VanEck Proposes Innovative Financial Instrument "Bit Bond" to Address U.S. Refinancing Needs

VanEck's Digital Assets Research team recently proposed an innovative financial instrument concept called "Bit Bond" aimed at addressing the upcoming $14 trillion refinancing needs of the U.S. government. This concept combines traditional U.S. Treasury bonds with exposure to Bitcoin, providing investors with potential inflation protection.

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

This structure aims to balance the interests of investors with the U.S. Treasury's need to refinance at competitive rates, while also providing investors with opportunities to hedge against dollar depreciation and asset inflation.

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.

From the perspective of the U.S. government, the main advantage of Bit bonds is the potential to reduce financing costs. Even with a slight appreciation or stability in Bitcoin, the government may save on interest expenditures compared to issuing traditional 4% fixed-rate bonds. According to analysis, the government's breakeven interest rate is approximately 2.6%.

However, this innovative structure also has some potential drawbacks. Investors must bear the full downside risk of Bitcoin, while the upside gains may be limited. Additionally, the Treasury may need to issue additional debt to make up for the funds used to purchase Bitcoin.

Nevertheless, Bitcoin bonds as a new financial instrument may provide the U.S. government with an asymmetric upside exposure to Bitcoin while reducing dollar-denominated debt. The actual effects and feasibility of this innovative concept still need further exploration and validation.