trey on Nostr: When speaking about bitcoin's return profile vs. other assets, a lot of people use ...
When speaking about bitcoin's return profile vs. other assets, a lot of people use the term "cost of capital" when I think they really mean "hurdle rate".
Cost of capital describes the interest rate you pay to borrow a financial asset, generally to fund other positions. It's normally used in the context of an arbitrage between two different rates. For instance, an investor may borrow short-term and lend long-term to take advantage of a difference in yields across an interest rate curve. A business may borrow operating capital using a line of credit (LOC) from a bank, which is being invested in revenue-driving activities that are used in part to pay interest on the borrowed capital. The rate paid on borrowed money is the cost of capital, and an investor aims to produce higher returns than this cost in order to produce a profit.
While the cost of capital may be a factor in determining an investor's hurdle rate, these are not the same things. A hurdle rate is the baseline rate of return required by a particular capital allocator to make an investment profitable and/or worthwhile. If an investor is borrowing money to make an investment, then his cost of capital is the starting point for his hurdle rate. However, it is not the only factor. A hurdle rate may also take into account other fees and operating expenses. It also takes an assessment of risk into account. A riskier investment implies a higher hurdle rate to compensate for the higher probability that an investment sours.
A hurdle rate can also be defined by establishing a benchmark for comparing a specific investment vs an index. For instance, when investing in the stock market, the S&P 500 is often used to define the hurdle rate, or at least as a starting point for one. Buying a particular company's stock may only make sense if it can meaningfully outperform the index. Otherwise, you might as well buy the index and go to the beach. And if another investment can't match the returns of the index, much less beat it, you're missing out on opportunity. What we're really talking about is not the "cost of capital", but the "opportunity cost of capital" deployed to inferior assets.
When talking about bitcoin's return profile, I believe "hurdle rate" is the more appropriate term. When thinking about long duration assets, bitcoin's returns should be used as the hurdle rate to determine if any other allocation opportunities make sense. If you can't beat bitcoin's return over a 4+ year period, why bother? Just stack sats and chill. 😎
Thank you for coming to my TED talk!
Cost of capital describes the interest rate you pay to borrow a financial asset, generally to fund other positions. It's normally used in the context of an arbitrage between two different rates. For instance, an investor may borrow short-term and lend long-term to take advantage of a difference in yields across an interest rate curve. A business may borrow operating capital using a line of credit (LOC) from a bank, which is being invested in revenue-driving activities that are used in part to pay interest on the borrowed capital. The rate paid on borrowed money is the cost of capital, and an investor aims to produce higher returns than this cost in order to produce a profit.
While the cost of capital may be a factor in determining an investor's hurdle rate, these are not the same things. A hurdle rate is the baseline rate of return required by a particular capital allocator to make an investment profitable and/or worthwhile. If an investor is borrowing money to make an investment, then his cost of capital is the starting point for his hurdle rate. However, it is not the only factor. A hurdle rate may also take into account other fees and operating expenses. It also takes an assessment of risk into account. A riskier investment implies a higher hurdle rate to compensate for the higher probability that an investment sours.
A hurdle rate can also be defined by establishing a benchmark for comparing a specific investment vs an index. For instance, when investing in the stock market, the S&P 500 is often used to define the hurdle rate, or at least as a starting point for one. Buying a particular company's stock may only make sense if it can meaningfully outperform the index. Otherwise, you might as well buy the index and go to the beach. And if another investment can't match the returns of the index, much less beat it, you're missing out on opportunity. What we're really talking about is not the "cost of capital", but the "opportunity cost of capital" deployed to inferior assets.
When talking about bitcoin's return profile, I believe "hurdle rate" is the more appropriate term. When thinking about long duration assets, bitcoin's returns should be used as the hurdle rate to determine if any other allocation opportunities make sense. If you can't beat bitcoin's return over a 4+ year period, why bother? Just stack sats and chill. 😎
Thank you for coming to my TED talk!