Back in June, I wrote that Wall Street remaining on the sidelines is not necessarily bad for our industry. While most traditional investors are still observing, Bitcoin’s (BTC) mainstream momentum has been building over the last four months. Currently, the Bitcoin price is hovering around $18,000, steadily approaching its historical all-time high.
Bitcoin is a store of value and a potential global reserve currency
When we talk about asset valuation, the first step is always to understand the fundamental economics. Equities, bonds and real estate, for example, generally derive value from generating cash flows. Therefore, valuation of these assets involves projecting future cash flows. Commodities, on the other hand, are more utility-based, so their prices are anchored by industrial supply and demand.
So what is Bitcoin? Here’s my take as a holder:
- Bitcoin is sound money and the first native internet money in human society.
- It is scarce (with a fixed supply of 21 million), durable (digital), accessible (blockchain is 24/7), divisible (1 Bitcoin equals 100 million satoshis), verifiable (open-source Bitcoin core) and most importantly, censorship resistant (encrypted).
- With these superior monetary qualities in one asset, Bitcoin is a great store of value. Once it reaches a critical mass of adoption as a store of value, Bitcoin has huge potential to grow into a global reserve currency over time as well as a universal unit of account.
History of money shows us that natural forms of money generally go through three phases of evolution — first as collectible (speculation on scarcity), second as investment (store of value), third as money (unit of account) and payment (medium of exchange).
Between 2009 and 2018, Bitcoin was in its first “collectible” phase. It was hard to estimate demand given the fickle nature of speculative trading, whose magnitude outweighed holders (mostly cypherpunks) who believed in Bitcoin as “future sound money.” The Bitcoin network also survived one of its most serious community divisions that led to the creation of Bitcoin Cash (BCH) in 2017.
We are now in the early days of the “investment” phase. This year has brought us a global pandemic, continued uncertainty, unapologetic money printing, and in contrast, a successful third halving of the Bitcoin (as expected). For the first time since its inception, Bitcoin has entered the mainstream media as “digital gold” to hedge inflation risk. As more people start to embrace Bitcoin as a long-term wealth preservation mechanism, a simple supply-and-demand valuation framework becomes much easier.
There are many factors that could add upside to Bitcoin’s price in such a framework. Given that we are still in the early stage of mainstream adoption, I’ll leave out most of them to be conservative and only focus on a highly likely scenario where 1%–2% of U.S. household wealth is allocated to Bitcoin, while Fidelity’s most recent report actually recommends 5% target allocation.
According to the United States Federal Reserve, U.S. household wealth reached $112 trillion by June 2020. So, 1% to 2% of that would be $1.1 trillion to $2.2 trillion in potential demand. On the supply side, the current total circulating BTC is about 18.5 million. To keep it simple, let’s assume the max supply of 21 million max is all up for sale. Demand divided by max supply — we get a price range of $56,000 to $112,000. Given current macro trends, it is not too crazy to expect this to play out in 2021.
If we apply this math to $400 trillion global family wealth, according to Credit Suisse’s “The Global wealth report 2020,” 1% to 2% global allocation could push the Bitcoin price to $228,000 to $456,000. Will this happen within 2021? Likely not. Can this happen in the coming decade? Highly possible.
What could go wrong?
It is prudent to play devil’s advocate and assess downside risks too. Let’s look at major risks that may derail a Bitcoin bull run.
Protocol risk. The biggest risk always comes from within. Bitcoin has inherent value only because it has the unique characteristics of “sound money” — scarce, durable, accessible, divisible, verifiable and censorship-resistant. If any of those qualities are compromised, the foundation to its investment case will be eroded. Such protocol risks were high in its early years. After two major, controversial hard forks and three successful halvings, protocol-level risks seem to be contained now.
Political risk. Given that Bitcoin is positioned as the future of money, it is possible that sovereign governments ban it for fear of threatening fiat currencies. Such bans have already happened in several countries. However, given the lack of geopolitical homogeneity and increasing momentum of Bitcoin going mainstream, the risk of the cryptocurrency being banned out of existence diminishes with each passing day.
Adoption risk. This is a timing risk. It is quite possible that it may take much longer than expected for Bitcoin to go mainstream. Nevertheless, the unique quality of Bitcoin will speak for itself over time.
Conclusion
Bitcoin’s price chart between 2017 and 2018 very much looked like a bubble. However, if we look at Bitcoin’s full trading history, there is a clear upward trend together with a growing number of asset-holding addresses as well as the network’s increasing computing power. The increasing mean hash rate of the Bitcoin network represents the increasing security level that one would want to see in a network where people’s wealth is stored.
On-chain analysis also shows active addresses are still nowhere near the January 2018 level, even if the Bitcoin price is approaching its historical all-time-high. I may be on the bullish side for Bitcoin’s 12-month price trajectory, but I truly believe that time will be our best friend.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cryptox.
Hong Fang is the CEO of OKCoin — a cryptocurrency exchange headquartered in San Francisco — and is the chief operating officer at OKGroup. Hong comes from a Wall Street background, having spent almost a decade at Goldman Sachs, where she focused on mergers and acquisitions, capital markets, investment, restructuring and various other corporate development activities for both traditional financial institutions and fintech companies. She is a graduate of Peking University in Beijing, China, and has an MBA in finance, accounting and entrepreneurship from the University of Chicago’s Booth School of Business.
