond as an attractive investment despite the relatively low returns and the uncertainty surrounding it.

El Salvador has suggested that it may also open up bond issues to retail investors, but the scope of marketing is among the many details still being researched.

“There is a lot of wealth outside the banking system and you want to stay out of it,” said one industry executive with experience working with Bitfinex. For these investors, accessing government debt in a currency-friendly way is attractive, “even if you’re generating lower returns.”

People involved in the project said that the status of bitcoin bonds as “the number one in the world” attracted potential investors. “There is a desire to be part of something very pioneering,” one said.

However, the process of raising funds from bitcoin bonds is facing huge hurdles, after the government announced a delay that puts the timeframe and future of the issuance in doubt – with important details that remain unclear. The sale was initially expected in March but was postponed.

Bukele blamed the delay on the need to press ahead with pension reforms, while his finance minister Alejandro Zelaya confirmed last week that market conditions were responsible and that the issuance was still ready for launch. Zelaya also confirmed that the government plans to issue the bonds through the state-backed La Geo Thermal Power Company.

“There appears to be little chance of a deal being struck anytime soon,” Barclays analysts said.

According to Arduino, full details of the bond’s terms will have to wait until the government issues its own securities legislation.

“The schedule for that could be anywhere from one week to two months. That is the main obstacle for us moving forward,” he said.

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Although many traditional investors are betting that Bukele’s bitcoin push will push El Salvador away from the IMF and near bankruptcy, some hope that cryptocurrency traders will provide a lifeline to the country.

“The bitcoin community is doing some weird things,” said Bradley Wiakins, founder of Broad Reach, an emerging market hedge fund that holds some traditional El Salvador bonds. “If they end up providing a means of financing without the IMF, it could completely change El Salvador’s fortunes over the next few years.”

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