VanEck proposes to launch a "Treasury + BTC" bond to resolve the $14 trillion challenge.

This concept was proposed at the Strategic BTC Reserve Summit, aiming to address the sovereign financing needs and investors’ demand for inflation protection.

Source: cryptoslate

Compiled by: Blockchain Knight

Matthew Sigel, the head of digital asset research at VanEck, proposed the launch of “BitBonds,” a hybrid debt instrument that combines exposure to US Treasuries with BTC, as a novel strategy to address the impending $14 trillion refinancing needs of the US government.

The concept was proposed at the Strategic BTC Reserve Summit, aiming to address sovereign financing needs and investors’ demand for inflation protection.

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

When the bond matures, the investor will receive the full value of the U.S. Treasury bond portion (for example, for a $100 bond, this portion is worth $90) along with the value configured in BTC.

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

This 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 to hedge against dollar depreciation and asset inflation.

Sigel stated that the proposal is a “unified solution to address the issue of misaligned incentives.”

Investor’s Break-even Point

According to Sigel’s prediction, the breakeven point for investors depends on the fixed coupon rate of the bonds and the compound annual growth rate (CAGR) of BTC.

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

If the BTC CAGR remains between 30% and 50%, the model’s return rate will sharply increase across all coupon rate tiers, with investor returns reaching as high as 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 Yield

From the perspective of the U.S. government, the core benefit of Bitcoin bonds will be the reduction of financing costs. Even if BTC appreciates slightly or remains unchanged, the Treasury will save on interest expenses compared to issuing traditional 4% fixed-rate bonds.

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 pointed out that this approach will create a differentiated category of sovereign bonds, providing the U.S. with asymmetric upside exposure to BTC while reducing debt denominated in dollars.

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 breakeven point rises with the increase in bond coupon rates, with a 3% coupon rate Bitcoin bond breakeven point at 14.3%, and a 4% coupon rate version at 16.3%. In the case of poor BTC performance, the Treasury will only incur losses if the government issues high coupon rate bonds and BTC performs poorly.

Trade-offs of Issuance Complexity and Risk Allocation

Despite the potential benefits, VanEck’s report also acknowledges the drawbacks of this structure. Investors bear the downside risk of BTC but cannot fully participate in the upside gains; unless BTC performs exceptionally well, low-coupon 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 suggests possible design improvements, including providing investors with some downside protection against a sharp drop in BTC.