Bitwise Chief Investment Officer: Double Buff of Bitcoin Value

By Matt Hougan, Chief Investment Officer, Bitwise

Compiled by: Luffy, Foresight News

A common mistake people make when evaluating Bitcoin is to severely underestimate its potential.

Last week a financial advisor asked me a great question: Does the dollar need to collapse for Bitcoin to reach $200,000?

This is a great question because it reveals the fuzzy logic many people use when talking about Bitcoin. In my experience, they often say something like this: Bitcoin is digital gold and the US is printing money on a massive scale, therefore Bitcoin is valuable.

That’s true, and I’ve said something similar on CNBC. But it’s a lazy statement that conflates two different arguments. It leads people to severely underestimate the full potential of Bitcoin and the likelihood of its success. If you separate these arguments and consider them individually, you’ll have a much better understanding of Bitcoin.

Argument 1: Bitcoin will succeed

When buying Bitcoin, your first bet is that it will eventually succeed. To me, that means it will one day join gold as a mature and well-understood store of value held by all types of investors.

Over the past 15 years, Bitcoin has made huge strides toward that goal. It has grown from being worthless to an asset worth more than $1 trillion, held by 60% of the world’s largest hedge funds, the world’s largest asset managers, and even some countries. It has survived bull and bear markets, scandals and breakthroughs, and multiple regulatory challenges. Now most people agree that it is here to stay.

But it’s not “mature” enough. Today, most institutional investors still don’t hold Bitcoin; many financial institutions still prohibit Bitcoin business; the media still doesn’t trust it. Many people still don’t understand it, and you rarely hear about gold.

A simplified zero-sum version of this argument is that Bitcoin will cannibalize the gold market. But I think the more likely scenario is that Bitcoin will gradually increase the size of the "store of value" market.

Bitcoin’s market cap is $1.3 trillion, 7% of gold’s $18 trillion market cap. I don’t know if “mature Bitcoin” is half the size of gold, or equal to gold, or higher. But I’m sure it won’t be just 7%.

Therefore, betting on Bitcoin is betting that it will continue on its current path from niche to mainstream. This has been the primary driver of Bitcoin's amazing returns over the past 15 years. I think Bitcoin still has a lot of room to run.

Argument 2: Governments will devalue fiat currencies

The second bet for buying Bitcoin is that the U.S. and other governments will continue to print money and borrow, thereby devaluing fiat currencies. This, the reasoning goes, both increases the value of “store of value” assets like Bitcoin and gold and encourages more investors to invest in such assets, further expanding the market.

The US now has $36 trillion in debt, and it’s increasing by $1 trillion every 100 days. This year, the US dollar will spend $900 billion to service the debt, and interest payments alone are one of the largest expenses in the federal budget. The Congressional Budget Office estimates that by 2054, the debt will reach $142 trillion.

I believe that this massive amount of debt and money printing will expand the size of the store of value market as investors seek a safe haven from currency debasement. Can the current $20 trillion store of value market become $50 trillion in 10 years? Or even $100 trillion?

It is easy to see that if the store of value market triples in size over the next 10 years and Bitcoin retains only 7% of that market, then the price of Bitcoin will also triple.

It’s worth noting that many in the Bitcoin community (including me) see uses for Bitcoin beyond the traditional “store of value”. For example, I think Bitcoin will one day be used as an alternative to national currencies to settle international payments. Any additional use cases like this would further increase the value of Bitcoin.

Conclusion

What is important about these arguments is that they are both additive and independent.

What I mean by independent is that you only need one of them to be a successful investor.

Imagine that Bitcoin accounts for 25% of the current gold market, all else being equal. There is no market expansion, no new use cases, and no concerns about growing debt. In this scenario, Bitcoin would reach $214,000, roughly four times its current level.

Or imagine that Bitcoin’s market share didn’t grow, but the store of value market tripled; then Bitcoin would also triple.

If both of these happen, then a miracle will happen. I think this is the most likely scenario.

So, my answer to my advisor friend is, no, Bitcoin does not need a dollar collapse to reach $200,000. It only needs to capture a small fraction of gold's existing market to get there. As governments continue to print money and Bitcoin continues to mature, it will likely surpass that level.