Bitcoin as the Corporate Hurdle Rate
In conventional finance companies are evaluated against their unique cost of capital. This metric comprises both cost of debt and cost of equity, with investors treating each component as a distinct hurdle rate. While individual companies maintain specific capital costs, their equity performance is predominantly benchmarked against the S&P 500. Companies that consistently underperform this index typically experience capital reallocation as fund managers shift their investments to better-performing alternatives. Under a Bitcoin standard, this dynamic would evolve: companies outperforming Bitcoin would attract increased investment, while those falling short would face reduced funding.
Bitcoin has outperformed most publicly listed corporations, as evidenced by its performance relative to SPY, as well as Bitcoin proxies, like Coinbase, and WGMI (an ETF comprising publicly listed Bitcoin miners). This outperformance can be attributed to two primary factors: these alternatives maintain substantial cash positions, and lack of commitment to maximize their Bitcoin holdings. The underperformance stems from either management's reluctance to evaluate every investment decision against Bitcoin holdings or the absence of sustainable competitive advantages.
MicroStrategy presents a notable exception, having outperformed Bitcoin over the 2020-2024 period through aggressive accumulation of Bitcoin holdings; this was achieved by a combination of initial treasury purchases and positive operating cash flows. What transpired was unique in that Microstrategy’s equity increased in volatility, a deep options market emerged, and opened the door for additional types of debt issuances (e.g., convertibles) at low rates. However, we anticipate that such financial engineering advantages will diminish as markets become more efficient at pricing Bitcoin. Additionally, it is worth noting a MicroStrategy investment carries additional risk layers beyond direct Bitcoin exposure and strong financial engineering execution (e.g., technology, execution, management).
Early Riders we believe two types of companies that have the potential to outperform Bitcoin. The first archetype are companies that can significantly grow their earnings, cash flow, and Bitcoin holdings over time, while limiting their liabilities’ growth. The second archetype of companies that can outperform Bitcoin are those that can utilize financial engineering to take advantage of information arbitrage and the mispricing of Bitcoin in capital markets. At Early Riders we aim to address the former. The latter can be attractive, though we believe over time capital markets will become more efficiently priced, and it will be increasingly difficult to use financial engineering to outperform Bitcoin.
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