VanEck’s head of digital assets research, Matthew Sigel, has put forward a groundbreaking idea at the Strategic Bitcoin Reserve Summit – the introduction of “BitBonds.” This innovative hybrid debt instrument combines traditional US Treasuries with Bitcoin exposure as a strategy to address the government’s $14 trillion refinancing requirement.
BitBonds would be structured as 10-year securities with 90% exposure to US Treasuries and 10% allocation to Bitcoin, funded by the proceeds from bond sales. At maturity, investors would receive the full value of the US Treasury portion plus the value of the Bitcoin allocation. Investors would also capture 100% of Bitcoin’s upside until their yield-to-maturity reaches 4.5%, after which gains would be shared between the government and bondholders.
The concept aims to align the interests of bond investors seeking inflation protection with the Treasury’s need to refinance at competitive rates. According to Sigel, this proposal offers a solution for the mismatched incentives between the two parties.
The breakeven for investors in BitBonds depends on the bond’s fixed coupon rate and Bitcoin’s compound annual growth rate (CAGR). Lower coupon bonds would require higher BTC CAGR for breakeven, but in scenarios where Bitcoin performs well with a CAGR between 30% to 50%, investors could see significant returns, potentially up to 282%.
From the government’s perspective, issuing BitBonds could lead to lower borrowing costs compared to traditional fixed-rate bonds. Even in scenarios where Bitcoin appreciates modestly or not at all, the Treasury stands to save on interest payments. Sigel’s analysis suggests that issuing $100 billion in 1% coupon BitBonds could save the government $13 billion over the bond’s life, with potential for additional value if Bitcoin performs well.
While the benefits of BitBonds are clear, the structure also comes with trade-offs. Investors bear the full downside of Bitcoin exposure without full upside participation, and lower coupon bonds may become unattractive unless Bitcoin performs exceptionally well. Additionally, the Treasury would need to issue more debt to offset the 10% Bitcoin allocation from bond sales.
Overall, the introduction of BitBonds could create a unique sovereign bond class for the US, offering asymmetric upside exposure to Bitcoin while reducing dollar-denominated obligations. With possible design improvements to address downside protection and complexity in issuance, BitBonds could offer a compelling investment opportunity for both investors and the government.