Author: Matt Hougan, Chief Investment Officer at Bitwise; Translation: 0xjs@Golden Finance
People often make a mistake when evaluating Bitcoin, which leads them to seriously underestimate its potential.
Last week, while having dinner, a financial advisor asked me a great question:
Does Bitcoin have to rise to $200,000 for the dollar to collapse?
That's a great question because it reveals the fuzzy logic that many people use when discussing Bitcoin. In my experience, they often say things like:
Bitcoin is digital gold, and the U.S. is abusing the dollar; therefore, Bitcoin is valuable.
This is not wrong—oh, I might have said something similar on CNBC. But this way of stating it is lazy. Specifically, they have conflated two different arguments.
This confusion is harmful because it leads people to significantly underestimate the full potential of Bitcoin and its chances of success. By separating these arguments and considering them individually, you can better understand Bitcoin.
Argument 1: Bitcoin will succeed.
When you buy Bitcoin, your first bet is that it will succeed. For me, this means that one day it will be able to stand alongside gold as an established, widely recognized means of storing value, held by various types of investors.
Over the past 15 years, Bitcoin has made tremendous progress towards this goal. It has grown from nothing to become an asset worth over $1 trillion, held by 60% of large hedge funds around the world, many large asset management companies, and even some countries. It has experienced bull markets and bear markets, scandals and breakthroughs, and has undergone various regulatory frameworks. Now, most people acknowledge that it will continue to exist.
But it is still not mature. Nowadays, most institutional investors still do not hold Bitcoin. Many financial institutions still prohibit holding it. The media still distrust it. And many people still do not understand it. We don't often hear such situations regarding gold.
A simplified, zero-sum view of this argument is that Bitcoin will take market share from gold. But I think a more likely scenario is that Bitcoin will gradually expand the size of the 'store of value' market.
For our purposes, this is actually not important. Bitcoin has a market value of $1.3 trillion, which is only 7% of gold's $18 trillion market value. I don't know if a mature Bitcoin market value will be half of gold, equivalent to gold, or double that of gold, or if it will bring in new groups of investors. But I am sure it won't just be 7%.
Therefore, investing in Bitcoin is betting that it will continue along its current path from a small niche market to a mainstream market. This has also been the main driver of its astonishing returns over the past 15 years. I believe there is still a lot of room for growth.
(By the way: If Bitcoin's market value grows to match gold, then each Bitcoin will be worth about $900,000.)
Argument 2: Governments will continue to devalue fiat currency.
When you buy Bitcoin, your second bet is that the U.S. and other governments will continue to print money and accumulate debt, thereby devaluing fiat currency. According to this reasoning, this will both increase the value of 'store of value' assets like Bitcoin and gold, and encourage more investors to allocate to such assets, thereby further expanding the market size.
In the U.S., we currently have $36 trillion in federal debt—and it increases by $1 trillion every 100 days. This year, we are spending $900 billion to service this 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 view, such a massive amount of debt and money printing will greatly expand the size of the 'store of value' market, as investors seek a safe haven from this madness. Could the current $20 trillion market size become $50 trillion in 10 years? Or $100 trillion?
I want to make an obvious statement: If the size of the 'store of value' market triples in the next decade, and Bitcoin merely maintains its 7% share of that market, then the price of Bitcoin will also increase threefold.
(It is worth noting that many people in the Bitcoin community—including myself—believe that Bitcoin has other uses beyond the traditional 'store of value' function. For example, I believe that one day Bitcoin will be used as an alternative currency for settling international payments. Any other use case arguments like this count as additional benefits.)
Conclusion: Why This Analytical Framework is Powerful.
The importance of these arguments lies in the fact that they are both cumulative and independent of each other.
When I say independent, I mean that as an investor, you only need one of the arguments to hold true to succeed.
Imagine Bitcoin's market value growing to 25% of the current gold market, while nothing else changes. No market expansion, no new use cases, and no concerns about rising debt spirals. Great! In this case, the price of Bitcoin would reach $214,000, about four times its current level.
Or imagine that Bitcoin's market share does not grow, but the 'store of value' market size triples. That would be great! Then the price of Bitcoin would also increase threefold.
If both of these things happen (and it would be even better if those additional opportunities materialize), that would be really great. The good news is that I think this is the most likely scenario.
So, in response to my advisor friend's question, the answer is: No, Bitcoin does not need the dollar to collapse to rise to $200,000. It just needs to capture a small share of the existing gold market to reach that price.
But as governments continue to abuse their currencies, Bitcoin is maturing, and it may not only reach this price point but far exceed it.
