VanEck Research Director Proposes Innovative "Bit Bond" Concept

A hybrid debt instrument concept called "BitBonds" that combines exposure to U.S. Treasury bonds and Bitcoin has recently been proposed, aiming to address the upcoming $14 trillion refinancing needs of the U.S. government. This innovative idea was presented by the head of a digital asset research agency at a strategic Bitcoin reserve summit, attempting to simultaneously tackle sovereign financing demands and investors' requests for inflation protection.

The proposed Bit bond is designed as a 10-year security, with 90% exposure to traditional U.S. Treasury bonds and 10% exposure to Bitcoin. The Bitcoin portion will be funded by the proceeds from the bond issuance. At maturity, investors will receive the full value of the Treasury bond portion and the value of the Bitcoin allocation. Before the yield to maturity reaches 4.5%, investors can enjoy all the appreciation gains from Bitcoin, and any gains exceeding this threshold will be shared between the government and bondholders.

This structure aims to balance the interests of bond investors with the needs of the U.S. Treasury to refinance at competitive rates, while providing investors with a hedge against dollar depreciation and asset inflation.

Investor Profit Analysis

The investor's breakeven point depends on the fixed coupon rate of the bond and the compound annual growth rate of Bitcoin ( CAGR ). For a bond with a 4% coupon rate, the breakeven point for Bitcoin CAGR is 0%. The breakeven threshold for bonds with lower coupon rates is higher, with a 2% coupon rate bond requiring a 13.1% CAGR, and a 1% coupon rate bond requiring a 16.6% CAGR.

If the CAGR of Bitcoin remains between 30% and 50%, the model's return rate will increase significantly, with investor returns reaching up to 282%. This structure provides asymmetric upside potential for investors who believe in Bitcoin's prospects, while retaining the basis for risk-free returns. However, investors will also bear the full downside risk of Bitcoin exposure.

Government Revenue Analysis

From the perspective of the U.S. government, the core benefit of Bit bonds lies in reducing financing costs. Even if Bitcoin appreciates slightly or remains unchanged, the Treasury can save on interest expenses compared to issuing traditional 4% fixed-rate bonds. The government's breakeven interest rate is approximately 2.6%.

According to the analysis, issuing a $100 billion bond with a coupon rate of 1% and no Bitcoin price appreciation will save the government $13 billion over the life of the bond. If Bitcoin reaches a 30% CAGR, the same issuance could generate over $40 billion in additional value.

This approach will also create a differentiated category of sovereign bonds, providing the United States with asymmetric upside exposure to Bitcoin while reducing dollar-denominated debt.

Potential Challenges and Risks

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, low coupon rate bonds may lack appeal.

Structurally, the Ministry of Finance needs to issue more debt to offset the 10% returns from purchasing Bit. For every $100 billion raised, an additional 11.1% in bonds needs to be issued to counteract the impact of the Bit allocation.

To address these challenges, the proposal suggests possible design improvements, including providing investors with some downside protection against the sharp decline risk of Bitcoin.