Source: cryptoslate

Translation: Blockchain Knight

Matthew Sigel, the head of digital asset research at VanEck, proposed the launch of "BitBonds," a hybrid debt instrument that combines U.S. Treasury exposure with BTC exposure, as a novel strategy to address the U.S. government's imminent $14 trillion refinancing needs.

The concept was introduced at the Strategic Bitcoin Reserve Summit, aimed at addressing sovereign financing needs and investors' demand for inflation protection.

BitBonds will be designed as 10-year securities, with 90% traditional U.S. Treasury exposure and 10% BTC exposure, funded by the proceeds from the bond issuance.

At maturity, investors will receive the full value of the U.S. Treasury portion (for example, for a $100 bond, this portion is worth $90) along with the value of the BTC allocation.

Additionally, before the yield to maturity reaches 4.5%, investors will receive all appreciation gains from BTC. Any gains exceeding this threshold will be shared between the government and bondholders.

This structure aims 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 misalignment of incentives."

Investor Break-Even Point

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

For a bond 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: a 2% coupon rate bond has a CAGR of 13.1%, and a 1% coupon rate bond has a CAGR of 16.6%.

If BTC CAGR remains between 30% and 50%, the model's return rate will sharply increase across all coupon rate tiers, with investor returns potentially reaching up to 282%.

Sigel noted that BitBonds will be a "convex bet" for investors who believe in BTC, as this tool will provide asymmetric upside potential while retaining a base layer of risk-free return. However, its structure means that investors will bear the full downside risk of BTC exposure.

In the case of BTC depreciation, bonds with lower coupon rates could incur significant negative returns. For instance, if BTC performs poorly, a BitBond with a 1% coupon rate could lose between 20% and 46%.

U.S. Treasury Benefits

From the U.S. government's perspective, the core benefit of BitBonds will be reduced financing costs. Even with slight or no appreciation of BTC, the Treasury will save on interest expenses compared to issuing traditional 4% fixed-rate bonds.

According to Sigel's analysis, the government's break-even rate is approximately 2.6%. Issuing bonds with coupon rates below this level will reduce annual debt interest expenses, saving funds even if BTC remains flat or declines.

Sigel predicts that issuing $10 billion in BitBonds with a 1% coupon rate and no BTC appreciation will save the government $1.3 billion over the life of the bonds. If BTC achieves a 30% CAGR, the same issuance could generate over $4 billion in additional value, primarily from the sharing of BTC gains.

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 dollar-denominated debt.

He added, "The rise of BTC will only make the deal more attractive. The worst-case scenario is low-cost financing, while the best-case scenario is gaining exposure to the long-term volatility of the world's strongest asset."

The government's BTC CAGR break-even point increases with higher bond coupon rates, with a 3% coupon rate BitBond having a break-even point of 14.3%, and a 4% coupon rate version having a break-even point of 16.3%. In the case of poor BTC performance, the Treasury will only incur losses if it issues high coupon rate bonds while 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 rate bonds may become unattractive.

Structurally, the Treasury will also need to issue more debt to offset the 10% allocation used to purchase BTC. For every $10 billion raised, an additional 11.1% of bonds will need to be issued to counterbalance the impact of the BTC allocation.

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

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