by Nick Giambruno

(El Salvador’s Volcano Bonds are the biggest thing to happen to Bitcoin since its birth in early 2009. If you missed my recent dispatch, click here to get up to speed.)

A common question is, why not just invest in Bitcoin instead of El Salvador’s Volcano Bonds?

But that’s the wrong question because they are different assets with different risk/reward profiles that serve different purposes.

Bitcoin is a commodity, a digital bearer instrument, and simply money. Bitcoin has no counterparty risk, is not a security, and has no yield.

The Volcano Bonds will be registered securities and traded on regulated exchanges. They are a liability of the government of El Salvador and will pay a 6.5% annual coupon, plus the bonus Bitcoin distributions after year five.

So, the Volcano Bonds shouldn’t be compared to Bitcoin, but rather to other assets in the same asset class—other bonds.

It’s hard to think of a worse place to put your capital than in traditional bonds right now.

Central banks and their rampant money printing have disfigured the bond market. As a result, bonds have been in the biggest bubble they’ve ever been in through all of human history—though it appears to have finally popped.

Since bond yields are inversely related to bond prices, yields are just coming off the lowest levels they’ve ever been. As a result, many bonds still yield far below the government’s crooked definition of inflation—never mind the actual inflation rate. That means you are guaranteed to lose purchasing power by investing in many bonds today.

In other words, traditional bonds have turned from assets into liabilities.

That means there is around $100 trillion in capital parked in the bond market that’s starved for real yield and not getting it.

It has all the makings of a compelling contrarian speculation.

In short, the bond market is ripe for disruption. The Volcano Bonds could be what sparks it. They are an innovative structure that is far better than the existing model for both the borrower and the bondholders.

The bondholders get to share in the enormous upside potential of Bitcoin while also benefiting from downside protection, reduced volatility, and 6.5% annual coupon income.

Volcano Bonds reduce the risk to bondholders because they have two tracks to repayment: 1) Bitcoin price appreciation and 2) payments from the government of El Salvador.

There is always a risk of default with all bonds. But the Bitcoin component of the Volcano Bonds makes default less likely because it offers another track to repay investors, one that is highly lucrative.

For example, if Bitcoin merely doubles by 2028—which I believe is a conservative assumption—it will significantly reduce the risk of default. That would mean El Salvador would have enough dollars to make the bondholders whole from the Bitcoin price appreciation alone.

Volcano Bonds should be less volatile than Bitcoin—which can drop by as much as 80% at times—because they also have the traditional bond element in which a sovereign government backs them. The El Salvador government, of course, has risk, but it provides a measure of protection that could reduce the overall volatility.

Further, many institutional investors have charters that may prohibit them from owning Bitcoin but allow them to invest in bonds. The Volcano Bonds offer these investors a way to participate in the upside of Bitcoin while complying with their charters.

Volcano Bonds offers an attractive risk-reward profile compared to what else is available for bond investors. Moreover, with their Bitcoin upside component, they could easily outperform most other bonds on the market.

We can’t know how the Volcano Bonds will trade until El Salvador issues them. But if they are successful, the Volcano Bonds could help reduce the government’s borrowing cost.

That’s because El Salvador is offering these bonds at a lower yield than it would otherwise have to pay due to the Bitcoin component and issuing them on the Liquid Network. Informed insiders have indicated there is significant investor interest.

If El Salvador can pull this off, it could more than halve its borrowing costs—given where its regular bonds are trading as of writing. That’s a game-changer and will garner the attention of other sovereign issuers.

It will also give other countries a playbook for securing funding outside the traditional financial system. Volcano Bonds could prove that you could raise big money without forfeiting your sovereignty.

If a small country like El Salvador can raise a billion dollars in one day without the IMF, Wall Street, or China while at the same time halving its borrowing costs, it will get the immediate attention of many nations. I suspect it could spread quickly.

The race is officially on. El Salvador fired the starting gun.

Game theory suggests that the countries to move first will accumulate the most Bitcoin and thus benefit the most. That’s why there is a huge first-mover advantage for El Salvador. When other countries try something similar, I expect the Bitcoin price to be much higher.

El Salvador gained a tremendous head start in the race to accumulate the most inflation-resistant money ever known by being the first—and nobody will want to be last.

When you put it all together, we have a clear win-win situation with Bitcoin-backed bonds issued on the Liquid Network. It’s a financial innovation that is orders of magnitude superior to the current paradigm for borrowers and lenders. It has the potential to reinvent the bond market, which is ripe for disruption thanks to how much central banks have distorted it over the years.

Volcano Bonds could signal the birth of a new financial system built on top of Bitcoin, a milestone on the path to The Bitcoin Supremacy—a historic megatrend in which Bitcoin could ultimately emerge as the world’s dominant form of money.

It’s a highly ambitious plan, but El Salvador’s Volcano Bonds have a reasonable chance of success.

It will likely have a cascading effect as other countries see the enormous benefits.

Risks

Success could generate other problems for El Salvador.

Remember, central banks—and the people connected with them—are like a global mafia. They reap an unfathomable amount of power from their racket of printing fake money out of thin air and forcing it on the world.

El Salvador is cutting these vampires out of the loop with the Volcano Bonds and adopting Bitcoin as legal money.

That isn’t exactly a risk-free proposition, as Muammar Gaddafi and Saddam Hussein found out—both of whom looked to free their countries from US financial dominance wound up dead after military interventions.

I wouldn’t be surprised to see a coordinated media campaign to demonize El Salvador as the new dangerous haven for money laundering, drug traffickers, and corruption. The idea would be to lay the groundwork for sanctions, internal subversion, or worse.

The US government has a dirty history of interventions in Central America, and El Salvador in particular during its civil war in the ’80s.

I hope the US government and media do not go down this path—but I can’t rule it out either. So I’ll be watching closely.

The IMF, the Bank of England, the World Bank, and the mainstream media have all criticized El Salvador’s Bitcoin plans. Hillary Clinton also claimed Bitcoin threatens the US dollar’s role as the world’s reserve currency. So Bitcoin and El Salvador are on the elites’ minds now.

Bukele recognizes the danger he has put himself in but says he is proceeding anyway because it is worth the risk to give his country a chance at prosperity and independence.

It’s rare to see any politician anywhere in the world display even 1% of the courage that Bukele has already demonstrated. I wish him and the people of El Salvador all the best as they move toward total financial independence, thanks to Bitcoin.

Here’s the bottom line. If the US goes after El Salvador, they have to do it immediately to be effective, certainly before it spreads to other countries.

However, as other countries follow Bukele’s lead, there will be less incentive to attack El Salvador. Fortunately, that could happen very soon, especially if the Volcano Bonds succeed.

The risk that the US could conspire to overthrow Bukele is real. Should that happen, it would be a potentially fatal blow to the Volcano Bonds and a medium-term headwind for Bitcoin.

There is also the risk the president who comes after Bukele could reverse his pro-Bitcoin policies. Bukele’s term ends in 2024 when he will be up for reelection.

However, Bukele has the highest approval rating of any world leader. Therefore, as of now, he has a great chance of winning reelection.

In the meantime, there is also execution risk. But that risk is mitigated because El Salvador has engaged with Max Keiser and other top-tier financial and Bitcoin professionals.

Default

Aside from the Volcano Bonds, El Salvador has around $20 billion in outstanding traditional bonds.

I understand that from a mainstream view, El Salvador is distressed. But I don’t put much stock in what the rating agencies say. They have missed enormous changes in the market several times—notably before the 2008 financial crisis—and I don’t see any evidence that they understand the potential Bitcoin has to transform the country.

President Bukele said the country has enough cash to pay debt commitments at maturity and to purchase the debt even before it matures.

To ease investor concerns, Bukele made a voluntary purchase offer to all holders of Salvadoran sovereign bonds with maturities from 2023 to 2025 to buy them at the market price.

There is also a question of the legal rights of the Volcano Bond investors and how they rank in the order of priorities with the existing debt. The exact terms have yet to be published, but I don’t expect any big surprises.

On the other hand, if the Volcano Bonds are successful, they could generate billions in profits for El Salvador. The government could use that money to retire the existing debt, which Bukele has indicated he would consider doing.

In short, there’s a real chance El Salvador’s credit rating will get upgraded if its financial situation improves, thanks to Bitcoin.

Conclusion

Calling what El Salvador is doing a bold initiative would be a colossal understatement.

It has the chance to spark a restructuring in the securities markets, starting with the $100 trillion bond market.

Bukele has a reasonable chance of success. And if that happens, it will turbocharge The Bitcoin Supremacy megatrend. Increased demand for Bitcoin from the Volcano Bonds—and the future Bitcoin-backed bond issues it inspires—will likely send the BTC price soaring.

Here’s the bottom line.

Volcano Bonds could be an enormous catalyst for Bitcoin adoption.

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