Bitwise: Bitcoin can rise to $200,000 with two drivers

Author: Matt Hougan, Chief Investment Officer of Bitwise; Translated by: 0xjs@黄金财经

People often make a mistake when evaluating Bitcoin, which causes them to seriously underestimate its potential.

At dinner last week, a financial advisor asked me a great question:

For Bitcoin to rise to $200,000, must the US dollar collapse?

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 United States is abusing the dollar; therefore, Bitcoin is valuable.

These words are correct - heck, I may have said something similar on CNBC. But this statement is lazy. Specifically, they conflate two different arguments.

This confusion is harmful because it causes people to greatly underestimate the full potential of Bitcoin and the likelihood of its success. If you separate these arguments and consider them individually, you will have a better understanding of Bitcoin.

Argument 1: Bitcoin will succeed

When you buy Bitcoin, the first bet you make is that it will succeed. To me, that means it will one day be on par with gold as an established, well-known store of value, held by all kinds of investors.

Over the past 15 years, Bitcoin has made tremendous progress toward that goal. It has grown from nothing to an asset valued at over $1 trillion, held by 60% of the world’s largest hedge funds, many large asset managers, and even some countries. It has survived bull and bear markets, scandals and breakouts, and multiple regulatory regimes. Now most people agree that it’s here to stay.

But it’s still immature. Today, most institutional investors still don’t own Bitcoin. Many financial institutions still prohibit it. The media still doesn’t trust it. And many people still don’t understand it. We don’t hear that often about gold.

A simplified, zero-sum version of this argument is that Bitcoin will take market share away from gold. But I think it’s more likely that Bitcoin will grow the “store of value” market over time.

For our purposes, that doesn’t really matter. Bitcoin’s market cap is $1.3 trillion, just 7% of gold’s $18 trillion. I don’t know if a mature Bitcoin will be half as big, equal to gold, twice as big, or bring in new investor groups. But I’m pretty sure it won’t be just 7%.

So investing in Bitcoin is a bet that it will continue on its current path from a niche market to a mainstream market. That’s been the main driver of its amazing returns over the past 15 years. I think it has a lot of room to run.

(By the way: if Bitcoin’s market cap grew to match gold’s, each Bitcoin would be worth about $900,000.)

Argument 2: Governments will continue to debase fiat currencies

The second bet you’re making when you buy Bitcoin is that the U.S. and other governments will continue to print money and take on debt, thereby debasing fiat currencies. By this line of reasoning, this would both increase the value of “store of value” assets like Bitcoin and gold and encourage more investors to allocate to such assets, further expanding the market.

In the United States, we now have a $36 trillion federal debt—and we add $1 trillion every 100 days. This year, we’re spending $900 billion to service that debt, and interest payments have become one of the largest items in the federal budget. The Congressional Budget Office estimates that by 2054, the debt will be $142 trillion.

In my opinion, this level of debt and money printing will greatly expand the size of the “store of value” market as investors seek a safe haven from this madness. Is it possible that the current $20 trillion market could become $50 trillion in 10 years? Or $100 trillion?

I’m going to state the obvious: if the “store of value” market triples in size over the next 10 years, and Bitcoin maintains just 7% of that market, then the price of Bitcoin will also triple.

(It’s worth noting that many in the Bitcoin community — myself included — believe that Bitcoin has uses beyond its traditional “store of value” use. For example, I think Bitcoin will one day be used as an alternative to national currencies to settle international payments. Any additional use case arguments like these are just bonuses.)

Conclusion: Why This Framework Is Powerful

What’s important about these arguments is that they are both cumulative and independent of each other.

By independent, I mean that as an investor, you only need one of these arguments to be successful.

Imagine that Bitcoin’s market cap grows to 25% of the current gold market, and nothing else changes. No market expansion, no new use cases, and no concerns about spiraling debt. Great! In this case, Bitcoin’s price would be $214,000, about four times its current level.

Or imagine that Bitcoin’s market share didn’t grow, but the “store of value” market tripled in size. Also great! Then Bitcoin’s price would triple, too.

If both of those things happen (and those additional opportunities come to fruition, even better), that would be awesome. The good news is that I think that’s the most likely scenario.

So, to answer my advisor friend’s question: No, Bitcoin doesn’t need the dollar to collapse for it to reach $200,000. It only needs to take a small bite out of gold’s existing market to get there.

But as governments continue to abuse their currencies and Bitcoin continues to mature, it may not only reach that price, but go way beyond it.