It has been a challenging week for Bitcoin, with the price experiencing one of its steepest weekly percentage declines since late 2022. However, investors should remember that volatility is an inherent characteristic of Bitcoin. It is also worth recalling that late 2022 marked the bottom of the previous bear market, before Bitcoin went on to reach new all-time highs.
While Bitcoin’s performance this year has fallen short of many investors’ expectations, periods of weakness have historically been followed by phases of renewed growth. Since its inception, Bitcoin has repeatedly overcome significant market corrections, regulatory concerns and macroeconomic challenges, ultimately rewarding investors who maintained a long-term perspective.
In fact, a number of institutional investors and asset managers have published research demonstrating that, despite its volatility, a modest allocation to Bitcoin has historically improved the risk-adjusted returns of traditional portfolios. One commonly used measure of risk-adjusted performance is the Sharpe ratio, which assesses how much return an investment generates relative to the volatility experienced to achieve those returns. While Bitcoin has often been one of the most volatile assets available to investors, its long-term returns have historically been sufficiently strong that, when combined with traditional assets, it has often improved overall portfolio efficiency rather than detracted from it.
Personally, I have a high allocation to Bitcoin and Bitcoin treasury companies at approximately 100% of my portfolio. I have always been open about this and it is what I am comfortable with as I attach little value to most other asset classes including cash. But, whilst not offering financial advice, I do think that everyone should have an allocation to Bitcoin and Bitcoin treasury companies. For most, who do not share my high conviction, perhaps somewhere between 1% and 10% is sensible.
There is currently considerable discussion around perpetual preferred equities as what may become one of the most important capital markets instruments available to Bitcoin treasury companies. Given the recent movement in Bitcoin’s price, I thought it would be useful to explain these in the context of volatile price movements.
We have already reminded ourselves that Bitcoin is volatile. Despite that volatility, I believe it remains the best asset on which to build a corporate treasury. Equally, I believe that perpetual preferred equities represent one of the most attractive structures for raising permanent capital. It can appeal to yield-seeking investors while allowing the benefits generated from deploying that capital into Bitcoin to accrue to ordinary shareholders over time.
All forms of capital have a cost. With perpetual preferred equity, that cost is relatively straightforward to understand: the dividend commitment. The key question then becomes whether the return generated from the deployment of that capital exceeds its cost over time.
The Bitcoin treasury model is relatively simple in this regard.
For example, Strategy currently pays 11.5% on STRC and Strive pays 13% on SATA. Looking at Bitcoin’s historical performance, the compound annual growth rate over the last 3, 5 and 10 years has been approximately 39%, 15% and 59% respectively.
- £1 million invested three years ago would be worth approximately £2.26 million today.
- £1 million invested five years ago would be worth approximately £2.00 million today.
- £1 million invested ten years ago would be worth approximately £107 million today.
These figures illustrate an important point. While Bitcoin is volatile, the long-term historical growth rate has significantly exceeded the cost of capital represented by current perpetual preferred equity dividend rates.
Using the most conservative comparison above, if capital costs 13% per annum and the underlying asset compounds at 15% per annum, value is still being created over time. Of course, this is an intentionally simplified example and does not reflect all the complexities of a real corporate treasury model. However, it serves to illustrate the basic principle behind why a growing number of Bitcoin treasury companies view perpetual preferred equity as an attractive source of long-term capital.
Importantly, this approach seeks to minimise many of the challenges associated with other forms of financing while allowing a company to continue building its Bitcoin balance sheet, and increasing Bitcoin per share, over extended periods of time.
It is important to note that historical performance does not guarantee future results. The figures above are provided solely to illustrate the relationship between the cost of capital and Bitcoin’s historical long-term growth rates and should not be interpreted as a forecast of future Bitcoin performance.
On Friday last week, we held the inaugural Bitcoin Treasury Unconference. I have received a great deal of positive feedback since then, and we have now released the individual videos, along with photographs from the event, on our website for everyone to enjoy. We will be holding the event again next year and early bird tickets are already available via our website. Thank you to everyone who attended, spoke at or sponsored the event.
On Monday this week, we released two announcements.
Firstly, we updated the market regarding warrants exercised since the pre-IPO warrant window was opened. Today, there are just 8,075,600 of these pre-IPO warrants held by external investors. When we listed the business, and Bitcoin treasury companies were far less understood than they are today, these warrants formed an important part of our route to becoming a public company. I am pleased that the warrant overhang has now been substantially reduced.
The second RNS on Monday related to a proposed capital reduction and notice of general meeting. There has been speculation online regarding the reasons behind this proposal and I would encourage shareholders to refer to the official announcement for the company’s comments.
I would also like to ask every shareholder to vote their shares if they have not already done so. Whether you support or oppose a proposal, exercising your right to vote is an important part of being a shareholder. We hope that you will support this important resolution.
On Tuesday I had an update session with Squarebird, the business we acquired earlier this year using approximately 1% of our balance sheet enabling us to significantly grow our revenues. I am delighted with the progress they are making on growing the business and look forward to the hard work the team are putting into the projects developing into figures which will then be released in future updates we announce. We are lucky to have such a good business as part of our group.
For the remainder of the week, we made only two further announcements, both relating to updated TR-1 notifications from 210k Capital, LP. 210k have been a shareholder since the start of our journey and we are pleased to have Tyler Evans also on our board. These notifications were required because of our increased number of shares in issue and a change of ownership of their parent company. The quantity of shares held by 210k Capital has not changed; only its percentage ownership has changed. Under UK listing rules, significant shareholders must notify the company when certain percentage thresholds are crossed, and the company must then update the market accordingly.
Our team has been working exceptionally hard this week. Our focus remains on driving forward the various projects that we are working on, and I appreciate that it can sometimes be frustrating for shareholders not to know everything that is happening behind the scenes. However, we will disclose developments at the appropriate time and, in my view, the direction in which we are heading is the right one for the success of the business.
We are fortunate to have one of the most supportive shareholder communities in the Bitcoin treasury space. We will continue pushing forward every day, with speed, discipline and precision, as we work to build what we believe Smarter Web can become.
Thank you for your continued support; I never take that support for granted. We are working hard every day to justify the trust you place in us, and I look forward to updating you on our progress as we move forward.
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