"Bitcoin Beach" - Part 4
Joel Waterman
Active participant in the financial, nuclear energy & digital asset economy
This is Part 4 in a series of articles following the fascinating story of a country, El Salvador, which took a very bold step and became the first country on the planet to adopt Bitcoin as a national currency. In Parts?1?and?2?you can read about the use case and how Bitcoin works as a national currency. Part 3 chronicles the Bitcoin adoption cycle. It's been a few months since those first articles and there have been several interesting developments to this story, so I thought it was time for an update. Mining Bitcoin with Volcano Power. Link-up with Satellites. Building a new City. $1Billion Bitcoin Bond. Bitcoin Bankathon. Enjoy Part 4.
Quick recap
In June, earlier this year, El Salvador announced at the Bitcoin Conference in Miami (FL) that they would make Bitcoin legal tender (in addition to their existing currency). This legislation went into effect in September this year. El Salvador launched a Bitcoin wallet and payment system named Chivo, which according to El Economista, a local paper, has been downloaded by more than 500,000 Salvadorans (mid September data point). President Bukele claims three million people have downloaded Chivo which, if true, is roughly half the country's population. Users received $30 in Bitcoin when they downloaded the wallet for the first time. They also installed a network of >200 Bitcoin ATMs across the country. They created a Bitcoin mining facility, using available volcano energy to mine Bitcoin.
Mining Bitcoin with Volcano Power
What you are seeing on the right is a picture of the geothermal energy facility that is built into the Tecapa volcano in El Salvador. This is where the first bitcoin mining equipment was installed. On September 30, El Salvador started exploiting volcanic geothermal energy to mine Bitcoin. On October 1, President Bukele tweeted that El Salvador mined its first Bitcoin - in reality they mined just 0.00599179 ? but who is counting - you have to start somewhere... :-)
Details are still a little vague on this project. President Bukele did not explain how many machines were online or how much electricity was being allocated to the Bitcoin mining effort, but the project appears to be taken its first steps toward becoming a real volcano power mining facility. To be continued as they say....
Hooking-up Bitcoin mining facilities to satellites
In another interesting development, a team from a company called Blockstream was recently in El Salvador with the aim to hook-up the Bitcoin mining facility to their satellite infrastructure. The Blockstream Satellite network broadcasts the Bitcoin blockchain around the world 24/7 for free, protecting against network interruptions and providing areas without reliable internet connections with the opportunity to use Bitcoin.
Bitcoin requires a stable network connection to synchronize a full node with the latest activity on the blockchain and to broadcast new transactions. Where internet access is unreliable, Blockstream’s satellite services - they rent the satellites - come into play. Anyone who can install a mesh antenna (like a TV antenna) is able to participate in the global Bitcoin network.?
Building Bitcoin City
The President of El Salvador announced on Saturday, November 20th, that he was planning to build the world’s first “Bitcoin city". The idea of Bitcoin City has several dimensions:
Issuing $1B in Tokenized Bonds on the Liquid Network
The government of El Salvador will be issuing a 1 Billion US Dollar tokenized bond that will carry a 6.5% yield. $500M will go towards building the city and related projects, the other $500M will be invested in Bitcoin.
These are considered Bitcoin-backed bonds for two reasons: (1) half of the bond proceeds will be invested in Bitcoin and (2) the bonds will be tokenized on Blockstream’s Liquid side-chain. These rather novel concepts need some further explanation, so let's unpack this a little more.
The Liquid Network connects multiple cryptocurrency exchanges, brokers and various other financial institutions in a network. The Liquid Network is designed to improve the speed and cost of settling large-volume, Bitcoin-based transactions. It is technically a sidechain, which is a blockchain that is built over an existing blockchain (in our case, the Bitcoin blockchain). Transactions on a sidechain don't need to be included in the main blockchain, so no network fees are incurred by transacting over the sidechain. ?
What does tokenization mean? Liquid network members can create a token that represents a collateralized cryptocurrency, like Bitcoin. These tokens can now be traded and settled between Liquid users with the same speed and privacy as Bitcoin and other issued assets. This approach allows exchanges and traders to safely handle these assets without ever needing to support the underlying asset. More detail is beyond the scope of this article. I included a couple of links to more information in the Sources & Inspirations section.
Let's turn towards Blockstream's blog posts for more information on the Billion Dollar Bond:
[...] [El Salvador] will be issuing a $1 billion US “Bitcoin Bond” on the Liquid Network. The $1 billion US raised will be split between a $500M allocation of bitcoin (BTC) and a $500M infrastructure spend for building out energy and Bitcoin mining infrastructure in the region. El Salvador also aims to create a government securities law and grant a license to Bitfinex Securities to process the bond issuance.
The Bitcoin Bond will have special dividends dispersed on an annual basis generated by the staggered liquidation of bitcoin. Using Blockstream’s Asset Management Platform (AMP), dividends are easily paid out to bond holders. Since we’re using the Liquid Network and Blockstream AMP, we’re also able to easily accept investments as small as $100 to democratize access to the bond.
[...] investment capital can flow in from around the globe without friction. Dividends can be distributed to investors instantly, with built-in cryptography to maintain confidentiality. Bonds can be traded 24/7 with other assets like stablecoins, using protocols that help eliminate the need for trust. [...]
Where a 10 year US Treasury will have a negative real yield (nominal yield minus inflation), as do many Government Bonds in Europe, where many Banks charge negative interest as well, a Bitcoin Bond backed by the El Salvador government and yielding a reported 6,5% could be very competitive in some corners. The Bitcoin-backing makes it even more attractive as Bitcoin's price is expected to rise significantly over the years. Of course, if it does not, this story won't work so well :-), but that is the risk/reward calculation everyone has to make for themselves.
Investors will receive dividends generated by staggered liquidation of bitcoin holdings, which will begin from the sixth year. The annualized yield back to investors could reach 146% in the 10th year, according to Blockstream projections that are based on certain assumptions of the increase in the price of Bitcoin. That would allow El Salvador to pay off the bond with the profits from selling the Bitcoin they bought earlier (+/- 1,100 so far). The 10-year yield on El Salvador’s regular and current government bonds stands at 13 percent.
Who would buy this? Bitcoin skeptics are unlikely to find this very attractive. Others will be quick to point out the counterparty risks. I am sure the rating agencies won't like this Bond either :-) - but to me these companies have lost a lot of their credibility, just watch the 2015 movie "The Big Short' or the 2010 documentary 'The Inside Job', which provides a comprehensive analysis of the global financial crisis of 2008 !
In contrast, Bitcoin enthusiasts might want to back El Salvador and take advantage of the fact that this Bond can be purchased in tranches as low as $100 USD. I can also imagine that institutions that are legally or physically barred from holding Bitcoin and who are interested in buying emerging market debt might want to invest as well. The risk-return profile of a Bitcoin bond is totally different than holding spot Bitcoin and this may be attractive for those companies whose investment mandate does not allow them to hold actual Bitcoin. It can also be attractive for large Bitcoin holders who wish to de-risk their holdings but still have exposure to Bitcoin. In the Sources & Inspirations section I added a link to a podcast which discusses the Bond in more detail and projects some very attractive yields. Just 'yiedl' :-) If it works people will start following this example and El Salvador's government might even raise more of these to fund infrastructure works and the like.
Will all of this really work?
President Bukele has his critics of course. You cannot embark on a course like this and not expect to encounter resistance.
Domestic residents have been protesting - people have different views of course, certainly many folks don’t want to be obligated to accept Bitcoin (one of the early criticisms of the wording of the law). International markets also are unenthusiastic. Moody’s downgraded El Salvador’s debt in July and the IMF issued several warnings citing financial and regulatory challenges of using cryptocurrencies. Even the Bank of England expresses concerns, citing Bitcoin's volatility and the question of whether the people of El Salvador understand what they are letting themselves in for. One could argue these are familiar objections from the usual suspects, but it's noteworthy as a statement of how parts of the traditional finance ecosystem are viewing this effort at this point in time..
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The biggest issue of all will undoubtedly be education & adoption. El Salvador’s levels of education and understanding surrounding financial assets in general and Bitcoin specifically, makes it very likely that much of the population does not fully grasp or buys in to the possibilities of this decision, or simply disagrees with it. That would be the same in any country in my view. In addition, using digital wallets needs a lot of education full stop.
Economist Ricardo Castaneda voices another common concern; “The hundreds of millions of dollars spent buying bitcoin come from the general budget and could have been spent on health or education. Even those Salvadorans who don’t use bitcoin will pay the price of this experiment.”
Amidst all this criticism, the local business community is stepping up. Banco Hipotecario de El Salvador, a state owned bank, will stage the first Bitcoin Bankathon in November to encourage developers to devise solutions allowing the bank to offer bitcoin-based financial services to all Salvadorans. “To succeed in creating a more inclusive financial services landscape for the citizens of El Salvador, we must start driving innovation proactively,” said Celina Padilla, the bank’s president. “A hackathon is like a seed that allows innovation to sprout. Banco Hipotecario is proud to be the first bank to plant this seed to create innovative Bitcoin-based applications that will remove the barriers preventing Salvadoran citizens from accessing financial services in the region.”
Adoption Adoption Adoption
In the end it's all about adoption. The numbers to prove the current state of adoption vary. We saw that the President claims that 50% of the people downloaded the Chivo wallet. A lot of the online magazines and crypto experts seem to quote these claims without questioning them. From some of these folks & sources I would have expected a little more due diligence, but I digress. I did many internet searches and I cannot back up these numbers with easily retrievable and independent sources. If I find more or I missed something, I will update the article at a later stage. What I can find is this (reported status correct as per 30/11/21):
The President also tweeted that Salvadorans are inserting more cash (to buy Bitcoin) than they are withdrawing from the Bitcoin ATM's. He further expressed the hope that 2.5 million Salvadorans living in the United States will eventually send remittances through Chivo. To date, about 30 Bitcoin ATM's have been installed for that purpose (to send remittances to El Salvador) in Atlanta, Chicago, Houston and Los Angeles. President Bukele says that around $2 million is being sent via Chivo daily. Again, I have not been able to verify that number from other independent sources.
According to the the Salvadoran Foundation for Economic and Social Development, (SFESD) 12% of consumers have used the cryptocurrency. The foundation, which polled 233 companies across different sectors, found that the overall use was still low, with 93% of companies reporting no Bitcoin payments. This is not surprising. These things take time.
One of the problems is that the Chivo wallet is closed-source software (as opposed to open source) and it's a government project, very closely tied to the President's personal success. After all, he basically staked his reputation on this plan. For now, we do not seem to have independent market research figures. I could only find that one from the SFESD.
For example, it appears that at this time, you cannot send ? from the Chivo wallet to another wallet. So it's all a bit too closed for my liking. This may very well change and I will keep monitoring this story - expect a Part 5 at some point :-). There are several Chivo product reviews online. I posted a link to one in the Sources & Inspirations section.
It's very early days, these things take time and it's complex. Nobody said this was going to be easy and in my view this bold and courageous effort deserves support. We are witnesses to modern financial history in the making.
Sources & Inspirations
Overview of El Salvador's Bitcoin initiative, https://www.inverse.com/innovation/bitcoin-el-salvador-protests-chivo-app
The companies behind the El Salvador bitcoin decisions, https://www.inverse.com/innovation/bitcoin-el-salvador-protests-chivo-app
President Bukele's twitter account, https://twitter.com/nayibbukele
El Salvador's Volcano node, https://cryptonews.com/news/el-salvadors-bitcoin-mining-volcanode-takes-its-first-steps.htm and
President Bukele and his plans do have their share of critics, see
Bitcoin City announcement, https://news.coincu.com/36473-el-salvador-inaugurates-a-bitcoin-city-backed-with-bitcoin-bonds-worth-1-billion/
Satellite driven BTC mining power, https://blockstream.com/satellite/ and https://bitcoinmagazine.com/culture/the-blockstream-satellite-network-maintaining-bitcoin-sovereignty-in-space and https://www.crowdfundinsider.com/2021/11/183194-el-salvador-connects-volcanoes-to-blockstream-satellites-fidelity-now-canadas-first-institution-focused-on-bitcoin-custody-report/
Bitcoin Bond, https://finance.yahoo.com/news/junk-rated-el-salvador-bitcoin-174520282.html
Blockstream in El Salvador, https://moneytrainingclub.com/from-volcanoes-to-space-miners-in-el-salvador-connect-to-bitcoin-via-satellite/
What is the liquid network?, https://help.blockstream.com/hc/en-us/articles/900002016823-What-is-the-Liquid-Network-
Liquid, Technical Overview, https://docs.blockstream.com/liquid/technical_overview.html
Forbes on El Salvador's Bitcoin projects, https://www.forbes.com/sites/theapothecary/2021/10/07/in-el-salvador-more-people-have-bitcoin-wallets-than-traditional-bank-accounts/?sh=298198e20b57
Chivo downloads, https://www.reuters.com/technology/one-month-el-salvadors-bitcoin-use-grows-headaches-persist-2021-10-07/
Bitcoin owned by El Salvador, https://www.reuters.com/technology/el-salvador-adds-nearly-25-mln-bitcoin-state-coffers-says-president-2021-10-27/
Reviewing the Chivo wallet, https://www.nasdaq.com/articles/a-first-look-at-the-chivo-app-el-salvadors-bitcoin-wallet-2021-10-11
Chivo Wallet tutorials (Spanish), https://twitter.com/nayibbukele/status/1435074772774305795?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1435074772774305795%7Ctwgr%5E%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Felsalvadorgram.com%2F2021%2F09%2Fcomo-descargar-chivo-wallet-en-tu-android-iphone-o-huawei%2F
A Sovereign Bitcoin Bond in El Salvador w/ Adam Back & Samson Mow (Bitcoin Podcast), https://link.chtbl.com/BTC054
NY Times article, https://www.nytimes.com/2021/10/07/world/americas/bitcoin-el-salvador-bukele.html