Reprinted from the author: Matt Hougan, Chief Investment Officer of Bitwise
There is a common mistake people make when evaluating Bitcoin that causes them to severely underestimate its potential.
Last week at dinner, a financial advisor asked me a great question:
For Bitcoin to rise to $200,000, does the U.S. dollar have to collapse?
This is a great question because it reveals the fuzzy logic a lot of 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 are true statements — heck, I may have said something similar on CNBC. But they are 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 gain a better understanding of Bitcoin.
Argument 1: Bitcoin will succeed
When you buy Bitcoin, your first bet is that it will succeed. To me, that means that it will one day be on par with gold as an established, widely known store of value held by all types of investors.
Over the past 15 years, Bitcoin has made tremendous progress toward this goal. It has grown from nothing to an asset valued at more than $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 breakthroughs, and multiple regulatory regimes. Now most people agree that it is here to stay.
But it’s still immature. Today, most institutional investors still don’t own Bitcoin. Many financial institutions still prohibit holding 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 the more likely scenario is that Bitcoin will gradually increase the size of the “store of value” market.
For our purposes, it 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, or twice as big, or bring in new investors. But I’m sure it won’t be 7%.
So, investing in Bitcoin is a bet that it will continue on its current path from a niche market to a mainstream market. This is the main driver of its amazing returns over the past 15 years. I think it still has a lot of room to grow.
(By the way: If Bitcoin’s market cap grew to match that of gold, each Bitcoin would be worth about $900,000.)
Argument 2: Governments will continue to devalue fiat currencies
The second bet you make when you buy Bitcoin is that the U.S. and other governments will continue to print money and take on debt, devaluing fiat currencies. This, the reasoning goes, will 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 reach $142 trillion.
In my opinion, this amount of debt and money printing will greatly expand the size of the "store of value" market as investors seek safe havens from this madness. Is it possible that the current $20 trillion market could become $50 trillion in 10 years? Or $100 trillion?
Let me 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” purpose. 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 bonus points.)
Conclusion: Why this analytical framework is powerful
What is important about these arguments is that they are both cumulative and independent of each other.
When I say independent of each other, 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 scenario, 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. Great! Then Bitcoin’s price would triple, too.
It would be really great if both of those things happened (and even better if those extra opportunities also materialized). The good news is that I think this is the most likely scenario.
So, the answer to my advisor friend’s question is: No, Bitcoin does not 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 this price point, but far exceed it.