VanEck's Head of Research Proposes Innovative Bond Concept to Address U.S. Government Financing Needs

Matthew Sigel, the head of digital asset research at a certain asset management company, recently proposed an innovative bond concept—"BitBond"(BitBonds). This hybrid debt instrument aims to combine exposure to U.S. Treasuries and Bitcoin to address the $14 trillion refinancing needs that the U.S. government is about to face.

This concept was first introduced at a recent Bitcoin Reserve Summit, aiming to address both sovereign financing needs and investors' demands for inflation protection. According to the design, Bitcoin bonds will be a 10-year security, with 90% exposed to traditional U.S. Treasury bonds and 10% exposed to Bitcoin, the latter funded by the bond issuance proceeds.

When the bond matures, investors will receive the full value of the treasury bond portion of (. Taking a bond with a face value of $100 as an example, this portion is $90 ) and the current value of the Bitcoin allocation. Before the yield to maturity reaches 4.5%, investors can receive all the appreciation gains from Bitcoin. Any gains exceeding this threshold will be shared between the government and the bondholders.

Sigel stated that the scheme is a "unified solution to address the mismatch in incentive mechanisms." This structure aims to align the interests of bond investors with the U.S. Treasury's need to refinance at competitive rates, while also meeting investors' demands 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 of Bitcoin (CAGR). For bonds with a 4% coupon rate, the breakeven point for Bitcoin's CAGR is 0%. However, for bonds with lower coupon rates, the breakeven threshold is higher: a 2% coupon rate bond requires a 13.1% CAGR, while a 1% coupon rate bond requires a 16.6% CAGR.

If the CAGR of Bitcoin remains between 30% and 50%, the model's return rate will significantly increase across all coupon rate levels, with investor returns potentially reaching as high as 282%. Sigel believes that Bitcoin bonds will serve as a "convex bet" for investors who believe in the future of Bitcoin, as this instrument will offer asymmetric upside potential while retaining the fundamental layer of risk-free returns. However, its structure also means that investors will bear all the downside risk of Bitcoin exposure.

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 will save on interest expenses compared to issuing traditional 4% fixed-rate bonds. Sigel predicts that issuing $100 billion in Bitcoin bonds with a coupon rate of 1% and no appreciation in Bitcoin would save the government $13 billion over the life of the bonds. If Bitcoin achieves a 30% CAGR, the same issuance could generate over $40 billion in additional value.

Despite the potential benefits, this structure also faces some challenges. Investors bear the downside risk of Bitcoin but cannot fully participate in the upside gains, which may make low coupon rate bonds less attractive. In addition, the Treasury needs to issue more debt to make up for the 10% returns used to purchase Bitcoin. For every $100 billion raised, an additional 11.1% of bonds need to be issued to offset the impact of Bitcoin allocation.

To address these issues, the proposal also suggests possible design improvements, including providing partial downside protection for investors to guard against the sharp decline risk of Bitcoin. Overall, this innovative bond concept offers a new approach to addressing the financing needs of the U.S. government, but its practical implementation still requires further discussion and refinement.