Thread
There is very clearly an imbalance in capital disproportionately allocated to “crypto” and underweight the Bitcoin ecosystem. This creates tremendous asymmetry for investing in Bitcoin companies, which has not yet been appreciated by most
Most investors aren’t yet thinking about investing in Bitcoin companies because the broader market still does not understand bitcoin. That creates huge pricing upside in BTC but also underlies the impulse to only hold the asset and not invest in the “picks and shovels” around it
It makes sense to invest in Bitcoin infrastructure, in addition to holding BTC. First, unless you have 100% exposure to BTC, investing in the ecosystem should be evaluated relative to all other allocations in a portfolio (public markets, real estate, PE, etc.), not strictly BTC
Second, investments in Bitcoin companies can in fact outperform BTC. Successful investments in Bitcoin companies have 100x+ return potential over a shorter time frame, unlikely to be matched by BTC over the same horizon (even if we all believe in huge long term BTC upside). How?
Investments in Bitcoin companies that earn and build bitcoin on their balance sheet (e.g. a bitcoin miner) offer the opportunity to outperform bitcoin by effectively accruing bitcoin at below spot. In this way Bitcoin companies can in effect become leveraged plays on bitcoin
Thirdly, investing in Bitcoin companies can enhance your bitcoin portfolio by offering returns which are disentangled from near term price swings of bitcoin, balancing out the underlying volatility of the asset
Finally, there is a flywheel from investing in Bitcoin infrastructure. Investments in the Bitcoin ecosystem strengthen the network, driving increased adoption and value of the asset, which attracts add'l capital and further investment in infrastructure in a virtuous circle
The result is an overall improved risk/return profile versus holding bitcoin on a standalone basis. Rather than an “either/or” with holding bitcoin and investing in Bitcoin infrastructure, the conclusion is that one should both hold bitcoin AND invest in Bitcoin companies 
As we transition to a more Bitcoin-oriented world, the importance of profitability and sound business models will increase, and there will be a greater emphasis on returns on invested capital (measured in bitcoin terms)
Under a Bitcoin standard, earning bitcoin today will generally require less work than earning the equivalent amount of bitcoin in the future. Said another way, for the same amount of work you will earn less bitcoin in the future
This will emphasize the opportunity cost of foregoing bitcoin today for the prospect of bitcoin tomorrow. When the objective is to accumulate as much of the 21mm fixed supply as possible, this will become a forcing function on a company's mindset for evaluating investments
Return on investment ("ROI")-based analyses will become more common (e.g. "what is the expected bitcoin yield we could expect in profits from this investment?"). Investors will also begin to think more in bitcoin terms when evaluating the risk/return of investment opportunities
If an investor is making the economic decision of holding BTC today vs. investing in a Bitcoin company, the investor should only do this if he/she has conviction the investment will yield more BTC, with some premium required based on the risk being taken and the cost of capital
An investor could value a business using a multiple-based approach as a proxy for the bitcoin it can deliver over the longer term. Alternatively, a valuation could be based on the discounted value of the BTC it is expected to produce in the future (“discounted sats flow”) 
These are familiar concepts to anyone who has taken corporate finance, but under a Bitcoin standard the relative level of importance of the different value drivers may shift. In an inflationary system, holders of assets win. With deflation, holders of money win
Under the simplistic multiple-based valuation approach above, equity value creation is driven by:
(A) Growth in the company, measured in sats; plus
(B) The net sats flow accrued on the balance sheet; plus
(C) The impact of any change in the valuation multiple of the business
(A) Growth in the company, measured in sats; plus
(B) The net sats flow accrued on the balance sheet; plus
(C) The impact of any change in the valuation multiple of the business
If future financial performance is harder to achieve in bitcoin terms due to its deflationary nature, then components (A) and (C) of equity value creation will also become more challenging, and therefore component (B), the ability to generate sats flow, will become more important
Equity value creation, and by consequence investment success, will be more rooted in profitably generating sats
In turn, this may lead to an increased emphasis on Discounted Sats Flow analysis
In turn, this may lead to an increased emphasis on Discounted Sats Flow analysis
Following the same logic as above, if the amount of Bitcoin earned in the future is harder to achieve over time, then the value of a company’s Discounted Sats Flow will be more heavily weighted towards the present than in the previous paradigm
This will incentivize the pursuit of a sound, sustainable and profitable business model more quickly, as compared to the growth-at-all-costs model incentivized by the fiat standard
In a fiat world, cash is not valued; artificially low interest rates favor growth investing, and cash flow investing takes a back seat. In a bitcoin world, people value the monetary base unit more (sats), which will lead people to increasingly value businesses that can produce it
Conclusions:
- Investing in Bitcoin infrastructure is one of the most overlooked opportunities in the industry today, offering tremendous asymmetry
- An investment in Bitcoin infrastructure should be considered in conjunction with holding bitcoin (an “AND”, not an “either/or”)
- Investing in Bitcoin infrastructure is one of the most overlooked opportunities in the industry today, offering tremendous asymmetry
- An investment in Bitcoin infrastructure should be considered in conjunction with holding bitcoin (an “AND”, not an “either/or”)
- As we move closer to a Bitcoin standard, we expect a gravitation towards sound business models and a focus on sats flows
- As the new BTC available to the market reduces over time, one of the most effective ways to earn bitcoin will be to have equity stakes in Bitcoin companies
- As the new BTC available to the market reduces over time, one of the most effective ways to earn bitcoin will be to have equity stakes in Bitcoin companies
- Companies with the talent to build bitcoin infrastructure and profitably produce bitcoin will be significantly more valued, and this will be appreciated more by investors over time
- There is going to be a longer term increase in capital attracted to Bitcoin equities. Owning equity in the leading Bitcoin companies will become the future "scarce real estate."
It might make sense just to get some in case it catches on…
ten31.vc/content/investing-in-bitcoin-infrastructure
It might make sense just to get some in case it catches on…
ten31.vc/content/investing-in-bitcoin-infrastructure
