Bitcoin: Between Inflation and High Rates, Yield Under Pressure

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

Bitcoin: Three Investment Strategies, Three Different Outcomes

The cost of an investment depends as much on its financing as on market evolution. Two people can buy the same asset at the same price and hold it for the same period. Yet, their financial results can differ greatly depending on the means used to make this purchase. The difference becomes particularly visible when one invests their savings and the other borrows to increase exposure.

Let us first consider an investor who dedicates 10,000 dollars of their savings to this asset. They buy their units outright and do not incur any debt to finance the operation. As long as they keep their position, they do not pay interest to a lender. If the price remains stable for a year, their capital theoretically retains its initial value before fees and possible taxes.

However, this situation does not mean that the investment is free of economic cost. The saver forgoes the income they could have obtained with an interest-bearing investment. The yield on the three-month U.S. Treasury bill reached 4.26% on October 13, according to the Federal Reserve interest rate report. On 10,000 dollars, this annualized rate represents 426 dollars 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 dollars but borrows an identical amount at a hypothetical annual rate of 8%. Thus, they commit 20,000 dollars to the market while maintaining 10,000 dollars in debt. If the price does not change during a year, selling their assets yields 20,000 dollars. After repaying the borrowed principal and 800 dollars of interest, they have 9,200 dollars left, before other fees.

The difference becomes clear when the two strategies follow opposite paths. A 10% increase raises the spot position value to 11,000 dollars, compared to 22,000 dollars for the borrowed position. After debt and interest repayment, the second investor retains 11,200 dollars. Conversely, a 10% decrease reduces their net capital to 7,200 dollars versus 9,000 dollars for the spot investor. Leverage thus amplifies potential gains but also accentuates losses.

Borrowing Costs Can Erase Part of the Gains

Debt changes the level of performance necessary to make an investment profitable. In the previous example, the borrower must record a 4% increase just to cover the annual interest of 800 dollars. This threshold does not include transaction fees or possible taxes. To achieve a result higher than the indicative 426 dollar income associated with Treasury bills, the needed increase reaches about 6.13%. The price must thus rise enough to compensate for financing and the yield the investor forgoes.

This constraint becomes even more significant when interest rates rise. An investor financing their purchase with 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. Conversely, someone using only their savings avoids this recurring financial charge. However, they remain exposed to price fluctuations and to the opportunity cost of their capital.

The total amount paid to the lender does not limit the risk. Credit terms can also determine how long the investor may hold the position. A swift market drop can prompt the lender to request additional collateral or to liquidate the concerned assets. In this case, the investor may have to sell before the price recovers its initial level. They risk suffering a definitive loss even if their long-term view later proves correct.

The leverage effect thus introduces a major difference between the theoretical performance of an asset and the actual result. A calculation based solely on purchase and sale prices ignores interest, margin requirements, and liquidation risks. Yet, these elements can impact results well before the end of the planned holding period. Financing must therefore be incorporated into the analysis from the start rather than appearing as an incidental expense. This distinction helps compare strategies that nonetheless present a similar market exposure.

Bitcoin: Futures Contracts Sometimes Hide the Cost of Financing

Futures contracts allow taking a position on a price agreed upon today for a later settlement. Unlike a spot purchase, this operation may include a premium directly in the entry price. This difference, called the futures basis, is an important factor in assessing the real cost of exposure. It can complicate analysis when the investor focuses solely on spot price variations.

Imagine the spot price reaches 80,000 dollars, while a 90-day maturity contract trades at 81,200 dollars. The gap represents a premium of 1,200 dollars per unit, or 1.5% of the spot price. Annualized, this difference amounts to about 6.08%. If the spot price remains at 80,000 dollars until settlement, the contract must converge to this level. A long position then suffers a loss related to the disappearance of the initial premium.

The trader does not necessarily need to borrow money to bear this cost. The premium is already included in the price at which they open their position. This peculiarity explains why a lack of apparent debt does not always mean the exposure carries no financing cost. Futures prices also reflect investor demand for leveraged positions. They may also indicate the constraints faced by participants when using derivatives.

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

Comparison also requires consistent data. Spot and futures prices must correspond to observations sufficiently close in time. Otherwise, the calculated gap may not reflect a trade truly accessible to investors. This precaution is especially important when markets move quickly. A premium observed from delayed data may give a misleading picture of trading conditions. Calculation must therefore consider prices available at the time the strategy would have been executed.

Perpetual Contracts Add Variable Fees

Perpetual contracts differ from fixed-maturity contracts because they have no expiration date. Platforms use funding payments to bring their price closer to a reference market. These payments can vary according to trading conditions and the balance between long and short positions. The investor must thus monitor their evolution throughout the holding period rather than assume a single rate for the entire operation.

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

Credit costs and perpetual contract fees can move in different directions. Borrowing rates can stay high while perpetual funding becomes negative during a market decline. Therefore, an investor cannot deduce the total cost of their position from a single indicator. They must examine financing conditions applicable to their instrument and platform. This approach helps better understand expenses influencing final returns.

Collateral and margin requirements complete this equation. Depending on platform conditions and account financing mode, collateral may earn interest. Transaction fees add to funding payments and possible borrowing costs. Furthermore, margin requirements may change, forcing the trader to commit additional capital. To measure profitability accurately, these expenses must be included over the actual holding period.

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

Bitcoin: A Limited Supply Does Not Guarantee Protection Against Inflation

The argument in favor of this asset notably rests on the limit of its supply, capped at 21 million units. Some investors believe this scarcity can help preserve their purchasing power in the long term. Michael Saylor is among those who have placed this argument at the center 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 changes in the price of goods and services purchased by consumers. The yield of an asset depends on the price future buyers are willing to pay. These two mechanisms can interact but do not work identically. An increase in the consumer price index does not prove that an asset will automatically appreciate. Investors must distinguish their goal of protecting purchasing power from the actual performance obtained.

U.S. Treasury Inflation-Protected Securities, called TIPS, have a different mechanism. Their principal adjusts according to changes in the relevant inflation index, per the terms of the security. The real yield at constant maturity of ten-year inflation-indexed Treasury bonds reached 2.88% on October 13. This data provides a comparison point for investors evaluating multiple solutions. Nevertheless, it does not guarantee a gain in case of early sale.

Indeed, indexed bonds remain exposed to market rate variations. If yields increase, a bond’s price can fall, causing a loss to one who sells before maturity. Each asset class thus presents its own yield conditions and specific risks. Investors must compare possible incomes, liquidity needs, and price variations. An analysis limited to inflation alone is insufficient to determine which strategy best meets their goals.

Limited supply also does not exempt examining market financial conditions. Even if an investor anticipates long-term appreciation, they must be able to bear costs necessary to maintain the position. High borrowing rates may reduce their ability to wait for favorable movements. Conversely, an investor financing their purchase with savings avoids debt-related interest. However, they remain subject to price fluctuations and opportunity costs of interest-bearing placements.

Financing Becomes a Decisive Factor for Profitability

Analysis of different strategies shows that yield depends not only on the final price. A spot investor bears market risk and opportunity cost of capital. A borrower adds interest and liquidation risk to potential expenses. A trader using derivatives must also monitor premiums, funding payments, fees, and margin requirements. These differences can produce very divergent results, even when starting expectations are identical.

Holding period plays a central role in this comparison. A purchase financed by borrowing can become more costly as interest accumulates. A perpetual contract position can generate variable payments throughout its term. Cumulative fees then reduce available yield, while a sharp drop may trigger liquidation before any recovery. The price at which the asset ends the period thus does not always tell the whole investment story.

Calculations must also avoid confusing distinct expenses. The premium embedded in a futures price corresponds to a gap between two market prices. Interest on a loan used to finance collateral constitutes another expense. Adding them without checking their nature can lead to overestimating total cost. Conversely, omitting one element may yield an overly positive view of expected return. Accurate evaluation thus requires detailing financial flows linked to each operation.

Investors must also consider their ability to mobilize additional funds. A strategy appearing profitable on paper may become difficult to sustain when markets move fast. Margin calls and collateral demands can force immediate decisions. An investor lacking necessary liquidity risks exiting a position at the wrong time. This constraint distinguishes theoretical yield of a strategy from its feasibility in real market conditions.

In the future, changes in interest rates and financing costs will remain important factors for evaluating strategies related to digital assets. If credit remains costly, debt-funded positions will need to generate sufficient gains to cover their charges. Spot investors will continue to arbitrage between upside potential and forgone income. Derivative users will have to watch premiums, payments, and liquidation risks. The ability to maintain a position during tough periods could thus matter as much as price forecasts. Ultimately, BTC can satisfy a search for scarcity. However, its purchasing power preservation also depends on price paid, financing method, and length of exposure.