Are Bitcoin‑Backed Bitbonds America’s True Solution to a Straining Economy?

Even during peacetime, the US faces significant financial challenges that resemble those of a crisis. Its national debt is escalating, and bond markets are showing signs of fragility. Compounding these issues is a political environment where consensus on fiscal solutions remains elusive. 

In a conversation with BeInCrypto, Matthew Pines, Executive Director of the Bitcoin Policy Institute, argued that Bitcoin-enhanced Treasury Bonds, or Bitbonds, could offer an alternative solution that brings down interest rates and relieves the fiscal burden at no additional cost for the American taxpayer.

The Mounting US Debt Crisis

The United States is facing considerable fiscal pressure, with its national debt hovering around $36.2 trillion. 

Aggravating this already concerning figure are the historically elevated interest rates on government bonds, with the 10-year Treasury yield recently fluctuating around 4.3%, while the 30-year Treasury yield sees even higher rates.

Current interest rates for the 10-year Treasury bond. Source: Trading Economics.

These percentages present a particular predicament as the government prepares to refinance a significant portion of its debt that was issued at much lower interest rates during the COVID-19 pandemic. 

Should new debt be issued at the current prevailing rates, it would inevitably lock in a considerably heavier interest burden for future American taxpayers, exacerbating the nation’s financial strain.

Despite the alarming state of the economy’s health, discourse on mitigating the issue before it gets out of hand has been notably limited. In the crypto community, an alternative solution that may be worth trying out has been floating around.

A Chronic Fiscal Imbalance

The United States’ struggle with its fiscal deficit is far from new. For decades, the nation has frequently spent more than it collects, continuously accumulating national debt.

Despite its pervasiveness, most governments that have cycled in and out of power have done little to change the course of this longstanding reality. 

“We’re in a pretty good economy right now. We have low unemployment and moderate inflation, yet the government’s fiscal position is as if we were fighting a war. It’s almost back to COVID levels. That’s a sign of a fundamental pathology in the structure of the federal government’s balance sheet,” Pines told BeInCrypto.

While a basic economic approach to addressing the colossal US fiscal deficit would suggest stricter spending and more production, implementing such measures faces significant political hurdles. 

“If we lived in a perfect world, the government would be able to balance its budget and we’d be able to politically adjudicate the hard trade-offs associated with cutting government programs, which politically is not very palatable. But even in times of relatively high strength, the government rarely collects more than 20% of GDP in tax receipts. There’s just kind of a natural cap to what they can do,” Pines added. 

This fiscal pressure isn’t solely an internal economic problem but reflects broader global shifts deepening an already apparent power struggle.

Geopolitical Pressures and “Nontraditional” Solutions

China has long been the primary rival to the United States. However, their competition is now more intense than ever. This is especially true in key areas like economic growth, the race for AI dominance, and manufacturing strength.

According to Pines, China holds many means that it could disrupt the United States’ progress. 

“We’re in a geopolitical environment where our adversaries, China in particular, has a lot of leverage over our supply chains, rare earths… And they’ve now climbed the value chain in terms of manufacturing competitiveness,” he said, adding, “They can whipsaw our inflation through supply chain issues.”

This combination of pressures could be enough for the United States to seek solutions beyond conventional economic policies. 

“I think we’re at the point where we have to think about nontraditional ways to help us,” Pines emphasized.

Given that the current administration has shown a particular openness to digital assets, Bitcoin may offer a solution to the United States’ troubles.

What Are Bitcoin-Enhanced Treasury Bonds – Bitbonds?

In March, Pines released a policy brief he co-authored with fellow Bitcoin Policy Institute executive Andrew Hohns on implementing Bitcoin-enhanced treasury bonds, or Bitbonds for short. 

This initiative builds upon the foundational concept of a Strategic Bitcoin Reserve (SBR), which gained traction with a recent executive order establishing a stockpile for Bitcoin and other digital assets.

“The Trump administration… essentially [committed] not to sell the Bitcoin that it already holds in its possession and then [directed] the Treasury Secretary and the Commerce Secretary to identify, quote, budget-neutral ways of acquiring additional Bitcoin for the SBR at no marginal cost to the taxpayer,” Pines said.

Bitbonds may be one way to achieve the latter.

The Bitbond Methodology

Bitbonds are essentially regular Treasury bonds, but instead of allocating 100% of a bond’s proceeds to conventional government funding operations, a portion would be set aside to buy Bitcoin. How much will ultimately depend on what the federal government decides. 

Pines and Hohns suggested 10% for simplicity’s sake, but Pines clarified that starting small could be as little as 1%.

“The government sells, say, a billion dollars worth of a 10-year bond, and it takes a 10% of the proceeds that would otherwise go to fund government operations, and it puts half of that into the government’s SBR to hold indefinitely,” Pines explained, adding, “Then the other $50 million essentially gets held in an escrow account and is used to pay out a certain amount of Bitcoin over the lifetime of the bond to the buyers of the bond. So you’re basically buying a guaranteed distribution of a fixed amount of Bitcoin over the life of the bond.”

These metrics are also up for discussion. The federal government may decide to use all 10% to buy Bitcoin, or it could all go to the bondholders. 

Regardless, the central idea of such a bond would be to incorporate some of Bitcoin’s high volatility and high return aspects into the return profile of US Treasury debt. 

The end goal would be to bring down interest rates and use Bitcoin’s price appreciation to start paying off debt.

Dual Benefits: Lowering Rates and Leveraging Bitcoin

The current interest rates affecting Treasury holders are, in a sense, mortgaging their future. 

If the federal government had to issue new debt at today’s higher interest rates to pay off the outstanding debt, taxpayers would be responsible for much larger interest payments on the national debt in the future. As a result, demand for US debt is dropping.

“If there is a potential way of increasing demand for US debt that reduces the interest rate the government has to pay, well, that would save a substantial amount of money,” Pines told BeInCrypto.

He argues Bitbonds can stimulate demand for US debt by offering Bitcoin.

“Bitcoin, historically, has had a pretty volatile but very positive appreciation. So, there [is] a way of structuring a security instrument that takes some of the fixed income, low volatility, low risk aspects of a traditional bond, especially a government-issued bond, and integrating in a little bit of kind of the high volatility, high return aspects of Bitcoin as an asset,” Pines explained.

This increased demand, in turn, would allow the government to issue the bond at a lower interest rate. 

If Bitcoin continues to appreciate over time with a Bitbond program up and running, Pines believes that a meaningful portion of the US government’s fiscal position could be resolved. 

The government’s involvement would also create a profound psychological and market-moving effect. 

De-Risking Bitcoin Through Government Endorsement

A federal Bitbond program would require the government to make significant Bitcoin purchases. Although major corporations and Bitcoin treasury companies frequently make large acquisitions, the United States doing so would be monumental. It would exceed current precedents.

Pines emphasized that the primary impact wouldn’t solely stem from the direct buying volume but from a more profound shift in perception.

“It would really be the endorsement of the government saying they’re going to do such a thing. That would probably change future expectations of Bitcoin’s price dramatically, much more than the actual billion dollars of purchases,” Pines told BeInCrypto.

He elaborated that this governmental embrace would serve to “de-risk” Bitcoin in the eyes of the broader market. He noted that Bitcoin is often seen with two extreme, binary outcomes—it goes to zero or becomes a global store of value. 

By signaling long-term viability and legitimacy, the US government’s strategic adoption would effectively reduce the perceived likelihood of the “goes to zero” scenario.

Furthermore, Pines pointed out a unique aspect of the government’s position, describing it as a “reflexive” effect:

“One of the things the government can do that almost no issuer of debt can otherwise do is if it buys Bitcoin as a part of this debt issuance, Bitcoin is going to go up. And if it already has it as part of its bond, it can actually generate the reflexivity that almost no other issuer can do.”

However, the question remains of how bondholders could safeguard themselves against Bitcoin’s volatility if its price drops significantly.

Mitigating Bitcoin Volatility for Investors

How significantly Bitcoin’s volatility affects a bondholder depends on their risk appetite. Speculatively selling bonds before they reach maturity inherently involves risk. This scenario is standard for any bond.

Yet, for bondholders seeking stability, the negative consequences of holding a Bitbond until it reaches maturity are few to none. The money a holder initially invested is guaranteed to be returned by the US.

“The way we structure it, that downside risk is capped at essentially the equivalent of buying a normal bond. So, in the worst-case scenario, you just get what an otherwise normal 10-year Treasury security is, and you don’t get the gains you thought you were going to get from Bitcoin because Bitcoin didn’t do anything,” Pines explained.

Even if Bitcoin crashes, Bitbond’s design ensures a minimum return or principal protection. If it soars, an investor’s capital appreciates. 

A Phased Approach to an Unprecedented Idea

Implementing a never-before-used concept like Bitbonds within a traditionally conservative US financial framework presents a unique set of challenges.

Despite the compelling arguments for Bitbonds, Pines acknowledges that such an unprecedented idea will require a cautious and phased approach. 

“We recommend the government seriously explore this idea, start small with a pilot program, test the market, see how it would trade, and then see how successful it can be over time,” he said.

Pines also clarified that Bitbonds are intended not to disrupt the existing financial system but to serve as a complementary tool.

While the path to implementing Bitbonds may be slow due to bureaucratic processes and the need for thorough study, the concept presents a unique opportunity to address the nation’s pressing fiscal challenges.