Updating my long-term Bitcoin price projection! There is plenty of room to go!
A reasonable and conservative approach results in Bitcoin prices north of USD 200,000.
It's been on the horizon for a while, but the time has come to revise my long-term outlook for Bitcoin. The rationale is straightforward: I underestimated the appeal of US spot Bitcoin ETFs. Additionally, the favorable prospects for gold and its recent all-time high are also at work.
The case of scarce assets
For those who have followed my analysis, you know my valuation thesis largely hinges on Bitcoin as digital gold. Without reiterating too much, let me summarize the key points.
In an increasingly digital world, where our money and debts are mostly digital, a genuinely scarce asset that investors (and savers) are willing to adopt as a store of value becomes compelling. Both gold and Bitcoin have their merits at the current juncture, making a strong case for including both in a portfolio.
The allure of scarce assets direcly links to the diminishing long-term attractiveness of bonds. Interest rates must remain structurally low to prevent debt from spiraling out of control. The increasingly extreme policies of central banks have led to a permanent shift in the debt-yield relationship. Contrary to what classic theory dictates, the relationship between debt and the price of debt (yield) has turned negative. As a result, perhaps the most crucial relationship in modern finance, between fiat currency and trust, is also breaking up.
Gold vs. Bitcoin
Gold boasts over 5000 years of history as money, a monetary asset, and a store of value. Today, gold remains the go-to scarce asset that preserves 'value.' Bitcoin lacks gold's massive historical track record.
In addition, gold brings size, an aspect I believe is often overlooked. Size matters to offer a global-scale alternative to central bank balance sheets, unprecedented amounts of debt and outstanding bonds. Gold's real-time market value equals USD 16.5 trillion, roughly four times smaller than all the bonds in the Bloomberg Global Aggregate Index. Residential real estate is another scarce asset with size, but it comes with great heterogeneity and practical issues as a monetary asset. With a market cap of USD 1.4 trillion, Bitcoin is (still) relatively small.
However, Bitcoin is uniquely scarce, even more so than gold, with above-ground stocks increasing each year. Moreover, Bitcoin addresses two key issues:
The first is the weakening relationship between money and trust. Trust in the traditional sense has become obsolete through its underlying technology, as every PC running a node can verify the ledger. Energy is the arbiter, keeping the ledger safe (immutable) by making it and the underlying blocks 'heavier' with each new block mined.
The second issue is the settlement of the underlying scarce asset. People around the globe can transact almost instantly, but settling with a genuine store of value like gold can take hours, if not days. With Bitcoin, the transaction includes the scarce asset underpinning its value.
To be clear, this is a condensed version of the allure of gold and Bitcoin. Some can articulate it much better, but this is the foundation of the case for Bitcoin as digital gold.
Deriving Bitcoin price forecasts
From this foundation, I derive a rough estimate of Bitcoin's value (price) by performing the following steps:
The real-time market cap of gold is determined not based on two-year-old data but on a reasoned estimate of the total above-ground stock of gold multiplied by the price. According to my calculations, the current market cap of gold stands at USD 16.5 trillion.
Identifying the 'surplus value' over gold, which reflects the insurance premium investors are willing to pay to hedge against adverse circumstances, including soaring debt levels, inflation, etc.
Gold is 17 times as scarce as silver, while its price is roughly 90 times higher. From there, it can be derived that gold's insurance (surplus) value stands at USD 13.2 trillion. If you're looking for a reason why gold holds value, consider that an insurance premium is never free. And, the premium will increase when the odds of adverse circumstances becoming a reality rise.
I work with various scenarios to estimate Bitcoin's market value and account for its high volatility. Three aspects determine these scenarios:
The annual growth rate of the gold-related insurance premium. Since 2000, gold has realized an 8% return. Given the increased likelihood of a shift from debts/bonds to scarce assets, we should likely expect a return higher than the 8% historical average. However, as a conservative measure, I allow the gold premium to grow by 6% annually.
What is the size of the insurance premium, measured relative to gold's premium, that Bitcoin will capture? I consider seven scenarios ranging from 1% to 50%.
How long will it take Bitcoin to reach this market share? My scenarios range from two to seven years.
Changes to the forecast analysis
Below is an overview of the changes I made compared to the previous scenario analysis:
I previously worked with a constant insurance value for gold, meaning the insurance premium did not increase. This approach was too conservative.
I'm now working with a timeframe of two to seven years in the scenario analysis, down from three to eight years. This adjustment is based on the rate at which Bitcoin ETFs are accumulating assets.
My base scenario now posits that Bitcoin can capture 30% of gold's insurance premium. Previously, I estimated 20%. It's worth noting that if I only consider ETF flows and not gold's millennia-long track record, for example, the percentage should arguably be much higher. If you wonder why some (Bitcoin) investors anticipate a Bitcoin – gold ‘flippening,’ ETF flows will be their strongest argument.
Outcome – Plenty of room to go!
Based on the above considerations and various scenarios, my Bitcoin price forecast, based on reaching 30% of gold's insurance premium value, ranges between USD 224K and USD 288K two to seven years from now. The annual return varies between 78% and 22%.
Assuming a target period of four years, roughly until the next halving, the annual return would be 37%. Please be aware of the significant margin of error, as is often the case with forecasts involving risky assets, including stocks and commodities. Despite this, I believe this to be a quite reasonable and somewhat conservative approach to a Bitcoin price forecast.
If you have questions or comments? Feel free to respond to this post.