Can Bitcoin Bonds Revolutionize America’s Economic Future?

Even during periods of tranquility, the US confronts substantial economic hurdles that mirror those of a crisis. Its national debt is rising, and bond markets are exhibiting signs of instability. Adding to these complications is a political landscape where agreement on fiscal strategies remains hard to achieve.

In a discussion with BeInCrypto, Matthew Pines, Executive Director of the Bitcoin Policy Institute, contended that Bitcoin-augmented Treasury Bonds, or Bitbonds, could provide an alternative solution that lowers interest rates and eases the financial load at no extra expense for the American taxpayer.

The Escalating US Debt Crisis

The United States is encountering significant fiscal pressures, with its national debt nearing $36.2 trillion.

Intensifying this already alarming number are the historically high interest rates on government bonds, with the 10-year Treasury yield recently oscillating around 4.3%, while the 30-year Treasury yield experiences even higher rates.

These figures create a specific challenge as the government is about to refinance a substantial part 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 cement a considerably heavier interest obligation for future American taxpayers, worsening the nation’s financial pressures.

Despite the concerning state of the economy’s health, discussions on addressing the issue before it escalates have been conspicuously scant. In the crypto community, an alternative solution that may deserve consideration has been circulating.

A Persistent Fiscal Imbalance

The United States’ difficulty with its fiscal shortfall is not a recent phenomenon. For decades, the nation has routinely spent more than it collects, perpetually accumulating national debt.

Despite its persistence, most administrations that have cycled in and out of power have done little to alter the trajectory of this entrenched 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 informed BeInCrypto.

While a straightforward economic strategy to tackle the colossal US fiscal deficit would propose tighter spending and increased production, enacting such measures encounters considerable political obstacles.

“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 elaborated.

This fiscal strain isn’t merely an internal economic dilemma but reflects wider global shifts intensifying an already evident power struggle.

Geopolitical Pressures and “Nontraditional” Solutions

China has historically been the principal competitor to the United States. However, their rivalry has now intensified tremendously. This is particularly true in crucial fields like economic expansion, the race for AI supremacy, and manufacturing capability.

According to Pines, China possesses numerous means to disrupt the United States’ progress.

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

This amalgamation of pressures could compel the United States to explore solutions beyond traditional economic approaches.

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

Given that the current administration has demonstrated a distinct openness to digital assets, Bitcoin may provide a remedy for the United States’ difficulties.

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 the implementation of Bitcoin-enhanced treasury bonds, or Bitbonds for short.

This initiative builds upon the foundational idea 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 noted.

Bitbonds may be one method to achieve this.

The Bitbond Methodology

Bitbonds are fundamentally regular Treasury bonds, but instead of allocating 100% of a bond’s proceeds to traditional governmental funding activities, a segment would be reserved for purchasing Bitcoin. The precise amount will ultimately be determined by federal government decisions.

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

“The government sells, let’s say, a billion dollars worth of a 10-year bond, and it takes 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 elucidated,“`html adding, “Then the remaining $50 million is primarily held in an escrow account and utilized to distribute a specified amount of Bitcoin throughout the term of the bond to the bond purchasers. Thus, you are essentially acquiring a guaranteed disbursement of a defined quantity of Bitcoin over the duration of the bond.”

These indicators are also open for dialogue. The federal authority might choose to allocate the entire 10% for Bitcoin acquisition, or it might entirely go to the bondholders.

Nonetheless, the core concept of such a bond would be to incorporate elements of Bitcoin’s substantial volatility and high-reward characteristics into the return profile of US Treasury securities.

The ultimate aim would be to lower interest rates and utilize Bitcoin’s price appreciation to begin settling debts.

Dual Advantages: Reducing Rates and Leveraging Bitcoin

The existing interest rates impacting Treasury stakeholders might be considered as encumbering their future.

If the federal government needed to issue new debt at today’s elevated interest rates to pay off the existing liabilities, taxpayers would face significantly larger interest obligations on the national debt in the future. Consequently, the demand for US debt is decreasing.

“If there’s a potential method to boost demand for US debt that cuts down the interest rate the government must pay, that would save a considerable amount of funds,” Pines told BeInCrypto.

He asserts that Bitbonds can enhance the demand for US debt by providing Bitcoin.

“Historically, Bitcoin has demonstrated significant volatility but has also showcased very favorable appreciation. Therefore, there’s a way to structure a security instrument that combines the fixed income, low volatility, low risk features of a traditional bond, particularly a government-issued bond, while incorporating some of the high volatility, high return dimensions of Bitcoin as an asset,” Pines detailed.

This heightened demand, in turn, would permit the government to issue the bond at a decreased interest rate.

If Bitcoin continues to appreciate over time with an operational Bitbond program, Pines is confident that a substantial portion of the US government’s fiscal situation could be improved.

The government’s engagement would also induce a significant psychological and market-moving effect.

Mitigating Bitcoin Risk Through Government Approval

A federal Bitbond initiative would necessitate the government to conduct significant Bitcoin acquisitions. While major corporations and Bitcoin treasury firms often make large purchases, the United States doing so would be historic. It would set new precedents.

Pines highlighted that the primary impact would not merely arise from direct purchasing volume, but rather from a more substantial shift in perception.

“It would truly be the government’s endorsement indicating they’re engaging in such an action. This would likely alter future expectations of Bitcoin’s price significantly, far exceeding the actual billion dollars in purchases,” Pines shared with BeInCrypto.

He elaborated that this governmental approval would aim to “de-risk” Bitcoin in the perception of the wider market. He observed that Bitcoin is frequently viewed under two extreme scenarios—it plummets to zero or evolves into a global store of value.

By confirming long-term viability and credibility, the US government’s strategic acceptance would considerably lessen the perceived chance of the “goes to zero” outcome.

Furthermore, Pines emphasized a distinctive aspect of the government’s stance, characterizing it as a “reflexive” effect:

“One of the unique things the government can do that few other debt issuers can is if it acquires Bitcoin as part of this debt issuance, Bitcoin is likely to rise in value. And if it already possesses it as part of its bond, it can generate the reflexive outcome that nearly no other issuer can achieve.”

However, the concern persists regarding how bondholders could protect themselves from Bitcoin’s price fluctuations if it drops significantly.

Addressing Bitcoin Volatility for Investors

The extent to which Bitcoin’s volatility influences a bondholder hinges on their risk tolerance. Selling bonds speculatively before maturity inherently carries risk. This situation is typical for any bond.

Nevertheless, for bondholders in search of stability, the adverse effects of holding a Bitbond until it matures are minimal to none. The capital initially invested is assured to be refunded by the US.

“The way we structure it, that downside risk is limited essentially to that of acquiring a standard bond. So, in the worst-case scenario, you merely receive what an ordinary 10-year Treasury security would yield, and you forgo the gains you might have anticipated from Bitcoin if Bitcoin underperformed,” Pines clarified.

Even in the event of a Bitcoin downturn, Bitbond’s configuration guarantees a minimum return or principal safeguard. Should it surge, an investor’s wealth appreciates.

A Gradual Strategy for an Unprecedented Concept

Executing an entirely new concept like Bitbonds within a traditionally cautious US financial environment introduces a unique set of hurdles.

Despite the compelling arguments supporting Bitbonds, Pines recognizes that such an uncharted idea necessitates a careful and gradual approach.

“We advise the government to genuinely investigate this concept, begin modestly with a pilot initiative, evaluate the market’s response, observe how it would trade, and then assess its success over time,” he stated.

Pines also clarified that Bitbonds are designed not to disrupt the existing financial framework but to function as a supplemental tool.

While the journey to establishing Bitbonds may be slow due to bureaucratic procedures and the necessity for in-depth analysis, the notion presents a unique opportunity to tackle the nation’s pressing fiscal dilemmas.