VanEck proposes Bitcoin-linked treasury bonds to offset the 14 trillion dollar debt of the United States.

Matthew Sigel, head of digital asset research at VanEck, has proposed the introduction of “BitBonds,” a unique hybrid debt instrument that combines U.S. government bonds with Bitcoin (BTC). This is seen as a new strategy to address the government’s refinancing needs of up to 14 trillion USD.

This concept was presented at the Bitcoin Reserve Strategy Conference, with the aim of meeting government funding needs while satisfying investors’ desire for protection against inflation.

BitBonds will be structured like a 10-year security, consisting of 90% exposure to traditional U.S. government bonds and 10% Bitcoin, with the Bitcoin portion being funded from the proceeds of the bond sale.

Upon maturity, investors will receive the full value of the portion of the U.S. government bonds, corresponding to 90 USD for each 100 USD bond, plus the value of the allocated Bitcoin.

Moreover, investors will enjoy 100% profit from Bitcoin until the yield maturity reaches 4.5%. The government and bondholders will share any profit that exceeds this threshold.

This structure aims to balance the interests of bond investors, who are seeking protection against the depreciation of the dollar and asset inflation, with the Treasury’s need to refinance at competitive interest rates.

Sigel noted that the proposal is “a balanced solution to unsuitable motives.”

Investor Breakeven Point

According to Sigel’s forecast, the breakeven point of investors for BitBonds depends on the fixed coupon and gross annual growth rate of Bitcoin (CAGR).

For bonds with an interest rate of 4%, the breakeven BTC CAGR is 0%. However, for lower-yielding versions, the breakeven threshold is higher: 13.1% CAGR for 2% yield bonds and 16.6% for 1% yield bonds.

If the CAGR of Bitcoin maintains between 30% and 50%, the model’s profits increase significantly at all interest rates, with investor returns potentially reaching 282%.

Sigel stated that BitBonds will be a “convex bet*” for investors who trust in Bitcoin, as this instrument provides asymmetric returns while still maintaining a layer of risk-free returns. However, this structure also means that investors bear the full downside risk of Bitcoin.

Bonds with lower interest rates can lead to significant negative returns if Bitcoin depreciates. For example, a BitBond with an interest rate of 1% could lose between 20% and 46%, depending on the performance of Bitcoin.

Benefits for the Treasury

From the perspective of the American government, the main benefit of BitBonds is the reduction of borrowing costs. Even if Bitcoin only appreciates slightly or does not appreciate, the Treasury still saves on interest costs compared to a fixed 4% bond.

According to Sigel’s analysis, the government’s breakeven interest rate is about 2.6%. Issuing bonds with interest rates below this level will reduce annual debt service, creating savings even in scenarios where Bitcoin does not increase or decreases in value.

Sigel predicts that the issuance of 100 billion USD BitBonds with an interest rate of 1% and no BTC profit will save the government 13 billion USD over the bond’s duration. If Bitcoin achieves a CAGR of 30%, the same issuance could bring more than 40 billion USD in additional value, mainly from shared Bitcoin profits.

Sigel also pointed out that this method would create a distinct layer of sovereign bonds, providing America with asymmetric returns from Bitcoin while reducing dollar-denominated obligations.

“BTC profits only make the deal more attractive. Worst case: cheap funding. Best case: exposure to the hardest asset on Earth,” he added.

The breakeven BTC CAGR for the government rose with higher bond yields, reaching 14.3% for BitBonds with a 3% yield and 16.3% for versions with a 4% yield. In adverse BTC scenarios, Treasuries will lose value only when issuing bonds with higher interest rates while BTC performs poorly.

Trade-off between complexity in issuance and risk allocation

Despite the potential benefits, VanEck’s presentation acknowledges the limitations of the structure. Investors are exposed to the risk of Bitcoin depreciation without fully participating in the profits, and bonds with low interest rates become unattractive unless Bitcoin performs very well.

Structurally, the Treasury also needs to issue more debt to offset the 10% of the revenue used to purchase Bitcoin. Each 100 billion USD in funding will require an additional 11.1% to offset the BTC allocation.

This proposal outlines potential design improvements, including discount protection to shield investors from significant declines in BTC.

*The lumpy bet is characterized by a high potential for price increases and limited potential for price decreases, often described as “heads win, tails don’t lose.” This concept plays a key role in finance and investment.

Disclaimer****: The article is for informational purposes only, not investment advice. Investors should research carefully before making a decision. We are not responsible for your investment decisions*

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