El Salvador’s prospective Bitcoin Bonds do not have nearly enough interest to be good investments

TLDR: El Salvador’s debt is suspect, and so capital markets charge high interest. They are now going to bitfinex with ridiculously low interest. You should not buy these bonds unless the interest is significantly better

As you may have heard, Nayib Bukele is selling bitcoin bonds to build a bitcoin city. These bonds will be 5 year bonds, trading at 6.5%. Put bluntly, that level of interest on Salvadoran bonds, even in Bitcoin, is ridiculously low.

Let me explain. If you look at regular Salvadoran bonds, you will see that the interest rate on their 20 year bonds due 2023 is 7.75%, and on their 10 year bonds due 2029 is 8.625%. You may think that is an acceptable bitcoin discount. However, this is not the correct number to use-we need to use yield.

Yield is, basically, the interest rate scaled to the bond’s current price. This makes sense, because if you buy a $1000 bond paying 4% for 500 its really paying you 8%. So lets look at El Salvador’s yields. The first one, due 2023, has a yield of a whopping 26.5%. The second one, due 2029, has a yield of a still-high 15%. If these bonds would be due in 2027, you could reasonably expect a yield between those two figures (a linear approximation would expect 19%, but linear approximations are not very useful in bond trading).

Now, you could tell me that its worth buying a bitcoin bond at full price for 6.5% interest, or even at a premium-if bitcoin goes up, you win, after all. Not so fast-this runs into what’s called currency risk. If the price of bitcoin doubles, and El Salvador has spent the bitcoin it gained from the bonds on construction of Bitcoin City, then El Salvador will have to come up with more value to pay you back than they recieved. This happens in countries where there is little faith in the home currency-when Mexican companies issued dollar denominated bonds and the peso crashed, there were significant concerns about ability to pay. Same thing applies here.

Bitcoin Bonds are a cool idea, and a novel one. However, they should not be sold at 1/3 of the yield as a dollar-denominated bond. Bukele is trying to take advantage of Bitcoiners to raise capital cheaply-be cautious. I would advise against buying these bonds at anything below a 10% yield.

Edit 1: People have informed me that this bond is likely dollar denominated. In that case, it should certainly get a yield in between the 15% and 26.5% figures, and you as an investor should, if you want a Salvadoran bond, pick either of those over this offering. This is because theyd be in the same currency and from the same government.