Source: cryptoslate
Compiled by: Blockchain Knight
Matthew Sigel, Digital Asset Research Director at VanEck, proposed launching "BitBonds," a hybrid debt instrument that combines U.S. Treasury exposure with BTC, as an innovative strategy to address the U.S. government's imminent $14 trillion refinancing needs.
The concept was presented at the Strategic Bitcoin Reserve Summit, aimed at addressing sovereign financing requirements and investors' demand for inflation protection.
BitBonds would be designed as 10-year securities, with 90% traditional U.S. Treasury exposure and 10% BTC exposure, with the BTC portion funded by bond issuance proceeds.
At bond maturity, investors will receive the full value of the U.S. Treasury portion (for a $100 bond, this would be $90) and the value of the BTC allocation.
Additionally, investors will receive the full appreciation of BTC until the yield reaches 4.5%. Any gains beyond this threshold will be shared between the government and bondholders.
This structure aims to align bond investors' interests with the U.S. Treasury's need to refinance at competitive rates, as investors increasingly seek protection against U.S. dollar depreciation and asset inflation.
Sigel stated that the proposal is a "unified solution to address misaligned incentives".
Investor Break-Even Point
According to Sigel, the investor break-even point depends on the bond's fixed coupon rate and BTC's compound annual growth rate (CAGR).
For a bond with a 4% coupon rate, the BTC CAGR break-even point is 0%. However, for bonds with lower coupon rates, the break-even threshold is higher: 13.1% CAGR for a 2% coupon rate bond, and 16.6% for a 1% coupon rate bond.
If BTC CAGR remains between 30% and 50%, model returns will rise sharply across all coupon rate levels, with investor returns potentially reaching up to 282%.
Sigel described BitBonds as a "convexity bet" for BTC believers, as the instrument will provide asymmetric upside potential while retaining a risk-free return base. However, its structure means investors will bear the full downside risk of BTC exposure.
In the event of BTC depreciation, low coupon rate bonds could generate severe negative returns. For example, a 1% coupon BitBond could lose 20% to 46% if BTC performs poorly.
U.S. Treasury Benefits
From the U.S. government's perspective, the core benefit of BitBonds would be reducing financing costs. Even with slight or no BTC appreciation, the Treasury would save on interest expenses compared to issuing traditional 4% fixed-rate bonds.
According to Sigel's analysis, the government's break-even interest rate is approximately 2.6%. Issuing bonds with coupon rates below this level would reduce annual debt interest expenses, saving money even if BTC remains flat or declines.
Sigel predicts that issuing $100 billion in 1% coupon BitBonds without BTC appreciation would save the government $13 billion over the bond's lifetime. If BTC achieves a 30% CAGR, the same issuance could generate over $40 billion in additional value, primarily from BTC yield sharing.
Sigel also noted that this approach would create a differentiated sovereign bond category, providing the U.S. with asymmetric upside exposure to BTC while reducing dollar-denominated debt.
He added: "BTC's rise would only make the trade more attractive. The worst-case scenario is low-cost financing, and the best-case scenario is long-term volatility exposure to the world's most resilient asset."
The government's BTC CAGR break-even point rises with the bond's coupon rate, with 3% coupon BitBonds having a break-even point of 14.3% and 4% coupon versions at 16.3%. The Treasury would only incur losses if it issues high coupon rate bonds and BTC performs poorly.
Issuance Complexity and Risk Allocation Trade-offs
Despite potential benefits, VanEck's report acknowledges the structure's drawbacks. Investors bear BTC's downside risk without fully participating in upside gains, and low coupon rate bonds will become unattractive unless BTC performs exceptionally.
Structurally, the Treasury would need to issue additional debt to compensate for the 10% proceeds used to purchase BTC. For every $100 billion raised, an additional 11.1% of bonds would need to be issued to offset the BTC allocation's impact.
The proposal suggests potential design improvements, including providing investors with partial downside protection against BTC's sharp declines.
