Why El Salvador’s Bitcoin Bond May Not Be Worth the Hype
Recently, the President of El Salvador Nayib Bukele unveiled an ambitious plan to create the world’s first city created around the concept of Bitcoin. The city dubbed “Bitcoin City” will have no personal income tax, no sales tax, and no property tax. Revenue from the city will come from a 10% VAT tax. To help raise funds for the Bitcoin crypto city’s massive building project, El Salvador is looking to raise $1 billion from a bond sale with half of those funds being converted to bitcoin.
While many Bitcoin maximalists are exciting about the prospect of a “Bitcoin City,” they should think twice before investing their hard-earned Bitcoin in this project.
What’s Wrong with the Bitcoin Bond?
The Bitcoin Bond doesn’t really live up to its name. The Bitcoin Bond does pay a rather generous 6.5%. However, the payout is made in fiat, not Bitcoin. If you live in the United States, you are now experiencing 6.2% year-over-year inflation. That means that your money would only earn 0.4% a year in real terms. Compare that with Bitcoin which is returning, on average, 100% a year for the pasted 12 years. Even the S&P 500 has been returning a stellar 20% in the last five years.
Bitcoin Bond is rated as junk
Also, you have to bear in mind that the Bitcoin Bond is considered a “junk bond.” That means that the bond carries a high risk of default. For instance, if the city is never completed, you can lose your funds. Also, consider the fact that El Salvador is not known for its stability. Any charge in the government can lead to the entire project being abandoned. This is a significant risk for a bond that is going to return to you a third of what the S&P 500 performing.
Avoiding any Investment that Pays Back in Fiat
With inflation on the rise, it may be smart to avoid any investment that is going to pay you back in fiat. Consider the fact that you may want to consider sites that allow you to lend your Bitcoin and get paid interest you have to get more than a 6.1% annual return just to beat inflation these days. If you are looking for a better return on your Bitcoin, then look at getting paid back in BTC. Some sites where you can loan your Bitcoin and get paid in BTC include BlockFi, Gemini, and Binance. This can help you build your BTC stack while also protecting your buying power.
Stay Clear of the Bitcoin Bond
While the prospect of a nearly tax-free city built on the principles of Bitcoin is a noble idea, the current fiat payout of the Bitcoin bond makes it a “pass” for those looking to protect their wealth with crypto investing. You are better off lending your Bitcoin and getting paid back in BTC. Be sure to always carefully understand the risks and rewards of any investment before making a final decision.
REFERENCE:
https://www.reuters.com/markets/us/what-we-know-so-far-about-el-salvadors-volcano-powered-bitcoin-bond-2021-11-22/
