Bitcoin News
The math behind El Salvador’s volcano bonds
The $1.5 billion revenue pledge from President Bukele regarding volcano-powered mining revenue changes the math for the $1 billion Volcano Bonds. I view this move as a pivot toward using mining revenue to collateralize sovereign debt. The original plan involves the state-owned geothermal company La Geo. Half of the $1 billion proceeds would buy Bitcoin, while the other $500 million funds energy infrastructure. This infrastructure supports the planned Bitcoin City in the eastern region of La Union. The city, located at the base of the Conchagua volcano, remains a central part of Bukele’s vision. The city aims for zero taxes on income or property, though residents would still pay value added tax. Half of the VAT revenue would go toward building the city, while the rest maintains the streets. Bukele likened the project to cities founded by Alexander the Great. The project relies on sophisticated computers to solve complex mathematical problems, a process that consumes massive amounts of energy. This energy requirement for mining creates a significant environmental debate. Earlier, the government launched a digital wallet and provided $30 in Bitcoin to every citizen.
The mechanics of the bond
The bond terms require a five-year lock-up of $500 million in Bitcoin to reduce market supply. Investors receive a 6.5 percent annual coupon and a share of Bitcoin appreciation. Specifically, investors receive 100 percent of the appreciation up to a 4.5 percent compound annual return. Once they hit that threshold, the government keeps 50 percent of any further gains. I think the heavy dependence on the liquid network and Bitfinex for these transactions creates a very specific, centralized loop.
| Bond Specification | Detail |
|---|---|
| Total Issuance | $1 billion |
| Annual Coupon | 6.5% |
| Lock-up Period | 5 years |
| BTC Appreciation Cap | 4.5% compound annual return |
| Infrastructure Funding | 50% of proceeds |
The plan for Bitcoin City includes residential areas, commercial zones, an airport, and a central plaza designed like a Bitcoin symbol. Bukele estimated the public infrastructure costs at 300,000 Bitcoins. Since one Bitcoin trades at just under $60,000, that cost reaches massive levels. The city would use geothermal energy to power the mining rigs. To attract investment, the government provides a "Freedom Visa" for individuals who donate $1 million to the nation’s development. You probably remember the initial excitement surrounding the 2021 announcement that promised to make El Salvador a global financial center. Samson Mow, the chief strategy officer at Blockstream, suggested that if Bitcoin reaches $1 million, the government would recoup $500 million by selling Bitcoin in two quarters. Ten such bonds would remove $5 billion of Bitcoin from the market for several years.
Assessing the economic reality
I find the connection between Bitcoin mining and the country’s stability highly questionable. The government rescinded Bitcoin as legal tender in February 2025. This move followed the failure of the cryptocurrency to gain widespread adoption. The International Monetary Fund also pressured the government to limit its Bitcoin involvement due to macroeconomic risks. In early 2025, the administration secured a $1.4 billion loan from the IMF to help the economy. The decision to abandon Bitcoin as legal tender follows a long history of economic struggle, including a national debt that grew from 37.8% of GDP in 2001 to 95% by 2020. Decades of instability prompted the migration of over 1.6 million Salvadorans abroad.
The volatility of Bitcoin makes the bond’s collateralization look risky. The government held 6,150 BTC, valued at about $600 million, at 1.6 percent of the $36 billion GDP. Even with the reduction in crime, which saw homicide rates drop from 51 per 100,000 in 2018 to 2.4 in 2023, the fiscal situation stays tight. I wonder if the $1.5 billion mining revenue pledge can offset the debt-to-GDP ratio. Tourism grew 22% from January to July 2024, creating 36,000 new jobs and reducing unemployment to 2.76%.
