Risk Free Rate

The risk-free rate is the return available on an investment considered to carry no default risk, used as the baseline against which all other returns are judged. In practice it is proxied by short-term government debt, such as the three-month US Treasury bill, whose yield exceeded 5 percent in 2023 after sitting near zero for most of the prior 15 years.

Why it matters

The risk-free rate is embedded in nearly every financial calculation: it is the discount rate floor in valuation models, the hurdle in the Sharpe ratio, and the opportunity cost of every risky position. When it rises, the present value of future cash flows falls and cash becomes a genuine competitor for capital. The term is also slightly misleading, since a Treasury bill is free of default risk but not of inflation risk: its owner can be repaid in full in dollars that buy less.

In the gold vs bitcoin debate

Gold and bitcoin compete directly with the risk-free rate because they pay nothing. At a 5 percent bill yield, holding either asset means forgoing meaningful income, a headwind evident in 2022. Advocates invert the frame: they argue the truly riskless position depends on what one counts as risk, since Treasury investors accepted deeply negative real returns during 2021 and 2022. Gold, they note, is the traditional reserve asset held by central banks themselves precisely because it is no one's liability, and bitcoiners make the same claim for their asset with 16 years of history rather than several millennia.