How far can the Bitcoin price go (realistically)?
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Bitcoin has hit another all time high, lifting the entire crypto-sphere out of a winter that has started at the end of 2021. With regulatory clarity in the United States taking hold and one asset management heavyweight after the other offering crypto-ETFs, there seems to be no end in sight for the steep climb of Bitcoin prices. As always, Bitcoin is taking the entire crypto-world with it.
On the value of price predictions
Those who are long enough in the crypto-space will live through multiple deja vus. Today’s discussions have not progressed one inch from those we hear after every Bitcoin resurgence. In one corner are those who dismiss is it as a mania at best, or a giant fraud at worst. They parrot the trite argument that cryptocurrencies have no intrinsic value but are one hundred percent demand-driven. As such, they are bound to come crashing to zero.
In the other corner of the ring you have crypto-fanatics that honestly believe our current financial system is a means of the elites to suppress society. And since Bitcoin will liberate the people from any control by banks and governments it is inevitable that everybody in the world uses it. Hence, it is only a matter of time until its price shoots into the seven-figure range.
The only thing more absurd than this debate are the pseudo-mathematical explanations that come with it. The one thing they have in common is that obviously none of them has a real correlation to the real price development. My favorite is dividing the limited bitcoin supply (21 million coins) by the world’s population and somehow deriving a bullet-proof dollar price in the future.
There’s no shortage of such absurd explanations out in the web (and even serious media). If you are looking for some entertainment, check it out. Otherwise save yourself the time. Of course, the future Bitcoin price has nothing to do with mathematics, but mostly with psychology. Nobody can predict how it will develop and where it will end up eventually. However, I believe there is an indication of when we might eventually see a saturation effect of the demand for cryptocurrencies.
This indicates a potential ceiling. There are many factors that are correlated with the Bitcoin price, but that is not the question we are looking attoday. It might well be that it takes another couple of ups and downs until the price movements are not so drastic any more. And we might never even get to this point. There are so many developments that could not only kill the current bull run, but the entire crypto industry. Regulation, large-scale thefts, forks – just to mention some of the things that first come to mind.
Why Metcalfe’s Law sounds smart, but tells you nothing about Bitcoin’s future
A number of analysts have invoked Metcalfe’s Law to argue that Bitcoin’s value will increase exponentially in the future. Basically, the law stipulates that the more people use a network the more its appeal grows. It does not just expand linearly but disproportionally. As adoption gathers pace the farther it gets. This also applies to means of payments like credit cards or currencies. Needless to say, that those analysts arguing based on Metcalfe’s Law are overly optimistic on the price Bitcoin can achieve within the next year or two. Predicting a trend with proven network effects sounds more serious than predictions on gut feeling, yet if you look at the history of Bitcoin, it is clear that its climbs in value have not accelerated.
On the contrary. Percentagewise the appreciations of Bitcoin have slowed the more mainstream the asset got. In 2013, for example, the returns were north of 5,000% whereas 2020 and 2023, two very good years, boasted profits of ca. 300% and 150% respectively. Still remarkable, but not exactly a trend confirming Metcalfe’s Law.
It is because those experts get the very nature of Bitcoin wrong. It is not a payment instrument that rises in popularity the more people use it. Rather it is an investment asset that gets its appeal through its scarcity. Sure, when more people invest in it, the price surges, the media buzzes, and more people get in. But not exponentially like in the case of a true network.
Comparisons with the stock market cap seem more intriguing, at first at least. Interestingly, these comparisons are cited by both camps. Either as a proof of how irrelevant Bitcoin is or as proof how undervalued it still is.
Both are wrong. Though Bitcoin is an investment asset rather than a currency, it definitely does not behave like an equity. You don’t own part of a company, you don’t earn dividends, you don’t get voting rights. And the price is not driven by the utility value of the industry or by competitors or by earning potential. Hence, both asset behavior and investor interest are fundamentally different. There is, however, a comparison with another market cap that can lead us a step closer to understanding the maximum price.
Market demand for gold as the best yardstick
Bitcoin has been defined many times as digital gold. Its supply is limited, it is difficult to mine, and it cannot be copied or created artificially. On top, the argument most frequently made against Bitcoin – that it is worth only as much as somebody is willing to pay for it – can be made for gold too. The shiny metal has no utility value. If you own real estate you can live in it or rent it out. If you own stocks, you own part of a company that makes money. Fiat money is linked to the GDP of a country. Gold on the other hand keeps its value solely by hoping that somebody else will buy it from you in the future.
Thus, by looking at the money locked in gold you get an indicator of the potential market demand cryptocurrencies can address in the long run. My chart at the top of the article shows that currently there is roughly eleven times more money in gold than in Bitcoin. Two assets that will share the same characteristics in the future. Why will? Because Bitcoin most likely still has a couple of rollercoaster rides ahead until it is not only like gold in theory but behaves like it. It is wrong to believe that today Bitcoin is bought as a store of value as is the case with gold. With its volatility Bitcoin is much worse even than cash for preserving purchasing power from today to tomorrow. It will take a prolonged slowdown of the Bitcoin appreciation until it competes with its physical equivalent for investors. But it will happen one day.
Now does that mean Bitcoin can eventually rise by a factor of eleven and reach $800,000 apiece? Highly unlikely. It would mean that Bitcoin would have to take away all of gold’s market share. Yet what the comparison to the gold market cap demonstrates clearly is that there is plenty of market opportunity for Bitcoin still to address, even once its age of stellar returns comes to an end. And this is even before you factor in unforseeable variables such as tapping new types of investors.
The most important lesson history teaches us
I wrote that reaching a price of $800,000 is highly unlikely. I formulated it in a non-finite way because I have been in the space long enough to learn an important lesson. In 2019 I was holding a presentation at the Blockchain Tech World Conference in London. The event was attended by a rare mix of blockchain pioneers and top-notch executives from banks and corporations – definitively none of these nonsense analysts I mentioned in the beginning. At the venue the organizers had put up a board where participants could vote with stickers on where they believed the Bitcoin price would be ten years from then. Check the result in the picture I took (sorry for the poor quality, you can see why I ended up in technology rather than in photography):
The overwhelming majority thought the value would crash to zero. Many saw the price either at $10,000 or $100,000. In-between you can see hardly any stickers.
The Bitcoin price back then was at around $4,000. It was easy to dismiss those optimists as dreamers. Now that we are exactly half way through the ten-year prediction horizon it appears that those that had put their stickers at $100,000 are far closer to the reality than the pessimists ($0) and the prudent experts ($10,000). So, the lesson is this: Crypto-assets are the place where technology and investing meet and humans are very bad in forecasting both of those areas. It doesn’t matter how versed we are in the technology or the market. Yet we keep trying and trying. And regardless of how often we have been wrong before, every time we are convinced anew that our predictions will be accurate.
I mentioned in the beginning that Bitcoin prices have more to do with psychology than with anything else. So, do our forecasts. The only thing that will help us more reliably plan for the future, is becoming aware of our cognitive biases. The best way to start is by reading Morgan Housel’s amazing book The Psychology of Money.
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