VanEck proposes to launch bitcoin bonds with a yield of up to 282%

What’s new? Crypto investment company VanEck, which manages the spot bitcoin exchange-traded fund HODL with $1,18 billion in assets under management, has proposed the concept of a new financial product based on the first cryptocurrency called BitBonds. As explained by Matthew Sigel, the head of digital asset research, at the Strategic Bitcoin Reserve Summit, it is a hybrid debt instrument that combines bitcoin with US Treasury bonds.

Source: X.com

What else is known? BitBonds will be 10-year securities consisting of 90% traditional US Treasuries and 10% BTC purchased with bond proceeds.

Accordingly, at maturity, investors will receive the full value of the Treasury bonds ($90 per $100 BitBonds security) as well as the value of the bitcoin portion.

In addition, investors will receive 100% of BTC’s appreciation until the yield-to-maturity (YTM) reaches 4,5%. Returns above this threshold will be shared between the government and bondholders.

This structure is designed to reconcile the interests of bond investors, who are increasingly seeking protection against dollar depreciation and asset inflation, with the Treasury’s need to refinance at competitive rates. Sigel called the product “an aligned solution for mismatched incentives.”

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According to Sigel’s projections, a BitBonds investor’s breakeven depends on the bond’s fixed coupon and the bitcoin compound annual growth rate (CAGR). For example, the break-even BTC CAGR for bonds with a 4% coupon is 0%, while the break-even threshold is higher for lower-yielding versions: 13,1% CAGR for a 2% coupon and 16,6% for a 1% coupon. If the CAGR stays in the 30-50% range, yields rise sharply for all coupon levels, and investor returns can be as high as 282%.

According to Sigel, BitBonds may appeal to bitcoin supporters because the instrument offers asymmetric growth while maintaining a basic level of risk-free returns. However, the product’s structure means investors bear all losses if bitcoin falls.

For example, bonds with a lower coupon can lead to larger losses in scenarios where BTC loses value: a BitBond with a 1% coupon would lose 20-46%, depending on the cryptocurrency’s decline.

From the perspective of the US government, the main advantage of BitBonds will be lower borrowing costs. Even if BTC grows little or not at all, the Treasury will save on interest payments compared to traditional 4% fixed-rate bonds.

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According to Sigel’s analysis, the government’s breakeven interest rate is approximately 2,6%. Issuing bonds with coupons below that level would reduce annual debt service, resulting in savings even in a zero-growth or BTC decline environment.

Sigel predicts that a $100 billion BitBonds issue with a 1% coupon and no BTC growth would save the government $13 billion over the life of the bond. If BTC reaches a CAGR of 30%, the same issuance could add more than $40 billion in additional value, mostly due to the cryptocurrency’s growth.

The analyst emphasized that this approach would create a differentiated class of government bonds, offering the US an asymmetric benefit from bitcoin growth while reducing dollar-denominated liabilities.

Despite the potential benefits, VanEck recognizes the flaws in the concept. For example, investors take the hit from a potential bitcoin decline without being able to take full advantage of the positives, and lower coupon bonds become unattractive unless BTC performs exceptionally well.

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In addition, the Treasury Department will have to issue more debt to offset the 10% that will go towards bitcoin purchases. Every $100 billion in funding would require an additional 11,1% to invest in BTC.

The proposal suggests possible improvements to the structure, including downside protection to partially shield investors from BTC’s sharp drops.