VanEck’s head of digital assets research, Matthew Sigel, recently proposed the concept of “BitBonds” at the Strategic Bitcoin Reserve Summit. BitBonds would be a hybrid debt instrument combining US Treasuries with Bitcoin exposure to address the government’s $14 trillion refinancing requirement. The bonds would consist of 90% traditional US Treasury exposure and 10% Bitcoin, with investors receiving the full value of the Treasury portion at maturity, plus any gains from the Bitcoin allocation beyond a 4.5% yield-to-maturity threshold.
This structure aims to align the interests of bond investors seeking protection from dollar debasement and asset inflation with the Treasury’s need to refinance at competitive rates. According to Sigel, BitBonds would be a “convex bet” for investors, offering asymmetric upside potential while retaining a base layer of risk-free return. However, investors bear the full downside of Bitcoin exposure, particularly in scenarios where Bitcoin loses value.
From the US government’s perspective, the core benefit of BitBonds would be lower borrowing costs. Even if Bitcoin appreciates modestly or not at all, the Treasury could save on interest payments compared to traditional fixed-rate bonds. Issuing BitBonds with coupons below the breakeven interest rate of approximately 2.6% could generate savings for the government, with potential additional value from shared Bitcoin gains if the cryptocurrency performs well.
However, VanEck’s presentation also highlights potential trade-offs and challenges with the BitBonds structure. Investors take on Bitcoin’s downside risk without full upside participation, and lower-coupon bonds may be unattractive unless Bitcoin performs exceptionally well. The Treasury would also need to issue more debt to compensate for the 10% of proceeds used to purchase Bitcoin. Possible design improvements, such as downside protection for investors, are suggested to address these concerns and enhance the attractiveness of BitBonds.
In conclusion, BitBonds offer a novel strategy for managing the government’s refinancing requirements while providing investors with exposure to both US Treasuries and Bitcoin. The structure aims to align the interests of bond investors seeking protection against inflation with the Treasury’s need for competitive refinancing rates. While there are potential benefits for both investors and the government, trade-offs and challenges exist, such as downside risk and increased debt issuance. Overall, BitBonds present an innovative approach to sovereign funding and investment that could offer unique opportunities for both parties involved.
