VanEck Proposes Innovative Financing Solution: Bit Bonds

Matthew Sigel, head of digital asset research at VanEck, recently proposed an innovative financing solution called "比特债券"(BitBonds) to address the upcoming $14 trillion refinancing needs faced by the U.S. government. This hybrid debt instrument combines U.S. Treasury bonds with exposure to Bitcoin, providing investors with inflation protection while also meeting sovereign financing needs.

Bit bonds are designed as 10-year securities, with 90% being traditional U.S. Treasury exposure and 10% being Bitcoin exposure. Investors will receive the full value of the Treasury portion and the value of the Bitcoin allocation at maturity. Before the yield to maturity reaches 4.5%, investors will receive all the appreciation of Bitcoin, and any gains exceeding this threshold will be shared between the government and bondholders.

Sigel stated that this plan is a "unified solution to the problem of misaligned incentives." He predicts that the breakeven point for investors will depend on the fixed coupon rate of the bonds and the compound annual growth rate of Bitcoin (CAGR). If the Bitcoin CAGR remains between 30% and 50%, the model return rate will sharply increase across all coupon rate levels, with investor returns potentially reaching as high as 282%.

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 will save on interest expenses compared to issuing traditional 4% fixed-rate bonds. Sigel predicts that issuing $100 billion in Bit bonds with a face interest rate of 1% and no Bitcoin appreciation gains will save the government $13 billion over the life of the bonds.

However, this structure also has some drawbacks. Investors will bear the full downside risk of Bitcoin without being able to fully participate in the upside gains. Structurally, the Treasury also needs to issue more debt to make up for the 10% yield used to purchase Bitcoin.

Nevertheless, Sigel believes that this approach will create a differentiated category of sovereign bonds, providing the U.S. with asymmetric upside exposure to Bitcoin while reducing dollar-denominated debt. He concluded: "The rise of Bitcoin will only make trading more favorable. The worst-case scenario is low-cost financing, and the best-case scenario is gaining long-term volatility exposure to the world's most robust asset."