Reckoning with the New Cost of Capital

Link to the full Research in PDF

New Cost of Capital

"$1.4B Fartcoin¹ is what you get when the “risk-free” asset underpinning the entire banking & currency system is a bond issued by an insolvent government w/debt of 7x revenues, off-balance sheet liabilities of 20-30x revenues, peacetime deficits of 7% of GDP, that has not run a surplus in 24 years" - Luke Gromen

¹Interchangeable for any other speculative asset given the current underpinning of our financial system.

Introduction: Bitcoin as the New Hurdle Rate

It defies conventional logic to conclude it is possible to earn more capital without taking risk. The current monetary framework which proposes the “risk free rate” as being the 10 year treasury yield, is inconsistent with logical and analytical reasoning.

In the wake of unprecedented monetary expansion and geopolitical financial shocks, investors are re-evaluating what truly constitutes a "risk-free" asset and the very benchmark for returns. The traditional cost of capital framework, built on the assumption that government bonds (like U.S. Treasuries) are virtually risk-free, is being challenged by realities of fiat currency debasement and sovereign risk.

Massive growth in fiat money supply and episodes such as the freezing of Russia’s reserve assets have underscored that holding dollars or treasuries is not as riskless as once thought.

In parallel, a new alternative has been rising from the fringes to the mainstream: Bitcoin.

No longer viewed merely as a speculative asset, Bitcoin is increasingly seen by sophisticated investors and corporates like Paul Tudor Jones, Stanley Druckenmiller, Tesla, and Figma as a compelling store of value. This report explores how Bitcoin’s emergence is prompting a fundamental rethinking of the cost of capital, with profound implications for institutional investors, corporate treasuries, and capital allocators across the board.

The Erosion of the “Risk-Free” Benchmark

Despite the notion that allocating capital to an investment has risk, the 10-year treasury yield has been the default for investors to consider the risk free rate. However, some investors are re-evaluating their positions due to the following assumptions:

Geopolitical and Confiscation Risks: The sanctity of sovereign assets was called into question by the extraordinary sanctions related to the Russia-Ukraine conflict. In 2022, the U.S. and allies froze about $300 billion of Russia’s central bank reserves held abroad. For international investors and sovereign wealth funds, it underscored that dollar assets carry political risk; in extreme cases, holdings can be seized or frozen by fiat. The episode prompted questions globally: if even a central bank’s dollar reserves can be locked up, how risk-free are any fiat-denominated claims?

Implicit Default via Money Printing: The United States, for example, carries over $36 trillion in debt without considering unfunded liabilities like social security, medicare and medicaid. Servicing this burden without painful austerity or default means resorting to the printing press. The result is a slow debasement of the currency and a transfer of real value from creditors to debtors. Paying off bonds with newly created, diluted dollars is equivalent to a partial default on the debt. Thus, investors in “safe” government bonds face a stealth erosion of their wealth over time when large deficits are financed by central banks.Source: St. Louis Federal Reserve

When analyzing the growth rate of the M2 money supply, and the rate of return on the 10 year treasury yield, it is quite obvious that the 10-year treasury yield over a long time horizon, continues to underperform the growth rate of money, which is effectively subsidizing the “returns” on the 10 year yield.

Over 1959–2025 (the largest sample of reliable data), M2 money stock grew about 6.8% per year on average, whereas 10-year Treasury yields averaged around 5.8%. In other words, the rate at which the money supply expands (which often correlates with inflation over time) has tended to exceed the return on “safe” 10-year Treasuries. This implies that simply holding cash or risk-free bonds usually won’t outpace the expansion of money (and the inflation it eventually fuels), the “risk free” return is actually negative in real terms over a long time horizon.

The Historical Opportunity Cost

For most of recorded history, gold served as the de‑facto risk free rate. Its scarcity, rooted in the impossibility of synthetic production and the high marginal cost of mining, made gold an effective long‑term store of value. Yet gold’s physical properties eventually proved a liability. Large‑scale commerce demanded low‑friction final settlement, and gold’s weight, security expense, and indivisibility imposed prohibitive transaction costs. These frictions encouraged the proliferation of paper claims that far exceeded the metal available for redemption; verifying those claims at scale was both slow and expensive.

To solve the settlement bottleneck, the world migrated to fiat currency initially pegged to and theoretically redeemable for gold. Over time, however, monetary authorities expanded the supply of paper claims well beyond underlying reserves, culminating in the formal suspension of convertibility. Although gold retained inflation‑hedging appeal, its inability to function efficiently as a base‑layer settlement asset ultimately ceded the role of opportunity‑cost benchmark to fiat money, setting the stage for today’s search for a digitally native, scarcity‑based alternative.

Bitcoin’s Emergence as the New Benchmark

Out of the fraud and government bailouts of large financial firms in the wake of the financial crisis, Bitcoin emerged as a digital asset with a provably finite supply and a design explicitly resistant to inflationary debasement. Its core properties (a capped 21 million supply, decentralized issuance, and censorship resistance) position it as a better version of digital gold. The CEO of BlackRock, Larry Fink, now even touts Bitcoin as “digital gold” and a potential “safe haven, indestructible money” for investors seeking to hedge inflation. This is important, because prior to the last century and a half, gold has been considered the most important and widely accepted money in society, although ultimately failed as a money due to issues with respect to portability and divisibility.

Beyond these sound-money attributes, Bitcoin’s ability to attract capital has been nothing short of phenomenal. Over the past decade it has been the single best-performing asset class in the world. In fact, in eight of the past eleven years, Bitcoin delivered the highest annual return among major asset classes. An asset that started with no trading volume or market capitalization in 2009 reached a total valuation of over $2.4 trillion by mid-2025.

This track record has introduced a pivotal question in personal households and financial boardrooms: “If my portfolio or fund can’t beat Bitcoin’s performance, why not just hold Bitcoin instead?” What sounds like a thought experiment is now being asked in earnest. Bitcoin’s rise is forcing investors to reconsider their hurdle rate (the minimum acceptable return on an investment).

Unlike equities, bonds, or even gold held through custodial claims, Bitcoin is a bearer asset with no issuer or performance counterparty. Its monetary policy is fixed and enforced by open‑source consensus, eliminating default, dilution, or managerial‑execution risk. Settlement is direct on a public blockchain, independent of banks, clearing houses, or sovereign discretion, so holders are not exposed to the solvency, governance, or policy decisions of others. In effect, Bitcoin substitutes cryptographic guarantees for third‑party promises, offering investors a uniquely counterparty‑independent store of value whose remaining risks are systemic (protocol integrity, long‑term adoption) rather than credit‑ or management‑related.Opportunity Cost & Counterparty Dependencies

Although Bitcoin itself carries no issuer or credit risk, securing the asset introduces a distinct layer of custodial risk. As a bearer instrument, loss or theft of private keys is irrecoverable; estimates suggest that roughly one‑quarter of all mined Bitcoin is permanently lost or has been stolen or hacked, dampening broader adoption.

Industry‑wide standards are therefore critical. Multi‑Institution Custody (MIC) distributes signing authority across independent, regulated entities and is poised to become the dominant custody model. By reducing the single‑point‑of‑failure risk and adding institutional‑grade controls, MIC will increase the certainty and security needed for Bitcoin to proliferate as the new opportunity cost benchmark.

Bitcoin on Corporate Balance Sheets: A New Unit of Account

A number of companies have started to consider their returns to shareholders versus the opportunity cost of simply holding Bitcoin. The poster child of this movement is MicroStrategy, whose CEO Michael Saylor famously converted the company’s cash into Bitcoin starting in 2020, and furthered its Bitcoin holdings through financial engineering.

The results have been remarkable. Since August 2020, MicroStrategy’s stock price has skyrocketed by roughly 1,620%, outpacing Bitcoin’s ~426% gain in that period and leaving the S&P 500 (up ~73%) in the dust.

More fundamentally, companies like MicroStrategy are introducing new performance metrics denominated in Bitcoin. In essence, the metrics ask: How much Bitcoin does each share represent, and is that amount growing over time? This marks a striking shift in corporate mindset: prioritizing the accumulation of Bitcoin (a hard asset) over accumulation of dollars. MicroStrategy’s strategy is to issue equity or debt and use the proceeds to buy additional Bitcoin, continuously increasing its Bitcoin-per-share. The logic is simple: if the firm can expand its BTC holdings faster than Bitcoin’s price appreciates, shareholders benefit (relative to just holding Bitcoin directly); if it cannot, investors always have the option to hold Bitcoin themselves. In effect, the company explicitly acknowledges Bitcoin as the performance yardstick to beat.

This concept is only natural to adopt for investors given the preference of sound money over soft money. As such, we are in the very early innings of private investors being unwilling to offer capital to companies who cannot outperform Bitcoin. This is happening from angel investors to small funds, and founders, who are unwilling to spend their own time and capital on an endeavor which will yield them less Bitcoin than if they had just sat on their capital. Existing businesses are starting to take another look at each of their business lines and capital expenditures and evaluating if the capital could be better used just buying Bitcoin. The natural progression is more capital efficient businesses over time.

Implications for Investors and Capital Allocators

If Bitcoin is indeed becoming the new benchmark for return and value preservation, the implications for the investment industry are enormous. Venture capital, private equity, and asset management all must grapple with a world where the opportunity cost of capital is no longer the near-zero yield of a T-bill, but rather the significant upside of Bitcoin. Institutional investors – the LPs who fund venture and private equity firms – are starting to ask: “Why should we lock up capital in a fund for 10+ years if simply holding Bitcoin might yield as much or more?”

Consider that a typical VC or PE fund might target ~20% annual returns for its limited partners. If those investors believe Bitcoin itself could appreciate around 25% per year on average (a figure below its historical trend but plausible going forward), then the fund’s target return fails to clear the hurdle. The LP would have been better off just buying Bitcoin. In plain terms, even if Bitcoin’s future returns are only half as strong as historical performance, it would still outshine most traditional assets. When investment committees lay out performance comparison tables, Bitcoin stands so far ahead that almost every other asset class looks underwhelming by comparison.

For fund managers, this dynamic raises the bar. They may need to set higher return targets or find ways to generate real alpha above Bitcoin just to attract capital. We will see funds explicitly benchmarking against Bitcoin to prove they add value beyond a passive Bitcoin hold. Those that cannot beat Bitcoin’s performance risk seeing capital flow elsewhere. The default stance for many investors could become: “If you can’t beat Bitcoin, you might as well join it.” This will force managers to answer: What can you deliver that I can’t get simply by owning Bitcoin?

For startup founders, the opportunity cost of taking outside capital has risen – if a founder already holds Bitcoin, giving up equity is only worthwhile if the business can grow faster than their Bitcoin would have. Founders may become more selective about fundraising or explore alternatives to equity dilution.Finally, there’s a philosophical shift in what constitutes a “risk-free” asset. In traditional finance, government bonds (like the 10-year U.S. Treasury) are viewed as risk-free because they guarantee nominal repayment by the state. But that guarantee doesn’t protect against inflation eroding real value. Bitcoin flips this script by offering a fixed supply and resistance to debasement, even though its price in fiat terms can fluctuate. In effect, Bitcoin provides certainty in its monetary policy, you know exactly how many BTC will ever exist and on what schedule, whereas fiat bonds provide certainty in nominal payouts but uncertainty in real purchasing power. Some argue that this hard-money dynamic will raise the global cost of capital: when the baseline asset (money) tends to appreciate due to scarcity, investors demand higher returns on other investments to justify taking risk. Over time, capital may be allocated more judiciously.

In summary, Bitcoin’s emergence as a benchmark asset is transforming norms across the financial landscape. It has set a new, higher opportunity cost of capital, prompting companies and investors alike to rethink how they measure success and allocate resources. Now every allocator considering an investment must answer the question: “Why not just hold Bitcoin instead?” And increasingly, if a compelling answer is lacking, capital will flow to that provably scarce, globally accessible asset which has been busy rewriting the rules of investment.

Conclusion

The investment landscape is undergoing a paradigm shift. Reckoning with the new cost of capital means acknowledging that the old “safe” choice, holding cash or Treasuries, may be far riskier in real terms than widely appreciated, and that a new asset has entered the arena as a formidable benchmark. Bitcoin’s maturation from a fringe asset to a macroeconomic cornerstone is prompting investors to recalibrate their compasses.

Institutional money managers, corporate CEOs, venture capitalists, and even nation-states will need to grapple with the implications of a world where Bitcoin is the benchmark.

Crucially, this shift does not imply an overnight abandonment of traditional finance or a zero-sum replacement of dollars with Bitcoin. Rather, it is a gradual realignment of expectations and strategies. The most sophisticated investors have already quietly adjusted, setting higher hurdle rates and demanding truly exceptional prospects for deploying capital outside of Bitcoin. We see it in how companies like MicroStrategy operate with Bitcoin as their guiding star, and in how asset managers like BlackRock acknowledge Bitcoin as a permanent fixture of the financial ecosystem. Over time, what starts at the innovative edges often migrates to the core. If Bitcoin continues on its trajectory, offering a blend of scarcity-driven growth, liquidity, and resilience to inflation, it is likely to cement its role as a fundamental reference point for investors.

The takeaway for institutional investors is clear: the goalposts for acceptable returns are moving. In this new era, underperforming the debasement-proof asset (Bitcoin) could equate to destruction of wealth in real terms. In practice, this means more portfolios holding Bitcoin, more corporate treasuries diversifying into it, and more investment committees asking the Bitcoin question in every deployment of capital. The cost of capital, that critical threshold for go/no-go decisions, is being rewired to a higher standard anchored by Bitcoin’s performance.

Author: Early Riders