VanEck Research Director Proposes Innovative Bond Solutions to Address U.S. Refinancing Needs

An innovative debt instrument combining exposure to U.S. Treasury bonds and Bitcoin—"BitBonds"—has recently attracted market attention. This concept was proposed by the head of digital asset research at a certain asset research institution, aiming to address the impending $14 trillion refinancing needs of the U.S. government.

The proposal was introduced at a strategic Bitcoin reserve summit, attempting to address both sovereign financing needs and investors' demands to hedge against inflation. Bitcoin bonds are designed as 10-year securities, with 90% exposure to traditional U.S. Treasury bonds and 10% exposure to Bitcoin, the latter funded by the proceeds from the bond issuance.

At maturity, investors will receive the full value of the treasury bond portion (for example, a $100 bond, which is $90) as well as the value of the Bitcoin allocation. Before the yield to maturity reaches 4.5%, investors will receive all the appreciation gains from Bitcoin. Any gains exceeding this threshold will be shared between the government and the bondholders.

This structure aims to balance the interests of bond investors with the U.S. Treasury's need to refinance at competitive rates, especially in the context of investors increasingly seeking to hedge against dollar depreciation and asset inflation.

Investor Return Analysis

According to predictions, the breakeven point for investors depends on the fixed coupon rate of the bonds 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 thresholds are higher: the CAGR for a 2% coupon bond is 13.1%, and the CAGR for a 1% coupon bond is 16.6%.

If the CAGR of Bitcoin remains between 30% and 50%, the model return rate will significantly increase across all coupon rate levels, with investor returns reaching as high as 282%.

However, this structure also means that investors will bear the full downside risk of their Bitcoin exposure. In the event of Bitcoin depreciation, bonds with lower coupon rates could incur severe negative yields. For example, if Bitcoin performs poorly, a Bitcoin bond with a 1% coupon rate could lose between 20% to 46%.

Government Revenue Analysis

From the perspective of the U.S. government, the core benefit of Bitcoin bonds lies in reducing financing costs. Even if Bitcoin appreciates slightly or remains unchanged, the Treasury may save on interest expenses compared to issuing traditional 4% fixed-rate bonds.

Analysis shows that the government's breakeven interest rate is approximately 2.6%. Issuing bonds with a coupon rate below this level will reduce annual debt interest expenses, allowing for savings even if Bitcoin prices remain flat or decline.

It is expected that the issuance of $100 billion in Bitcoin bonds, with a face interest rate of 1% and no Bitcoin appreciation benefits, will save the government $13 billion during the bond's term. If Bitcoin reaches a 30% CAGR, the same issuance amount could generate over $40 billion in additional value, mainly from the sharing of Bitcoin profits.

Challenges and Areas for Improvement

Despite the potential gains, this structure also faces some challenges. Investors bear the downside risk of Bitcoin but cannot fully participate in the upside gains unless Bitcoin performs exceptionally well; otherwise, low coupon rate bonds may lack attractiveness.

Structurally, the Treasury also needs to issue more debt to make up for the 10% yield used to purchase Bitcoin. For every $100 billion raised, an additional 11.1% in bonds needs to be issued to offset the impact of the Bitcoin allocation.

To improve this plan, suggestions have been made to provide investors with some downside protection to guard against the sharp decline of Bitcoin. Although this innovative bond structure poses challenges, it also offers new ideas for addressing financing and investment needs in the current economic environment.