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

Source: Blockchain Knight

Matthew Sigel, head of digital asset research at VanEck, proposed the launch of "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 to address sovereign financing needs and investors' demand for inflation protection.

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

At maturity, investors will receive the full value of the U.S. Treasury portion ($90 for a $100 bond, for example) as well as 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.

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 protection against a depreciating dollar and asset inflation.

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

Investor Break-Even Point

According to Sigel's forecast, 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%. But for bonds with lower coupon rates, the breakeven threshold is higher: 13.1% CAGR for 2% coupon bonds and 16.6% CAGR for 1% coupon bonds.

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

Sigel said that Bitbonds will be a "convex bet" for investors who believe in BTC because 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, if BTC performs poorly, a 1% coupon Bitbond will lose 20% to 46%.

U.S. Treasury Benefits

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

According to Sigel’s analysis, the government’s break-even 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 is flat or falling.

Sigel predicts that issuing $100 billion of Bitcoin Bonds with a 1% coupon and no BTC appreciation would 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, primarily from a share of BTC earnings.

Sigel also noted that this approach would create a differentiated sovereign bond class that provides the U.S. with asymmetric upside exposure to BTC while reducing debt denominated in U.S. dollars.

He added: "A rise in BTC only makes the deal better. The worst case is low-cost financing, and the best case is exposure to the long volatility of the world's strongest asset."

The government's BTC CAGR breakeven point rises with the bond's coupon rate, with a breakeven point of 14.3% for the 3% coupon Bitcoin bond and 16.3% for the 4% coupon version. In the case of BTC's poor performance, the Treasury will only suffer losses if the government issues a high-coupon bond and BTC performs poorly.

Trade-offs between issuance complexity and risk allocation

Despite the potential gains, the VanEck 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 would also need to issue more debt to make up for the 10% of proceeds used to purchase BTC. For every $100 billion raised, an additional 11.1% of bonds would 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.