Bitcoin Is The Hurdle Rate
Link to the full Research in PDF
The hurdle rate represents the minimum acceptable rate of return that a project or investment must achieve to be considered viable. Traditionally, when a project fails to meet this threshold, it is deemed an inefficient use of capital and should be rejected. Investment managers have historically calculated the hurdle rate as the “risk-free rate” plus a “market risk premium.” This report examines the limitations of this conventional approach and presents Early Riders’ alternative perspective.
Introduction: Bitcoin Is The Hurdle Rate
Risk Free Rate: Traditional investment managers consider long-term government bonds, particularly the 10-year U.S. government bond, as the “risk-free rate” due to its highly liquid market. The conventional wisdom suggests this instrument typically trades at the expected inflation rate over the next decade.
Market Risk Premium: This component represents a subjective premium added to the risk-free rate to match the return rate of comparable investment alternatives.
Why is the Hurdle Rate Necessary?: The concept of a hurdle rate emerged primarily due to the continuous erosion of fiat currency purchasing power, driven by the expanding dollar supply. In a system without currency debasement, the imperative to invest merely to maintain pace with inflation would be unnecessary.
Bitcoin as the Hurdle Rate: For individuals and organizations operating on a Bitcoin standard, Bitcoin itself serves as the obvious hurdle rate. The foundation of Bitcoin’s role as a hurdle rate lies in its fundamental characteristics. Its finite supply ensures that no dilution of value can occur through additional issuance. The permissionless nature of the network allows anyone to acquire and hold Bitcoin without restrictions.
These features guarantee that investors can maintain their proportional ownership over time without concern for debasement. Unlike traditional financial systems where the time value of money plays a crucial role, Bitcoin offers an alternative paradigm where this consideration becomes largely irrelevant.
Investors who have held both Bitcoin and traditional assets through a four-year cycle have experienced this reality firsthand. These market participants naturally evaluate their portfolio performance against the opportunity cost of allocating all capital to Bitcoin. This comparison has become an intuitive benchmark for measuring investment success.
Operating with Bitcoin as the Hurdle Rate: Any individual purchase (i.e. cars, nice clothes, expensive dinners), investment decision, or company expense (i.e. hiring, launching a new product / service, or capital expenditures) should be considered against the marginal utility and extremely attractive benchmark of holding the capital in Bitcoin for the long-term.
Personal Hurdle Rate: The hurdle rate for every self-interested individual when considering an investment that will yield financial returns should be benchmarked versus Bitcoin. Bitcoin is clearly the best performing asset over the past decade, and its unique properties make it the perfect hurdle rate. Outside of investment decisions, every decision an individual makes, including spending resources like capital and time should be weighed against the marginal utility of acquiring more Bitcoin.
Bitcoin as the Investment Hurdle Rate
Over most four year periods, including most recently, Bitcoin has been the dominant performer across asset classes. Its annualized returns surpassed traditional investments by significant margins, outperforming U.S. large-cap equities, bond market funds, cash equivalents, and gold by more than 40%. This outperformance becomes even more striking when examined over longer time horizons.
This exceptional performance has fundamentally altered the investment landscape. Institutional investors have been compelled to recognize Bitcoin as a legitimate asset class, leading to a widespread reassessment of traditional investment benchmarks and opportunity costs. As Bitcoin continues to demonstrate superior long-term returns, we observe a growing trend of capital migration. Fund managers, individual investors, and limited partners increasingly redirect their investments from underperforming traditional assets toward Bitcoin allocations.
When denominating major asset classes such as the S&P 500 (SPY), bonds, cash equivalents, and gold in Bitcoin rather than dollars, a stark reality emerges: these traditional investments have experienced substantial value deterioration relative to Bitcoin. This perspective transformation suggests that investors should reconsider their fundamental approach to portfolio construction, potentially viewing Bitcoin not merely as an alternative asset, but as their primary investment benchmark.
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).
We believe two types of companies 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.
At Early Riders we believe that it is possible to outperform Bitcoin by investing in early stage companies with earnings power growth, Bitcoin treasury management, and limited balance sheet liabilities.
Conclusion
Bitcoin’s fixed supply and permissionless nature, and incredible returns create a unique environment where investors can maintain perpetual proportionate ownership, establishing it as an ideal hurdle rate. As Bitcoin’s network effect continues to grow and its integration into financial markets deepens, its position as the definitive hurdle rate will likely become increasingly mainstream.
About Early Riders: Early Riders is a bitcoin-denominated venture firm committed to backing and building companies that recognize the strategic value of integrating bitcoin into their operations. Early Riders aims to accelerate the adoption of bitcoin-centric business models, driving growth and innovation across industries. Early Riders raises its fund in Bitcoin, holds its treasury in Bitcoin, and after exiting its investments, returns Bitcoin to investors. We have created an incentive model that aligns Early Riders with limited partners and founders as all parties are aligned Bitcoin is the hurdle rate.
Author: Early Riders