Bitcoin – The Full Case for $100Ok Bitcoin

What a 12 months – a world pandemic, a wavering stock market, rising numbers of unemployed individuals and continued uncertainty in world markets. But, we noticed the bitcoin price recuperate from $5,300 in March to virtually $18,000 at time of writing. That’s virtually a 240% return inside 9 months.

For normal buyers, the burning query is whether or not bitcoin is turning into overpriced. Is it too late to purchase bitcoin?

Hong Fang is the CEO at OKCoin, a U.S. licensed, fiat-focused cryptocurrency exchange headquartered in San Francisco. Hong spent eight years at Goldman Sachs, leaving as VP of Funding Banking. She is a graduate of Peking College in Beijing, China, and has an M(BA) from the College of Chicago’s Sales space College of Enterprise.

If we put apart short-term volatility and take a long-term perspective, there’s a affordable path for the price of bitcoin to succeed in over $500,000 within the subsequent decade. To go even additional, I feel BTC is more likely to hit $100,000 within the subsequent 12 months. Important upside has but to play out for bitcoin.

Bitcoin is a ‘retailer of value’

After we discuss concerning the valuation of an asset, step one is to know the basic economics. Equities, bonds and actual property, for instance, usually derive their value from producing cash flows; subsequently, valuation of those belongings includes projecting future cash flows. Commodities, then again, are extra utility primarily based and subsequently their costs are anchored by industrial provide and demand. Earlier than taking any motion on bitcoin, I recommend asking your self, “What is bitcoin for?” Use this as a baseline to kind your individual view of the value of bitcoin and its truthful price vary in a given time horizon.

Right here’s my take as a HODLer:

  • Bitcoin is sound cash and the primary native web cash in human society.
  • It’s scarce (21 million mounted provide), sturdy (digital), accessible (blockchain is 24/7), divisible (1 bitcoin = 100 million satoshis), verifiable (open-source Bitcoin Core) and most significantly, censorship resistant (encrypted).  With these superior financial qualities in a single asset, bitcoin is a good retailer of value. As soon as it reaches a vital mass of adoption as a retailer of value, bitcoin has enormous potential to develop into a world reserve foreign money (and common unit of account, too) over time.
  • The historical past of cash reveals us that pure types of cash usually undergo three phases of evolution: first as collectible (hypothesis on shortage), second as funding (retailer of value), third as cash (unit of account) and fee (medium of exchange). As bitcoin goes by totally different phases, its valuation scheme varies, too. For my part, bitcoin is at the moment within the early stage of part II. Beneath is a brief abstract of the 2 phases bitcoin has been by and respective value implications.

Bitcoin as collectible

Between its inception in 2009 and 2018, bitcoin was in its “collectible” part. Solely a small cluster of cypherpunks believed in bitcoin as “future sound money.” It was arduous to give you a valuation scheme for bitcoin that matched its fundamentals. It was additionally too early to inform whether or not bitcoin might achieve constructing consensus round its “store of value” superiority. 

Bitcoin is constructed as a fundamental utility and doesn’t generate cash circulation, so there isn’t any method to forecast its price primarily based on cash flows. Its circulating provide was straightforward to calculate, nevertheless it was actually arduous to estimate demand given the fickle nature of speculative buying and selling. When speculative demand surged and drained out of the system, notably across the preliminary coin providing (ICO) growth in 2017, we noticed bitcoin’s price explode from $900 in early 2017 to $19,000 by the top of 2017, after which all the way down to $3,700 by the top of 2018.

Bitcoin’s opponents often assault bitcoin’s price volatility as a bug, however I imagine that bitcoin’s price volatility is a novel and sensible self-marketing characteristic. It was key to its survival within the early days. Bitcoin operates as a decentralized world community. There is no such thing as a coordinated advertising and marketing crew on the market selling bitcoin’s utility to the world. It’s the dramatic price volatility that has continued to draw consideration from non-followers, a few of whom had been later transformed into believers, thus driving the continued momentum of bitcoin adoption. 

Bitcoin went by an identification disaster as “sound money” earlier than it graduated into the second stage as an funding automobile. Beginning with the scalability debate in 2017, when the community grew to become congested with historic excessive quantity and transaction prices surged, its group had severe controversies (some known as it “civil war”) involving the longer term path of bitcoin. 

In consequence, on Aug. 1, 2017, the bitcoin blockchain was arduous forked to create the Bitcoin Cash (BCH) chain to permit bigger blocks as BTC caught to a block dimension restrict with SegWit adoption to allow a second-layer resolution. On November 15, 2018, the BCH community forked once more into Bitcoin Cash and Bitcoin Satoshi’s Imaginative and prescient (BSV).

Thankfully, bitcoin (BTC on this case) survived its rising pains (and the industry-wide bear market) and thrived thereafter. It’s also by such public disputes (and price efficiency after arduous forks) that BTC help and dominance has been additional solidified, with an rising variety of addresses holding BTC and lowering volatility. 

Banner 12 months

This 12 months has been a rare 12 months in lots of facets, however it’s actually a milestone 12 months for bitcoin. The coronavirus pandemic has introduced emotional and financial stress to many individuals on a world foundation. On prime of that, 12 years after the 2008 monetary disaster and the publication of the Bitcoin white paper, we’re reminded how simply our financial system may very well be flooded with new cash printed out of skinny air; $Three trillion in new cash was created in simply three months in america, about 14% of U.S. GDP in 2019. The U.S. was not alone.

In 2020, it has been extraordinarily arduous for accountable savers to seek out dependable, actual yields to protect their hard-earned wealth. American middle-class households have needed to both settle for zero to adverse rates of interest at banks and debasement threat or wager within the all-time-high fairness market when the actual financial system struggles, not understanding when the music will cease. In different international locations, individuals should battle an uphill battle on a regular basis to easily protect the incomes energy of their salaries.

These macro themes are too sturdy for anybody to disregard. In distinction, the Bitcoin community had its profitable third halving on May 11, 2020, highlighting the great thing about having financial self-discipline pre-written into code and executed by the worldwide community easily ever since. In consequence, extra buyers in conventional finance (Wall Street establishments included) have began to understand that bitcoin has a novel hedging functionality in opposition to long-term inflation threat, with a risk-reward profile higher than its closest financial cousin, gold.

Totally different from its 2017 experience, bitcoin’s present run-up is characterised by extra vocal institutional endorsement: Sq. and MicroStrategy allocate treasury cash into bitcoin; the Workplace of the Comptroller of the Forex (OCC) permit U.S. banks to supply crypto asset custody; PayPal enabling crypto shopping for and promoting; Constancy making a case for five% asset allocation and doubling down on crypto engineer recruiting; well-established conventional asset managers together with Paul Tudor Jones and Stanley Druckenmilller saying public help for bitcoin. The mainstream momentum is increase.

For the primary time since its historic inception, bitcoin formally entered mainstream media as “digital gold,” a legit and credible (and liquid) various asset to contemplate for each people and establishments. The sooner comparability to “Dutch tulip mania” begins to fade. As extra individuals educate themselves about what bitcoin is and begin to embrace it not as a speculative buying and selling asset however as a long-term asset allocation possibility, we will now take a look at its fundamentals and anchor price ranges with a easy supply-and-demand math.

Beneath are three situations used to triangulate bitcoin’s potential one-year trajectory.

State of affairs 1: 1-2% US family wealth allocation?

  • In line with the Federal Reserve, U.S. family wealth reached $112 trillion by June 2020 (prime 10% owns two-thirds of the wealth).
  • 1%-2% of $112 trillion = $1.1 trillion to $2.2 trillion potential demand (Constancy’s most up-to-date report really recommends 5% goal allocation).
  • Present whole circulating BTC is about 18.5 million. To maintain it easy, let’s assume 21 million max provide are all up on the market.
  • Divide the potential demand by max provide, we get a price vary of $56,000-$112,000. This state of affairs doesn’t account for the remainder of the world ($400 trillion world household wealth, in keeping with Credit score Suisse Wealth Report 2020). If we assume 1%-2% allocation of world household wealth, we can be a $228,000-$456,000 price vary. Would this occur within the subsequent 12 months? Doubtless not. Can this occur throughout the subsequent decade? I feel that’s very doable. 

State of affairs 2: 2%-3% of world high-net-worth particular person allocation?

  • In line with Capgemini World Wealth Report 2020, world HNWI wealth stood at $74 trillion by finish of 2019 (~13% various, 14.6% actual property, 17% mounted revenue, 25% cash and cash equal, 30% fairness).
  • 2%-3% of $74 trillion = $1.48 trillion-$2.22 trillion potential demand.
  • Divide the potential demand by max provide, we get a price vary of $70,000-$105,000.
  • This state of affairs does take a look at world information, however solely accounts for high-net-worth particular person (HNWI) allocation, assuming that this section has extra belongings to speculate and funding selections are extra pushed by institutional asset managers and advisers. I’m additionally assuming the next vary of allocation right here as a result of HNWI are usually higher positioned to tackle extra dangers seeking larger risk-adjusted return.

State of affairs 3: Catching up with gold?

  • There was a long-standing argument that bitcoin would catch as much as gold in market cap as soon as it’s broadly accepted as a “digital and superior version of gold.”
  • Present gold market cap is $9 trillion. That is about 2% of whole world wealth and 12% of world HNWI wealth.
  • 100% gold market cap means $428,000 price level for bitcoin. Can we get there in 12 months? Most likely too aggressive an assumption. Can bitcoin rise to 20%-25% of gold in 12 months (aka 2.4%-3% world HNWI wealth allocation)? Doable. That will give us a price vary of $80,000-$110,000.

There are further components that might add extra upside to bitcoin. On condition that we’re nonetheless within the early stage of mainstream adoption, I don’t need to over-emphasize them, however I need to lay them out simply to maintain the angle.

  • Potential allocation from company treasury administration. We’re already seeing early indicators of that with Sq. and MicroStrategy. Sq. lately allotted about 1.8% of its cash stability to purchase $50 million in bitcoin. Sizing up company demand for bitcoin is difficult, although. Every firm has its personal cash circulation and development profile, which can have an effect on its threat urge for food in asset allocation.
  • Potential allocation from overseas exchange reserves of all sovereign states. In line with the Worldwide Financial Fund, the worldwide overseas exchange (foreign exchange) reserve was $12 trillion by June 2020, with the highest three reserve currencies in U.S. {dollars} $7 trillion (58.3%), euros $2 trillion (16.7%), and yen $650 billion (5.4%). Is it doable to see sovereign international locations allocate a few of their foreign exchange reserves into bitcoin? I imagine that development will emerge over time when bitcoin’s superiority in “store of value” additional performs out within the subsequent 5 to 10 years. Assuming 25% allocation ($Three trillion, a bit greater than euro allocation), that’s one other $140,000 upside. Bitcoin catching up on the U.S. greenback as a dominant world foreign money reserve might take a very long time to materialize, if in any respect however it isn’t unattainable to see bitcoin among the many prime Three listing. 
  • Not 100% of bitcoin’s max provide can be obtainable for commerce. There may be about 18.5 million in circulation. About 10% of that has been dormant for over 10 years. It’s difficult to estimate how a lot of the overall bitcoin in circulation will really be up on the market at totally different price points.
  • Not one of the above account for the greenback’s inflation fee within the years to come back, which is about 2%-3% yearly as a baseline. Neither do these situations account for the community impact of bitcoin, the opportunity of bitcoin turning into extra ubiquitous and dependable as a unit of account.

What might go flawed?

A one-sided funding case is rarely a very good one. It’s prudent to play satan’s advocate and assess draw back dangers. What are the main dangers that may derail a bitcoin bull run?

Protocol threat

The largest threat all the time comes from inside. Bitcoin has inherent value solely as a result of it has the distinctive traits of “sound money” (scarce, sturdy, accessible, divisible, verifiable and censorship resistant). If any of these qualities are compromised, the inspiration to its funding case can be eroded or gone.

Such protocol dangers had been excessive in its first few years, however after two main controversial arduous forks and three profitable halvings, plainly protocol-level dangers are considerably contained. The Bitcoin ecosystem has been constant in unbiased developer help. In line with Electrical Capital’s developer report, the Bitcoin developer ecosystem has maintained 100+ unbiased builders each month since 2014. Moreover, we’ve additionally seen a rise in commits to the Bitcoin Core codebase in 2020, reaching a peak in May (across the time when the third halving occurred).

It’s additionally encouraging to see main improvement milestones rising on the Bitcoin Core community, together with the merge of Signet, Schnorr/Taproot and elevated concentrate on fuzz testing, to call a number of. These protocol-level developments proceed to boost the privateness and scalability of the community, boosting bitcoin’s technical stability as a foreign money.

To make sure a wholesome and secure future for bitcoin, it’s vital to make sure the Bitcoin Core developer group stays unbiased and decentralized and continues to make regular enhancements in vital areas like safety and privateness. That is additionally why we now have been enthusiastic about offering no-strings sponsorship to Bitcoin Core builders and tasks at OKCoin. Investing in bitcoin improvement helps scale back the protocol threat.

Focus threat

This, to me, is the second0biggest threat to bitcoin. Bitcoin’s ethos is to empower people by decentralization, however the threat of focus all the time exists.

Throughout the community, the danger lies within the focus of mining energy. It’s not an {industry} secret that 65% of the world’s hash energy is in China. If mining energy is coalesced, a mining pool or group of miners can manipulate community transactions, creating faux cash by double-spending, in flip impacting the market price. Nonetheless, there may be additionally the argument that such focus threat is inevitable however to some extent innocent, too, given how the community incentive has been designed for bitcoin. In different phrases, the incentives within the type of new bitcoins and transaction charges ought to work to maintain the vast majority of the nodes trustworthy as a result of it’s economically pricey to cheat (not as a result of it’s arduous or unattainable to cheat). The belief is that the mining members are all rational and make financial selections.

Externally, comparable threat lies in possession focus. Buyers, or “whales,” holding vital quantities of bitcoin can affect and even manipulate the market by triggering a change in price primarily based on their purchase/promote timing. On condition that a person (or an entity) can personal a couple of bitcoin tackle, it’s arduous to color an correct image of bitcoin possession. So this threat does exist. That is additionally why I really feel very enthusiastic about selling monetary literacy and crypto data. I imagine that we will construct a more healthy and extra sustainable future if extra people come to know what bitcoin is about and begin to embrace it. The primary institutional wave is thrilling to see, but when bitcoin possession tilts an excessive amount of towards the institutional finish, we might be defeated in our mission of constructing a extra inclusive and individually empowering community.

Political threat

One other main threat comes from sovereign governments. On condition that bitcoin is positioned as future cash, it’s doable that sovereign governments ban it for concern of threatening fiat currencies. Once more, such dangers are highest in earlier years earlier than bitcoin builds significant adoption momentum. Really, such bans have already occurred in a number of international locations (India in 2018, for instance, which was revoked in 2020). Central bank digital foreign money (CBDC) experiments around the globe might additionally have an effect on how bitcoin’s future performs out.

This 12 months has seen the primary wave of institutional endorsement for bitcoin, and subsequently 2020 can be acknowledged as a milestone 12 months in assuaging this political threat. When publicly listed corporations, asset managers and well-known people begin to personal bitcoin and communicate in favor of bitcoin, such a ban goes to grow to be very unpopular and therefore more durable to implement in international locations the place well-liked votes do matter. I hope the momentum will proceed to construct, making a threat of whole bitcoin ban more and more distant as time passes.

In a world of uncertainty, bitcoin offers HODLers like me confidence. It has an enormous community impact that may in the end empower each particular person who believes in it and makes use of it.

A profitable and full ban on bitcoin may also have to take coordinated efforts of all sovereign governments, which could be very unlikely. So long as there are international locations that permit bitcoin legally circulation, bitcoin can have an opportunity to win – a decentralized world community can’t be shut down by any single occasion.

That being stated, bitcoin price volatility may very well be amplified on occasion by home and geopolitical modifications. For my part, political dangers stay the second-largest threat to bitcoin till it turns into too huge to be tampered with. We’re clearly far-off from that time.

There may also be a wider fee ban on bitcoin whereas it’s being acknowledged as authorized monetary belongings. Such a threat will not be completely out of the image but. The great factor is, we aren’t banking on bitcoin turning into the unit of account and medium of fee in our $100,000-$500,000 state of affairs. When bitcoin does progress to part III, we won’t be speaking about bitcoin price anymore, however as a substitute discuss all the things else’s price in bitcoin.

Adoption threat

It is a timing threat. It’s fairly doable that it may take for much longer than anticipated for bitcoin to go mainstream.

The one method to handle this threat is to ensure your bitcoin portfolio is correctly sized.

For those who spend money on bitcoin (or the rest) and fear about the place its price can be within the subsequent 12 months, your portfolio of bitcoin might be too huge for you. Measurement it primarily based by yourself threat tolerance and conviction degree in bitcoin. Don’t do greater than what you possibly can afford (or imagine in).

I additionally imagine the distinctive high quality of bitcoin will communicate for itself over time. Bitcoin’s price chart between 2017 and 2018 very a lot regarded like a bubble. Nonetheless, if we take a look at bitcoin’s full buying and selling historical past, there’s a clear upward development along with rising asset-holding addresses, rising lively addresses and rising community computing energy. The rising imply hashrate of the Bitcoin community represents the safety degree that one would need to see in a community the place individuals’s wealth is saved.

I may be on the bullish facet for bitcoin’s 12-month price trajectory however I actually imagine that with bitcoin, time can be our greatest pal.

Trying forward

Bitcoin is in contrast to another asset we now have encountered earlier than. It is a actually sound and world wealth community that may proceed to develop because the world acknowledges the importance of its properties. To place issues in perspective, here’s a current tweet from Michael Saylor, CEO of MicroStrategy, that summarizes the relevance of bitcoin as a utility and retailer of value.

In a world of uncertainty, bitcoin offers HODLers like me confidence. It has an enormous community impact that may in the end empower each particular person who believes in it and makes use of it. I sit up for the continued evolution of the bitcoin ecosystem and really feel enthusiastic about being a part of it.

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