Bitcoin: Between inflation and high rates, returns under pressure

Inflation is pushing many investors to seek assets capable of preserving their purchasing power over the long term. Bitcoin occupies a special place in this debate due to its limited supply, capped at 21 million units. However, holding this asset does not guarantee a positive return. Borrowing costs, forgone income, and fees on derivatives can reduce gains. When rates remain high, these expenses become a determining factor in assessing the actual profitability of an investment.

In brief

• Bitcoin can serve as a potential hedge against inflation, but its price does not guarantee any positive return.
• Borrowing costs reduce gains and can lead to losses, even when the price remains stable.
• Leverage amplifies potential profits but also increases losses in case of a downturn.
• Futures contracts sometimes include a premium that weighs on the profitability of long positions.
• Perpetual contracts add variable financing fees and margin requirements.
• Interest rates and holding costs can compromise the profitability of a strategy aimed at preserving purchasing power.

Bitcoin: three investment strategies, three different outcomes

The cost of an investment depends as much on its financing as on market developments. Two people can buy the same asset at the same price and hold it for the same period. However, their financial outcomes can diverge significantly depending on the means used to make that purchase. The gap becomes particularly visible when one invests their savings while the other borrows to increase their exposure.

First, let's consider the case of an investor who allocates $10,000 of their savings to this asset. They buy their units outright and do not incur any debt to finance their operation. As long as they maintain their position, they do not pay any interest to a lender. If the price remains stable for a year, their capital theoretically retains its initial value, before any fees and potential taxes.

However, this situation does not mean that the investment carries no economic cost. The saver forgoes the income they could have earned with a paid investment. The yield on three-month U.S. Treasury bills reached 4.26% on October 13, according to the Federal Reserve's report on interest rates. On $10,000, this annualized rate represents $426 in potential income before taxes. This amount serves as a benchmark for measuring the opportunity cost of an investment that pays no interest.

A second investor also has $10,000 but borrows an identical amount at a hypothetical annual rate of 8%. They thus engage $20,000 in the market while maintaining a debt of $10,000. If the price does not change over the year, selling their assets brings them $20,000. After repaying the borrowed capital and the $800 in interest, they are left with $9,200, before other fees.

The difference becomes clear when the two strategies follow opposite trajectories. A 10% increase raises the value of the cash position to $11,000, compared to $22,000 for the leveraged position. After repaying the debt and interest, the second investor retains $11,200. Conversely, a 10% decrease reduces their net capital to $7,200, compared to $9,000 for the cash investor. Thus, leverage amplifies potential gains but also exacerbates losses.

Borrowing Costs Can Erase Some Gains

Debt alters the performance level required to make an investment profitable. In the previous example, the borrower must achieve a 4% increase just to cover their annual interest of $800. This threshold does not include transaction fees or potential taxes. To achieve a result exceeding the indicative income of $426 associated with Treasury bonds, the necessary increase reaches about 6.13%. Therefore, the price must rise sufficiently to offset the financing and the return the investor forgoes.

This constraint becomes more significant when interest rates rise. An investor financing their purchase through debt must allocate part of their resources to interest payments. Even if the market moves in the expected direction, these expenses reduce the final profit. In contrast, a person using only their savings avoids this recurring financial burden. However, they remain exposed to price fluctuations and the opportunity cost of their capital.

Risk is not limited to the total amount paid to the lender. The terms of the credit can also determine how long the investor can maintain their position. A rapid market decline may prompt the lender to demand additional collateral or liquidate the affected assets. In this case, the investor may have to sell before the price returns to its initial level, risking a permanent loss, even if their long-term outlook proves correct.

Leverage thus introduces a major difference between the theoretical performance of an asset and the actual result obtained. A calculation based solely on the purchase price and selling price ignores interest, margin constraints, and liquidation risks. These factors can impact the outcome well before the end of the envisaged period. Financing must therefore be included in the analysis from the outset, rather than appearing as a secondary expense. This distinction helps compare strategies that nonetheless have similar market exposure.

Bitcoin: Futures Contracts Sometimes Conceal Financing Costs

Futures contracts allow for a position to be taken on an agreed price today for a future settlement. Unlike a cash purchase, this operation can incorporate a premium directly into the entry price. This difference, known as the futures contract basis, is an important element for assessing the real cost of exposure. It can complicate analysis when the investor focuses solely on cash price fluctuations.

Imagine that the cash price reaches $80,000, while a contract maturing in 90 days trades at $81,200. The difference represents a premium of $1,200 per unit, or 1.5% of the cash price. Annualized, this difference equates to about 6.08%. If the cash price remains at $80,000 until settlement, the contract must converge to this level. A long position then incurs a loss related to the disappearance of the initial premium.

The trader does not necessarily need to borrow money to cover this cost. The premium is already included in the price at which he opens his position. This particularity explains why the absence of apparent debt does not always mean that the exposure carries no financing cost. Futures prices also reflect investors' demand for leveraged positions. They can also reflect the constraints that participants face when using derivatives.

Interest rates play a role in this balance. An operator who buys spot and simultaneously sells a more expensive contract may need to borrow to finance his initial purchase. When dollar financing becomes more expensive, this expense can alter the economic interest of the operation. However, the futures premium and the interest on a loan do not automatically represent the same cost twice. A correct analysis must distinguish each component to avoid counting the same expense twice.

The comparison also requires consistent data. Spot prices and futures prices must correspond to observations that are close enough in time. Otherwise, the calculated gap may not reflect a transaction that is truly accessible to investors. This precaution is particularly important when markets are moving quickly. A premium observed from delayed data can give a misleading picture of trading conditions. The calculation must therefore take into account the prices available at the time the strategy would have been executed.

Perpetual Contracts Add Variable Fees

Perpetual contracts differ from fixed-term contracts because they do not have an expiration date. Platforms use funding payments to bring their price closer to a reference market. These payments can evolve according to trading conditions and the balance between buying and selling positions. The investor must therefore monitor their evolution throughout the duration of his position, rather than retaining a single rate for the entire operation.

According to the rules published by Deribit, a positive funding rate means that long positions pay short positions. When the rate becomes negative, short positions pay long positions. The direction of the payment thus depends on the conditions observed in the market. This mechanism differs from a traditional loan, whose interest rate follows the terms set by the contract. It also means that a funding rate does not necessarily remain stable during a holding period.

The costs of credit and those of perpetual contracts can evolve in different directions. Borrowing rates may remain high while the funding of perpetual contracts becomes negative during a market downturn. An investor cannot therefore deduce the total cost of his position from a single indicator. He must examine the financing conditions applicable to his instrument and his platform. This approach allows for a better understanding of the expenses that influence the final return.

Collateral and margin requirements complement this equation. Depending on the platform's conditions and the account's financing mode, collateral can generate interest. Transaction fees add to funding payments and any borrowing costs. Moreover, margin requirements can change and force the trader to mobilize more capital. To accurately measure profitability, it is therefore necessary to integrate these expenses over the actual holding period.

The choice of financial product thus determines part of the risks borne by the investor. A cash position financed with equity does not adhere to the same constraints as a leveraged perpetual contract. In the latter case, variable fees and margin requirements can accelerate available losses. Profitability then depends on the market price, but also on the conditions for maintaining the position. These differences must be clearly apparent before any comparison between several strategies.

Bitcoin: A Limited Supply Does Not Guarantee Protection Against Inflation

The argument in favor of this asset is notably based on the limit of its supply, set at 21 million units. Some investors believe that this scarcity can help preserve their purchasing power over the long term. Michael Saylor is among those who have placed this argument at the heart of their investment strategy. However, a limited supply does not guarantee a price increase when consumer prices rise. Scarcity is a characteristic of the asset, not a promise of return.

Inflation measures the change in the price of goods and services purchased by consumers. The return on an asset, on the other hand, depends on the price that future buyers will be willing to pay. These two mechanisms can interact, but they do not function in the same way. An increase in the consumer price index does not therefore prove that an asset will automatically progress. Investors must distinguish their objective of protecting purchasing power from the performance actually achieved.

Inflation-protected U.S. Treasury securities, known as TIPS, have a different mechanism. Their principal adjusts according to changes in the relevant inflation index, in accordance with the terms of the security. The real yield on ten-year inflation-indexed Treasury bonds reached 2.88% on October 13. This figure provides a point of comparison for investors evaluating several solutions. However, it does not guarantee a gain in the event of early resale.

Indeed, indexed bonds remain exposed to market rate fluctuations. If yields rise, the price of a security may decrease, resulting in a loss for someone who sells it before maturity. Each asset class therefore presents its own yield conditions and specific risks. Investors must compare potential income, liquidity needs, and price fluctuations. An analysis limited solely to inflation is not sufficient to determine which strategy best meets their objectives.

A limited supply does not exempt one from examining the financial conditions of the market. Even if an investor anticipates long-term appreciation, they must be able to bear the necessary costs to maintain their position. High borrowing rates can reduce their ability to wait for a favorable development. Conversely, an investor who finances their purchase with savings avoids interest related to debt. However, they still face price fluctuations and the opportunity cost associated with interest-bearing investments.

Financing Becomes a Decisive Factor for Profitability

The analysis of different strategies shows that yield does not depend solely on the final price. A cash investor bears market risk and the opportunity cost of their capital. A borrower adds interest and liquidation risk to their potential expenses. A trader using derivatives must also monitor premiums, financing payments, fees, and margin requirements. These differences can produce very divergent results, even when initial expectations are identical.

The holding duration plays a central role in this comparison. A purchase financed by borrowing can become more expensive as interest accumulates. A position in a perpetual contract, on the other hand, can generate variable payments throughout its duration. The accumulated fees then reduce the available return, while a sharp decline can trigger a liquidation before any recovery. Therefore, the price at which the asset ends the period does not always tell the whole story of the investment.

Calculations must also avoid confusing distinct expenses. The premium embedded in the price of a futures contract corresponds to a gap between two market prices. The interest on a loan used to finance collateral constitutes another expense. Adding them together without verifying their nature can lead to an overestimation of the total cost. Conversely, forgetting one of these elements can give an overly favorable view of the expected return. An accurate assessment thus requires detailing the financial flows associated with each operation.

Investors must finally consider their ability to mobilize additional funds. A strategy that seems profitable on paper can become difficult to maintain when markets evolve rapidly. Margin calls and collateral requests can impose immediate decisions. An investor who does not have the necessary liquidity risks exiting their position at the wrong time. This constraint distinguishes the theoretical return of a strategy from its feasibility under real market conditions.

In the future, the evolution of interest rates and financing costs will remain an important element for evaluating strategies related to digital assets. If credit remains expensive, positions financed by borrowing will need to generate sufficient gains to offset their charges. Spot investors will continue to arbitrate between the potential for upside and the income they forgo. As for users of derivative products, they will need to monitor premiums, payments, and liquidation risks. The ability to maintain a position during a difficult period could thus be as important as forecasting the final price. Ultimately, BTC may fulfill a search for scarcity. However, its ability to preserve purchasing power will also depend on the price paid, the mode of financing, and the time during which the investor can maintain their exposure.