The price of bitcoin has tripled to $60,000 per coin in merely three months. Hopefully most of you reading this have already invested and are enjoying the gains. Some of you will also be feeling a little sad because it’s now so expensive to acquire a single bitcoin. If you haven’t invested enough yet, you may be wondering if it’s too late. But no matter where you are coming from or how much you have, you need to think about where the price is going so that you can make the optimal investment decision. As always, your choices are buy, sell, or hold?
Ballet founder and CEO Bobby Lee predicted in December 2018 that the bitcoin price would peak at $330,000 per coin in December 2021. When the price broke $60,000 per coin on March 13, Lee reaffirmed his expectation of $300,000 bitcoin by the end of this year – a fivefold increase in price from today. That is a bold prediction, but many experts have similarly high expectations. Max Keiser’s 2021 target is $220,000 per coin, which is in line with Lee’s. If they’re right, then $60,000 is a bargain price, and you should definitely not sell now. You should increase your position if possible.
But you don’t just have to take the experts’ word for it. There are always experts on both sides of every issue. Listen to what they say, but verify their reasoning yourself. You can look at the same set of public facts available to everyone and come to your own conclusion. You don’t need to have any industry-specific education or experience in order to understand basic factors that affect bitcoin supply and demand.
There is a huge difference between the current level of demand and the demand when bitcoin achieves full market penetration. The speed of global bitcoin adoption is accelerating faster than internet adoption in the 1990s and 2000s. At this rate, bitcoin will achieve 50% market share of digital payments and saving/investing by the end of this decade, possibly much sooner. Bitcoin’s current market share is only 1% of the total global fiat currency market capitalization. It’s impossible to measure this data with high precision, but it’s clear that there is much more room for growth. Most people that we will interact with in our everyday lives are not bitcoin owners, but someday soon they will be. If bitcoin is worth $60,000 per coin with only 1% market share, imagine where the price will be when bitcoin usage for digital payments matches the dollar or the euro.
Demand for bitcoin will continue to grow as its competitive edge over fiat currency (medium of exchange) and gold (store of value) becomes evident to more people. If you aren’t already a believer in bitcoin’s technological superiority, we won’t try to explain and convince you here. That’s beyond the scope of this article. Here we’re trying to understand the factors influencing price. If you haven’t had the time or desire to do your own research, you can just let the words and actions of bitcoin’s competitors – central banks and financial institutions – speak for themselves. They have done the research on bitcoin and they have several years of experience trying and failing to crush it. The only reasonable interpretation of their behavior is that they know they can’t beat bitcoin, so they logically decided to try to profit from it instead.
Morgan Stanley, one of the biggest banks in America, just announced that it will offer the ability to invest in bitcoin “after clients demanded exposure to the cryptocurrency.” According to CNBC, “Bitcoin’s rally in the past year has put Wall Street firms under pressure to consider getting involved in the nascent asset class.” Wall Street is realizing that they can’t compete with bitcoin as a store of value, so they will be incorporating it into their existing products and business strategy in order to defend their market share and relevance. As an example of this strategy, Morgan Stanley is reported to be in negotiations to buy the Korean cryptocurrency exchange BitThumb. They really have no choice if they want to be competitive. We are witnessing Wall Street’s transition from a mindset of trying to stop bitcoin to trying to profit from it and use it for their own ends. Those who see and act on the opportunity first have a tremendous amount to gain. Those who don’t will fail and be replaced. Wall Street’s embrace of bitcoin is a big source of demand that will continue to grow.
The electronic payments industry has also signaled its acceptance of bitcoin’s inevitable and unstoppable rise. Visa CEO Alfred Kelly announced that the company is working to allow bitcoin payments “to be used at any of the 70 million places around the world where Visa is accepted.” Rather than trying to fight bitcoin as they did years ago, Visa is now taking advantage of it by integrating it into its existing business. Visa’s main competitor, Mastercard has also announced that it will give merchants the ability to receive cryptocurrency payments by the end of this year. No one should understand the competitive landscape of the payments industry better than Visa and Mastercard, and if they believe that their only chance to remain competitive is to embrace bitcoin, they are probably right. Essentially, the centralized fiat currency payment system will evolve into an off-chain, layer-two scaling solution that will allow people to transact in bitcoin rapidly and at low cost. Larger transactions would still be recorded on the blockchain. If bitcoin could be used everywhere credit/debit cards are, it would have a clear path to become the preferred medium of exchange in the digital global economy.
Last month, Tesla made waves when it was revealed that they invested 1.5 billion dollars of company funds into bitcoin, and that they would soon accept bitcoin as payment for their electric vehicles. What made this a significant story is the unique reputation of Elon Musk and Tesla in the world of business. Musk is admired and imitated by countless entrepreneurs and executives around the world, and now that he set the example that it is rational and responsible to invest company funds into bitcoin, we can expect smart and innovative companies across every industry to adopt the same strategy. There will soon be pressure on every CEO to integrate bitcoin into their business both as a store of value and a payment system. It will be impossible to keep up with competitors otherwise. The corporate imperative to maximize shareholder value requires firms in most industries to undertake bitcoin integration.
Musk himself was following in the footsteps of (and possibly influenced by) Michael Saylor, the visionary CEO of MicroStrategy, who said the following about his company’s capital allocation strategy:
“This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. Since its inception over a decade ago, Bitcoin has emerged as a significant addition to the global financial system, with characteristics that are useful to both individuals and institutions. MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy.”
MicroStrategy started buying bitcoin at $10,000 per coin in 2020, and they are still accumulating now when the price is greater than $50,000. They clearly have confidence in the direction of the trend. Saylor also reportedly said that Google, Facebook, or Apple will be investing in bitcoin.
So much more could be said about the causes of demand for bitcoin, but that would require the length of a book. We haven’t even mentioned the new economic stimulus payments in the United States, which will result in tens of billions of newly-printed dollars being invested into bitcoin. Virtually every country in the world will be following the same inflationary economic policies, and a lot of that money will be invested by people into bitcoin directly. Now that citizens are used to the idea of government giving them free money, the government will be forced to give more. The insatiable government spending will fuel inflation, which will make bitcoin an even more attractive investment option for people seeking to preserve their wealth. Out-of-control government fiscal policy is bitcoin’s best friend.
We also need to spend some time on the other side of the equation – supply. The fixed bitcoin supply limit (21 million coins) and issuance schedule (four-year halving cycle) are the most important supply factors that have contributed to its rapid price appreciation and growing acceptance as a trusted store of value. The strictly limited supply is what enables extreme upward price volatility whenever there is a surge in demand. The bitcoin block reward halving schedule creates a predictable supply squeeze every four years. After the halving, miners have half as many coins to sell on exchanges, which means the price must go up if demand stays the same or increases. The halving that occurred in 2020 was arguably the most important trigger for the current bull market.
The price of bitcoin is set by buyers and sellers on exchanges. Only the coins that are held in the custody of exchanges directly influence the price that we see on the charts. Even large peer-to-peer transactions do not directly influence the price; they use the exchange price to set the terms of their own private transactions. So to analyze supply, we need to focus on the number of coins held by exchanges. According to blockchain data provided by Glassnode, less than 2.5 million bitcoin are currently held by cryptocurrency exchanges, which is a two-year low. That may seem like a lot, but it’s actually a smaller amount than coins held in long-term cold storage and coins that have been permanently lost. This data indicates a growing preference of bitcoin investors for self-ownership of private keys (which happens to be Ballet’s core business). They are withdrawing coins from exchanges and either locking them up in long-term cold storage or using them in digital commerce. They won’t sell during this bull market at any price. That reduces the available supply of bitcoin on exchanges, and the shortage ensures that an incoming surge of demand will launch the price multiples higher.
Bitcoin is different from any other asset class but there are some interesting comparisons that can be made to help us understand the rate of growth and set realistic price targets. Bitcoin is a decentralized network of independent participants, not a company, but it can be compared with companies in order to illustrate a sense of scale. The most common way to do this is to take the market capitalization of a company and compare it to the total value of all bitcoin in circulation. Bitcoin’s current total value is approximately 1.1 trillion dollars. That makes bitcoin worth more than Tesla and Facebook but less than Apple, Microsoft, Amazon, and Google. Apple is currently the most valuable company in the world at 2 trillion dollars. It would be a phenomenal achievement for bitcoin to surpass the value of Apple, and it is well within reach of this bull market.
Bitcoin is often characterized as “digital gold” because it has many attributes that would allow it to take over the historical monetary function of gold. Since bitcoin seems destined to replace gold in the global monetary system, it makes sense to use gold as a yardstick to measure the progress of bitcoin. The total value of gold in the world today is 11.1 trillion dollars, and bitcoin’s total value is 1.1 trillion. If bitcoin truly is a better monetary asset and store of value than gold, we should expect bitcoin to eventually reach and exceed the price of gold. That would be a tenfold increase in price from today. The total value of silver in the world is 1.4 trillion dollars, which bitcoin has almost reached.
A truly ambitious target for bitcoin is to achieve parity with nation states. One possible way to measure their relative strength is to compare the GDP of a country to the total value of bitcoin in circulation. This is an arbitrary comparison that has no real-world , but it is a fun thought experiment. Bitcoin’s total value is currently 1.1 trillion dollars, which is roughly equivalent to the GDP of Spain, the 14th largest economy in the world. One way we can choose to interpret that is to say that bitcoin provides as much economic benefit to the world as the nation of Spain. The GDP of the United States is 21 trillion dollars. If bitcoin can continue to grow in value and usefulness, it will eventually exceed the GDP of the United States, and that would require the price of bitcoin to be greater than one million dollars per coin. That may seem unrealistic, but the desperate smear campaign of central bankers to hurt bitcoin’s reputation is an indication that they take the possibility of million-dollar bitcoin very seriously.