Imagine You Are Bullish On Bitcoin. What Would You Do?

Chances are, you would buy some bitcoin.

Now imagine you are very bullish on bitcoin.

You would scrap all your investments and put the cash together with the balances of your savings accounts. Then you would use up the money to buy more bitcoin.

Let’s take it one step further.

Imagine you are super bullish on bitcoin. What would you do?

You would go to the bank and take out a loan. A loan as leveraged as your collateral permits. You would then use the proceeds to buy as much bitcoin as possible.

Does it sound rational?

Not much.

Does it make sense?

Only if you don't have a family to sustain and have a place to go should your gamble go south.

As insane as it sounds, that's exactly the plan the Government of El Salvador announced in November 2021.

El Salvador plans to sell bitcoin-backed bonds

The plan consists of the sale of $1 billion in U.S. dollar-denominated bonds with a coupon of 6.5% and a maturity of 10 years backed by bitcoins.

Half of the money would be used to buy bitcoin and hold it for 5 years. The other half would be used to invest in bitcoin-related stuff, like building a "Bitcoin City".

To give some context, El Salvador is a highly indebted country with a battered economy and an increasing public spending deficit. On top of that, there are $800 million in upcoming bond payments due in early 2023.

For the moment, the plan is on hold.

I assume it has to do with the steep decrease in the valuation of bitcoin since last November when bitcoin was sitting comfortably above the $50,000 mark. 

As of today, bitcoin trades slightly below $21,000.

Bitcoin is highly volatile. It is challenging to predict its valuation the next month, let alone in 5 years. Bitcoin is still in its infancy, and any institutional investment in bitcoin should be treated with extreme care until a more widespread adoption occurs.

I am not against Bitcoin. On the contrary, I am a firm believer. I like the concept, I think it is the hardest form of money, and I appreciate the freedom this technology provides to its supporters.

It was a movement that brought the country into the limelight and attracted the interest of many investors and crypto supporters.

But if I was the President of El Salvador, I would think twice before going further and making such splendorous announcements.

Unless you are negotiating a bailout package with the IMF and want to have an ace up your sleeve to increase your negotiation power. 

But that is another story...

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