VanEck Experts Propose Innovative Bond Solutions to Address US Refinancing Needs

Matthew Sigel, the head of digital asset research at VanEck, recently proposed an innovative debt instrument concept called "BitBonds" (. This hybrid bond aims to combine exposure to U.S. Treasuries and Bitcoin, providing a new solution for the $14 trillion refinancing needs that the U.S. government is about to face.

The concept was introduced at a digital currency summit, aiming to simultaneously meet 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.

Upon maturity, investors will receive the full value of the government bond portion as well as the value of the Bitcoin allocation. Before the yield to maturity reaches 4.5%, investors can enjoy all the appreciation gains from Bitcoin. Profits exceeding this threshold will be shared between the government and bondholders.

Sigel stated that this proposal is a "unified solution to the problem of misaligned incentives."

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 of Bitcoin )CAGR(. For example, for a bond with a 4% coupon rate, the breakeven point for Bitcoin CAGR is 0%. However, for bonds with lower coupon rates, the breakeven threshold is higher.

If the CAGR of Bitcoin remains between 30% and 50%, the model's return rate will significantly increase, with investor returns potentially reaching as high as 282%. However, investors will also bear the full downside risk of Bitcoin exposure.

From the perspective of the US government, the main advantage of Bitcoin bonds is the reduction in financing costs. Even if the price of Bitcoin rises slightly or remains unchanged, the Treasury can save on interest expenses compared to issuing traditional 4% fixed-rate bonds.

Sigel predicts that issuing a $100 billion Bitcoin bond with a coupon rate of 1% and without Bitcoin price appreciation will save the government $13 billion over the bond's duration. If Bitcoin achieves a 30% CAGR, the same issuance could generate over $40 billion in additional value.

Despite the potential benefits, the scheme also faces some challenges. Investors bear the downside risk of Bitcoin but cannot fully share in the upside gains. Structurally, the Treasury also needs to issue more debt to make up for the 10% returns used to purchase Bitcoin.

To improve the plan, Sigel suggested providing some downside protection for investors to cope with the potential sharp decline of Bitcoin. This innovative bond concept offers a new perspective for the U.S. government and investors, but its actual feasibility and implementation details still need further discussion and refinement.