VanEck proposes Bitcoin bonds that combine Bitcoin and U.S. Treasuries to address the $14 trillion refinancing need.

Matthew Sigel, the head of digital asset research at the American investment management company VanEck, recently proposed an innovative debt instrument concept - "BitBonds." This hybrid bond combines exposure to U.S. Treasury bonds and Bitcoin (BTC), aiming to address the upcoming $14 trillion refinancing needs facing the U.S. government.

This concept was proposed at a strategic Bitcoin reserve summit with the aim of addressing both sovereign financing needs and investors' demand for inflation protection. Bitcoin bonds are designed as 10-year securities, with 90% exposure to traditional US Treasury bonds and 10% exposure to Bitcoin, the latter funded by the proceeds from the bond issuance.

When the bond matures, the investor will receive the full value of the government bond portion (for example, for a $100 bond, this portion is worth $90) as well as the value of the Bitcoin allocation. Before the yield to maturity reaches 4.5%, the investor will receive all the appreciation in Bitcoin. Any gains above this threshold will be shared between the government and the bondholders.

Sigel believes that this structure can align the interests of bond investors with the U.S. Treasury's need to refinance at competitive rates, while also meeting investors' demands to hedge against dollar depreciation and asset inflation.

According to Sigel's analysis, the breakeven point for investors depends on the fixed coupon rate of the bond and the compound annual growth rate (CAGR) of Bitcoin. For bonds with a coupon rate of 4%, the breakeven point for Bitcoin's CAGR is 0%. However, for bonds with lower coupon rates, the breakeven threshold is higher: the CAGR for a 2% coupon rate bond is 13.1%, and the CAGR for a 1% coupon rate bond is 16.6%.

If the CAGR of Bitcoin remains between 30% and 50%, the model return rate will rise sharply across all coupon rate levels, with investor returns potentially reaching as high as 282%. However, in the case of Bitcoin depreciation, bonds with lower coupon rates may incur severe negative returns.

From the perspective of the US government, the core benefit of Bitcoin bonds will be reducing financing costs. Even if Bitcoin appreciates slightly or does not appreciate, 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 approximately 2.6%.

Sigel predicts that issuing Bitcoin bonds worth $100 billion with a coupon rate of 1% and no Bitcoin appreciation gains will save the government $13 billion over the life of the bonds. If Bitcoin reaches a CAGR of 30%, the same issuance could generate over $40 billion in additional value.

Despite the potential benefits, this structure also has some drawbacks. Investors bear the downside risk of Bitcoin but cannot fully participate in the upside gains; unless Bitcoin performs exceptionally well, low-yield bonds will become less attractive. Structurally, the Treasury also needs to issue more debt to make up for the 10% yield used to purchase Bitcoin.

In order to improve this proposal, it may be necessary to consider providing some downside protection for investors to guard against the sharp decline of Bitcoin. Overall, Bitcoin bonds represent an innovative financing method, but their implementation still faces many challenges and risks.