VYSYN Ventures Weekly Insights #76 — $1 billion project to be powered by volcano
President of El Salvador Nayib Bukele has been a vocal Bitcoin supporter. On November 20th, 2021, at the end of a week-long Bitcoin-focused event, Bukele announced that his country is planning to build a ‘Bitcoin City’, funded by bitcoin-backed bonds.
In the latest VYSYN Release, we highlight the details of this new city and other possibilities surrounding this development. We also look at the several controversies that surround El Salvador’s Bitcoin adoption policies and how effective they’ve been.
El Salvador to issue $1 billion in Bitcoin bonds
‘Bitcoin City’ is the next major step the government of El Salvador has decided to take in its Bitcoin endeavours. President Bukele announced this plan to an audience during the Bitcoin week event in the country’s coastal town of Mizata. According to Bukele, the city will be circular, representing the shape of a large coin, and will be built in the south-eastern region of La Union.
The location of the city is strategic, considering the energy demands of Bitcoin mining and global carbon emission concerns. Bitcoin City will take advantage of the Conchagua volcano’s geothermal energy and reduce environmental impact as a result.
There have been early experiments by El Slavador in this area, with the first set of mining rigs installed earlier in the year. Out of the 30 volcanoes in the country, 20 of them are thought to be potentially active, and could serve as a sufficient source of renewable energy required for the exercise.
The early experiments involved a geothermal plant in the city of Berlin that was built in 1999. The energy generated from this plant could reach up to 107 megawatts, of which only five are used for Bitcoin mining. The rest is supplied to the national grid for onward transmission. According to official data, geothermal energy accounts for nearly a fourth of El Salvador’s domestic energy production.
The proposed Bitcoin City will “include everything”, according to Bukele, including “residential areas, commercial areas, services, museums, entertainment, bars, restaurants, airport, port, rail — everything devoted to Bitcoin.” He also noted that no income tax will be charged in Bitcoin City. Citizens will only be levied on value-added tax (VAT) and half of the revenues generated will be used to “build up” the city, while the remaining half will be used to keep the city “neat and clean”.
Bukele did not provide specific dates for the construction or completion of Bitcoin City. However, he pegged the estimated cost of the city at 300,000 Bitcoins. The price of one Bitcoin at the time of the announcement was just below $60,000. Initial funding plans include the issuance of Bitcoin-backed bonds.
Bukele called on investors to take advantage of the opportunity and buy into this first-of-a-kind project. “Invest here and make all the money you want,” Bukele said. “This is a fully ecological city that works and is energized by a volcano.” A total of $1 billion in bitcoin bonds will be issued in the funding process. These bonds will be tokenized and developed by Blockstream, on the Liquid network. Half of this bond, $500 million, will be used to construct the needed energy and Bitcoin mining infrastructure, while the other half will be used to buy more Bitcoins.
El Salvador currently holds 1,120 Bitcoins in its treasury, having bought units of the cryptocurrency at different intervals. At current prices, $500 million will provide 9,500 Bitcoins for the country’s treasury. This might change by the time the exercise kicks in.
El Salvador’s Bitcoin adoption has faced criticism
El Salvador has long been bullish about Bitcoin’s ability to lift its economy out of poverty. On September 7th, 2021, the country officially adopted Bitcoin as legal tender, alongside the U.S. Dollar. While the Bitcoin and cryptocurrency community celebrated this development as a milestone towards mainstream adoption, several individuals and organizations thought otherwise.
Among those who have criticized the adoption of bitcoin as a legal tender are the citizens of El Salvador. A lack of technical knowledge and infrastructure are a few hurdles the government has ignored in favor of Bitcoin adoption headlines. Vitalik Buterin, Ethereum’s founder, had also criticized the country’s mandatory Bitcoin adoption policy. Buterin highlighted that it flew against cryptocurrencies’ ethos of providing financial freedom. The International Monetary Fund (IMF) also raised concerns over the macroeconomic, financial, and legal issues that this might cause.
Many observers also wondered how the country would mitigate Bitcoin’s high volatility. The value of bitcoin fluctuates so much that the price of goods and services denominated in the cryptocurrency can be very unstable. The government has since backtracked away from its mandatory adoption policy and has resorted to hoarding coins and enticing Bitcoin entrepreneurs to set up shop in the country.
Despite this criticism, El Salvador has not turned back on its Bitcoin adoption initiative, executing numerous promotional exercises. In one of these events, the government gave away $30 in Bitcoin to every citizen while launching a new wallet app. More than 200 bitcoin ATMs were also installed across different parts of the country. The government’s reasoning behind engaging in these exercises is to boost economic development and create jobs.
In the midst of these developments, it’s understandable why plans for Bitcoin City are facing immense skepticism. The government doesn’t have much of a track record developing infrastructure. Observers fear the funds raised by the bond issue will be misappropriated by a corrupt government, leaving citizens in a bigger hole.
Tokenized Bitcoin-backed bonds to be issued from 2022
El Salvador plans to issue the initial bonds for this project in 2022. According to Samson Mow, Blockstream’s chief strategy officer, the $1 billion in tokenized bonds will have 10-year terms, paying 6.5% coupons and will be U.S. Dollar denominated. They will be locked up for five years, after which El Salvador will start to sell its cryptocurrency holdings. The government will also pay an additional, unspecified dividend to bondholders at the time.
Mow’s prediction for the Bitcoin City bond investment is bullish, to say the least. Blockstream’s prediction model pegs Bitcoin’s price over the next five years at $1 million. Mow further predicts that after 10 years, the bond would have yielded up to 146% in profit. His predictions are borne by recent events. El Salvador’s foray into Bitcoin has been profitable, even if the gains have thus far been restricted to paper.
Whatever the future consequences, President Bukele has made another bold statement which the community has greeted with a mixture of skepticism and wonder. If his predictions are correct, Bitcoin City will become another milestone, turning Bitcoin from an alternative financial system to a tourist attraction.
About VYSYN Ventures
VYSYN Ventures is a longstanding venture capital company that specializes in funding and supporting disruptive startups in the blockchain and cryptocurrency industry. We have provided early-stage support to several projects that have grown to USD market capitalizations of hundreds of millions and even billions. Our incubation program focuses on providing capital allocations, versatile marketing support, and tech assistance.