0 to 1 Million Out Of Thin Air - Government Debt Reinvented - An Hedge Or A Curse?
Clarity Or Lunacy? El Salvador "did" it. - Mag 7 Update Coming Tomorrow
Hi and welcome back for a Quant data driven analysis. [Full Disclaimer]
Have you been following this whole Bit Bond thing? I've been tracking it closely since Trump signed that Strategic Bit Reserve executive order back in March, and I have to say, it's probably the most interesting story in government finance. I haven't written about it directly yet – partly because news has been moving at whirlwind pace, but honestly also because it's become absurdly polarizing. Talk about it and watch how fast the room divides.
But we're far enough into this mess that some things are becoming clear, and I think it's worth going over it with all the usual caveats about being in a market where nobody really knows what happens next but the data.
But when looking at the money supply one thing is undeniable, the fed’s printer will eventually run out of ink!
What the hell are BitBonds anyway?
First, let's get the basics straight. Bit Bonds (or "BitBonds" or "₿ Bonds" – yes, people are already using that symbol) are this weird hybrid financial instrument that mashes together traditional Treasury bonds with Bitcoin exposure. The structure isn't complicated: 90% of the money raised would go to regular government funding like normal Treasury bonds do, while the other 10% would be used to buy Bitcoin.
I've been in a few meetings where this has been discussed, and the structure seems to be solidifying around a few key elements. The bonds would offer a 1% interest rate – way below the current ~4.5% for 10-year Treasury’s. That sounds terrible for investors until you consider the Bitcoin kicker: at maturity, bondholders would get some upside from Bitcoin performance.
Specifically, investors would receive 100% of the Bitcoin gains up to a 4.5% annual return (so basically matching what a regular Treasury would pay), and then 50% of any additional gains beyond that. The government would keep the other 50% of the upside. And – this is important – all returns would be tax-free under the proposal. That's a crucial element they've baked in to juice investor demand.
If this sounds like a gamble, that's because it absolutely is. The government is essentially betting that Bitcoin's price appreciation will more than make up for the lower interest payments. And investors are betting that tax-free Bitcoin exposure with downside protection is worth accepting a lower guaranteed return.
Why is this happening now?
You can't understand BitBonds without looking at two things: Trump's embrace of crypto and America's debt problem.
Back in March, Trump signed that executive order creating a "Strategic Bitcoin Reserve" – which was mostly just a fancy repackaging of the crypto the government already had from seizures and forfeitures. It disappointed the Bitcoin maximalists by not actually committing taxpayer dollars to buy more Bitcoin, but it clearly signaled a policy shift.
The executive order did authorize "budget-neutral strategies" for acquiring more Bitcoin, which is exactly the opening the Bitcoin Bond proponents needed. If the Treasury can't get budget allocation to buy Bitcoin directly, they'll create a financial instrument that lets them do it indirectly.
And the timing couldn't be better from a debt management perspective. We're now staring down $36 trillion in national debt, with about $9.3 trillion coming due in the next 12 months. With interest rates at 4.5%, that's a shocking amount of money going just to interest payments. I was looking at the numbers last week, and we're now spending more on interest than on defense. It's wild.
The Bitcoin Bonds proposal is essentially saying: what if we could refinance some of that debt at 1% instead of 4.5%? The savings would be massive – we're talking about $70 billion per year on a $2 trillion issuance. That's real money, even in Washington.
Playing with fire - Volatility wild swings
Of course, the elephant in the room is the volatility. I've been in the markets long enough to remember when it crashed 83% in 2018 and 65% in 2022. Those kinds of swings would be catastrophic for a government that's betting its debt financing strategy on continued appreciation. For one thing, mainstream is all over the place on this.
That said, long-term performance has been pretty insane. Even with those dips, it's delivered returns that make traditional asset classes look like savings accounts. The question is: can those returns continue when Btc is now an $1.7 trillion asset?
To visualize it’s growth here’s a scenarios.
When I run these numbers, I keep coming back to the same place. At a 30% growth rate – which is way below Bitcoin's historical average but still absurdly high for any mainstream asset – Bitcoin would 10x over a decade. That would turn the government's $200 billion Bitcoin allocation into $2 trillion, offsetting the entire principal of the bonds. But if growth slows to 15% or Bitcoin crashes again? This whole scheme could look like a massive mistake.
Wait, but would investors actually buy these?
I was at a conference last month where this question dominated the conversation. Would investors really accept a 1% coupon in exchange for partial Bitcoin exposure? Several institutional investors I spoke with were surprisingly open to the idea – especially with the tax advantages.
But there’s more…