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World's First Bitcoin Bonds Receive Regulatory Approval in El Salvador
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This episode was hosted by Noelle Acheson. “Markets Daily” is executive produced by Jared Schwartz and produced and edited by Eleanor Pahl. All original music by Doc Blust and Colin Mealey.
Audio Transcript: This transcript has not been edited and may contain errors.
It’s Wednesday, December 13th, 2023 and this is Markets Daily from CoinDesk. My name is Noelle Acheson, CoinDesk collaborator and author of the Crypto is Macro Now newsletter on Substack. On today’s show we’re talking about market moves, inflation, El Salvador and more. So you don’t miss an episode, be sure to follow the podcast on your platform of choice, and turn on notifications. And just a reminder, CoinDesk is a news source and does not provide investment advice.
Now, a markets roundup.
Crypto markets are still trading range bound after the sharp drop earlier this week. According to CoinDesk Indices, at 9 a.m. Eastern time today, bitcoin was down almost 1%, at 41,407 dollars. Ether was down 1.6%, at 2,186 dollars.
Elsewhere, Solana, Polygon and Dogecoin were down around 5%. AVAX, Cardano, Polkadot and Chainlink were down around 4%.
In macro matters, yesterday delivered a key inflation read, with the official CPI increases for November. These came in largely as expected: Headline inflation grew by 3.1% in November, a slight deceleration from October’s 3.2%. Core inflation, which the Fed follows more closely because it strips out the volatile components of food and energy, increased by 4%, flat on the previous month.
As we have seen in previous months, a notable deceleration in the price increases of goods and energy is bringing the overall figures down. The prices of services and of housing, however, are still sticky. And excluding housing and energy, services prices climbed 0.4% from October, picking up from the previous month, according to Bloomberg calculations.
Today we get the rates decision from the last FOMC meeting of the year – it is almost certain to be a pause. Much more relevant for markets will be Fed Chair Jerome Powell’s comments in the press conference which starts at 2:30pm Eastern time today. We’ll be listening for tone and certain phrases to gauge the likelihood of rate cuts in the first half of next year.
If I were to make a forecast, it’s that we’ll probably hear the phrase “premature to speculate” at least once – Powell has used that several times recently. We’ll also hear less reference to how high yields are helping with the monetary tightening – the U.S. 10-year yield is almost 80 basis points lower than at the last FOMC meeting. And we could hear sterner language to try to curb market excitement about a Fed pivot. The job market is still strong, and enthusiastic investors and consumers will make the next leg down for inflation difficult.
Perhaps even more significant than Powell’s comments today will be the updated official forecasts, which will signal both the central bank’s expectations on inflation, and where the committee expects rates to end next year.
Consensus forecast seems to be that the Fed will signal two rate cuts next year – a more optimistic projection would make markets very happy.
And markets do seem to be happy after the in-line inflation data. Yesterday, the main U.S. stock indices reached year-to-date highs, with the S&P 500 and the Dow Jones up half a percent, and the Nasdaq gaining seven tenths. Futures are pointing to a slightly positive opening today as traders brace for the FOMC comments.
In Europe, the main stock indices were flat to slightly down yesterday. This morning, the UK GDP data was released which showed a much sharper than expected quarter-on-quarter contraction. The British economy shrank by 0.3% in the third quarter, whereas consensus forecasts were for no growth. The FTSE 100 seems to like this, since it could bring forward rate cuts – earlier today, it was up four tenths of a percent while the DAX and the Eurostoxx 600 were largely flat.
In Asia, sentiment was weak in trading today. Japan’s Nikkei index rose a quarter of a percent, while the Shanghai Composite dropped over 1% and the Hang Seng fell nine tenths.
In commodities, oil continues to head lower after a brief period of concern about missile attacks on container ships in the Red Sea. Yesterday, the Brent Crude benchmark dropped 3.6%, briefly reaching its lowest point since June. This morning it is recovering a bit, up seven tenths of a percent to trade at 74 dollars a barrel.
Gold continues to trade range bound, at 1,985 dollars an ounce.
Stay with us – after the break we’re going to look at a world first for bitcoin.
Welcome back!
It looks like El Salvador will soon be launching sovereign bonds based on bitcoin. Yesterday, the country’s bitcoin office announced that regulatory approval had been granted, and that the bonds could launch as soon as next quarter.
This is a big deal. It will be the first time that a government has issued bonds backed by a cryptocurrency. If you feel like you’ve heard this news before, it’ll be because the bonds were announced to much fanfare back in 2021, but for regulatory and then market reasons, issuance kept getting postponed.
Now, it looks like it’s going to happen. The goal is reportedly to raise $1 billion dollars to pay down some government debt and to expand the country’s bitcoin mining industry. This largely draws on local geothermal energy sources, which is why the securities are also known as “Volcano bonds”.
According to reports, they will have a maturity of 10 years, and pay an annual return of 6.5%.
What is especially interesting here is the alternative financing employed by an emerging economy. And a lot of different entities will be paying attention. It could herald even more demand for bitcoin next year, just as the U.S. lists its first spot bitcoin ETFs.
And it could influence sovereign demand from other regions, especially those interested in diversifying reserves away from the U.S. dollar. If this issuance gets a strong market reception, other governments could be encouraged to try something similar, especially if they have underused natural energy sources.
Of course, it’s not yet clear whether demand will be strong for these bonds. As you can imagine, the IMF is not particularly happy about the idea.
But El Salvador has remained steadfast in its bitcoin support, even through the market downturn. Its bitcoin holdings are reportedly now back in profit. It has launched a citizenship program for those willing to invest 1 million dollars worth of bitcoin or tether. And its innovative approach to sovereign financing could inspire more experimentation at the sovereign level, further diversifying bitcoin’s investor base.
