Author: Matt Hougan, Chief Investment Officer of Bitwise; Compiled by 0xjs@Jinse Finance
People often make a mistake when evaluating Bitcoin, which leads them to severely underestimate Bitcoin's potential.
Last week, while having dinner, a financial advisor asked me a great question:
Does Bitcoin have to crash the dollar to reach $200,000?
This is a great question because it reveals the fuzzy logic that many people use when talking about Bitcoin. In my experience, they often say things like:
Bitcoin is digital gold, and the US is abusing the dollar; so, Bitcoin has value.
These statements are not wrong - in fact, I may have said similar things on CNBC. But this kind of reasoning is lazy. Specifically, they are conflating two different arguments.
This confusion is harmful because it causes people to greatly underestimate Bitcoin's full potential and the likelihood of its success. If you separate these arguments and consider them individually, you can better understand Bitcoin.
Argument 1: Bitcoin will succeed
When you buy Bitcoin, your first bet is that it will succeed. For me, this means that one day it will be able to stand alongside gold as an established, widely recognized store of value, held by all types of investors.
Over the past 15 years, Bitcoin has made tremendous progress towards this goal. It has grown from nothing to become an asset worth over $1 trillion, held by 60% of large hedge funds, many large asset managers, and even some countries. It has weathered bull and bear markets, scandals and breakthroughs, and a variety of regulatory regimes. Now, most people acknowledge that it is here to stay.
But it is not yet mature. Today, most institutional investors still do not hold Bitcoin. Many financial institutions still prohibit holding it. The media still does not trust it. And many people still do not understand it. We don't often hear this about gold.
A simplified, zero-sum version of this argument is that Bitcoin will take market share from gold. But I think it is more likely that Bitcoin will gradually expand the overall "store of value" market.
For our purposes, this actually doesn't matter much. Bitcoin's market cap of $1.3 trillion is only 7% of gold's $18 trillion market cap. I don't know if a mature Bitcoin market will be half the size of gold, equal to gold, or twice as large as gold, or bring in new investment cohorts. But I'm confident it won't just be 7%.
So, investing in Bitcoin is betting that it will continue along its current path of moving from a niche market to the mainstream. This has been the primary driver of its amazing returns over the past 15 years. I believe it still has a lot of room to grow.
(Incidentally, if Bitcoin's market cap grew to be equal to gold, each Bitcoin would be worth around $900,000.)
Argument 2: Governments will continue to devalue fiat currencies
When you buy Bitcoin, your second bet is that the US and other governments will continue to print money and accumulate debt, thereby devaluing fiat currencies. Under this reasoning, this will both increase the value of "store of value" assets like Bitcoin and gold, and prompt more investors to allocate to such assets, further expanding the market.
In the US, we now have $36 trillion in federal debt - and we add $1 trillion every 100 days. This year, we'll spend $900 billion just servicing this debt, making it one of the largest items in the federal budget. The Congressional Budget Office estimates that by 2054, the debt will reach $142 trillion.
In my view, this scale of debt and money printing will greatly expand the "store of value" market, as investors seek safe havens from this madness. Could the current $20 trillion market grow to $50 trillion or $100 trillion in the next 10 years?
I'll state the obvious: if the "store of value" market expands threefold in the next 10 years, and Bitcoin merely maintains its 7% share of that market, Bitcoin's price will also triple.
(It's worth noting that many in the Bit community - including myself - believe Bit has uses beyond just traditional "store of value" applications. For example, I believe Bit may one day be used as an alternative to national currencies for international settlements. Any such additional use case arguments are just icing on the cake.)
Conclusion: Why this framework is powerful
The power of these arguments lies in the fact that they are both cumulative and independent.
By independent, I mean that as an investor, you only need one of the arguments to hold true to be successful.
Imagine, for example, that Bit's market cap grows to 25% of the current gold market, and nothing else changes. No market expansion, no new use cases, no concerns about the debt spiral. Great! In this scenario, Bit's price would reach $214,000, about four times its current level.
Or imagine that Bit's market share doesn't grow, but the "store of value" market expands threefold. Also good! Bit's price would then triple as well.
If both of these things happen (and the additional opportunities are realized, even better), that would be fantastic. The good news is that I think this is the most likely outcome.
So, for my advisor friend's question, the answer is: no, Bit doesn't have to crash the dollar to reach $200,000. It just needs to capture a small slice of the existing gold market to reach that price level.
But as governments continue to abuse their currencies, and Bit continues to mature, it may not only reach that level, but far exceed it.
