VanEck proposes to launch "Treasury bonds + BTC" bonds to solve the 14 trillion problem

Source: cryptoslate

Compiled by: Blockchain Knight

Matthew Sigel, head of digital asset research at VanEck, has proposed launching “BitBonds,” a hybrid debt instrument that combines U.S. Treasuries with BTC exposure, as a novel strategy to address the U.S. government’s looming $14 trillion refinancing needs.

The concept was proposed at the Strategic Bitcoin Reserve Summit and is intended to address sovereign financing needs and investors' demand for inflation protection.

The BitBond will be designed as a 10-year security with 90% exposure to traditional U.S. Treasuries and 10% exposure to BTC, with the BTC portion funded by proceeds from the bond issuance.

When the bond matures, the investor will receive the full value of the U.S. Treasury portion ($90 for a $100 bond, for example) plus the value of the BTC allocation.

In addition, investors will receive all of the BTC appreciation until the yield to maturity reaches 4.5%. Any gains above this threshold will be shared between the government and bondholders.

The structure is designed to align the interests of bond investors with the U.S. Treasury's need to refinance at competitive rates as investors increasingly seek protection against a falling dollar and asset inflation.

Sigel said the proposal is a "unifying solution to the problem of mismatched incentives."

Investor's break-even point

According to Sigel’s forecast, the investor’s break-even point depends on the bond’s fixed coupon rate and BTC’s compound annual growth rate (CAGR).

For a 4% coupon bond, the breakeven point for BTC CAGR is 0%. But for bonds with lower coupon rates, the breakeven threshold is higher: 2% coupon bonds have a CAGR of 13.1%, and 1% coupon bonds have a CAGR of 16.6%.

If BTC CAGR remains between 30% and 50%, model returns will rise sharply across all coupon rate tiers, with investor returns reaching up to 282%.

Sigel said that Bitbonds will be a "convex bet" for investors who believe in BTC, as the instrument will provide asymmetric upside while retaining the base layer of risk-free returns. However, its structure means that investors will bear the full downside risk of BTC exposure.

In the event of a BTC depreciation, bonds with lower coupon rates could generate severe negative returns. For example, a 1% coupon Bitcoin bond would lose 20% to 46% if BTC performs poorly.

U.S. Treasury Revenue

From the perspective of the U.S. government, the core benefit of Bitcoin Bonds will be to reduce financing costs. Even if BTC appreciates slightly or not at all, the Treasury will save interest expenses compared to issuing traditional 4% fixed-rate bonds.

According to Sigel’s analysis, the government’s breakeven rate is about 2.6%. Issuing bonds with a coupon rate below that level would reduce annual debt interest payments, saving money even if BTC remains flat or falls.

Sigel predicts that issuing a $100 billion Bitcoin bond with a 1% coupon and no BTC appreciation will save the government $13 billion over the life of the bond. If BTC achieves a 30% CAGR, the same issuance could generate more than $40 billion in additional value, mainly from a share of BTC earnings.

Sigel also noted that this approach would create a differentiated sovereign bond class, providing the U.S. with asymmetric upside exposure to BTC while reducing dollar-denominated debt.

He added: “BTC’s rally only makes the trade better. Worst case, cheap funding, best case, long volatility exposure to the strongest asset in the world.”

The government’s BTC CAGR breakeven point rises as the bond coupon increases, with the 3% coupon Bitcoin bond breaking even at 14.3% and the 4% coupon version breaking even at 16.3%. In the case of poor BTC performance, the Treasury will only suffer losses if the government issues high coupon bonds and BTC performs poorly.

The trade-off between issuance complexity and risk allocation

Despite the potential gains, VanEck’s report also acknowledges the shortcomings of the structure. Investors bear the downside risk of BTC without being able to fully participate in the upside gains, and unless BTC performs exceptionally well, low-coupon bonds will become unattractive.

Structurally, the Treasury needs to issue more debt to make up for the 10% of proceeds used to buy BTC. For every $100 billion raised, an additional 11.1% of bonds need to be issued to offset the impact of the BTC allocation.

The proposal proposes possible design improvements, including providing investors with partial downside protection against sharp declines in BTC.