VanEck proposes to launch a "Treasury + BTC" bond to solve the $14 trillion problem

Source: cryptoslate

Compilation: Blockchain Knight

Matthew Sigel, head of digital asset research at VanEck, has proposed 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 presented at the Strategic Bitcoin Reserve Summit to address sovereign funding needs and investors’ need for inflation protection.

Bit bonds will be designed as 10-year securities, with 90% exposure to traditional U.S. Treasury bonds and 10% exposure to BTC, with BTC partially funded by the proceeds of the bond issuance.

When the bond matures, the investor will receive the full value of the Treasury portion (in the case of a $100 bond, this portion is worth $90) as well as the value of the BTC allocation.

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

This structure is designed to align the interests of bond investors with the needs of the U.S. Treasury to refinance at competitive interest rates, as investors increasingly look to protect against dollar depreciation and asset inflation.

Sigel said the proposal is a “unified solution to the problem of incentive mismatch”.

The break-even point for investors

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

For bonds with a coupon rate of 4%, the break-even point for BTC CAGR is 0%. However, for bonds with lower coupon rates, the break-even threshold is higher: 13.1% for 2% coupon bonds and 16.6% for 1% coupon bonds.

If the BTC CAGR remains between 30% and 50%, the model return will rise dramatically across all coupon rate tiers, with investors returning up to 282%.

According to Sigel, the Bitcoin bond will be a “convex bet” for investors who believe in BTC, as the instrument will provide asymmetric upside while retaining a base layer of risk-free returns. However, its structure means that investors will bear the full downside risk of their BTC exposure.

In the event of BTC depreciation, bonds with lower coupon rates can generate significant negative returns. For example, if BTC does not perform well, a 1% coupon rate of a bit bond will lose between 20% and 46%.

U.S. Treasury earnings

From the U.S. government’s perspective, the core benefit of a bit bond will be to reduce the cost of financing. Even if BTC appreciates slightly or none, the Treasury will save on interest expenses than if it were to issue a traditional 4% fixed-rate bond.

According to Sigel’s analysis, the government’s breakeven rate is around 2.6%. Issuing bonds with coupon rates below that level will reduce the annual debt interest expense, saving money even if BTC is flat or falling.

Sigel predicts that the issuance of a $100 billion bit bond with a coupon rate of 1% and no BTC upside yield will save the government $13 billion over the life of the bond. If BTC reaches a CAGR of 30%, the same issuance could generate more than $40 billion in additional value, mainly from a share of BTC revenue.

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

He added, “The rise in BTC will only make trading more cost-effective. The worst-case scenario is low-cost financing, and the best-case scenario is long-term volatility exposure to the world’s strongest assets.”

The government’s BTC CAGR break-even point rises as the bond coupon rate increases, with a break-even point of 14.3% for a 3% coupon rate bit bond and 16.3% for the 4% coupon rate version. In the case of BTC’s underperformance, the Treasury will only suffer losses if the government issues bonds with high coupon rates and BTC does not perform well.

Trade-offs between issuance complexity and risk allocation

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

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

The proposal proposes possible design improvements, including partial downside protection for investors against BTC’s sharp decline.