It’s tempting for investors to be bullish on Bitcoin, especially after a 91% rally to $52,000 in just four months through Feb. 15. Bitcoin’s current $1 trillion valuation puts it among the world’s top 10 tradable assets, even ahead of Warren Buffet’s world-famous Berkshire Hathaway, which has a market cap of $875 billion.
The world's top tradable assets by USD market capitalization. Source: 8marketcap
Bitcoin would need an additional 34.5% gain to reach $70,000 from the current $52,000 level, which would represent an increase of $350 billion in BTC’s market cap. Such a move would put the cryptocurrency ahead of silver and the British pound, including bank deposits and monetary notes. The key question is whether the current situation supports a $1.35 trillion valuation for Bitcoin.
One could argue that Bitcoin cleared these hurdles when it hit an all-time high of $69,000 in November 2021. A repeat of that feat now seems more likely given the approval of a spot Bitcoin ETF in the U.S. and the resolution of some risks, such as Binance’s court battle with regulators and FTX exchange bankruptcy proceedings.
Bitcoin's all-time high is driven by low interest rates and surging inflation
In November 2021, traditional financial fixed income yields were below 0.50%, which led investors to seek risky assets for higher yields. In November 2021, the US inflation rate, measured by the Consumer Price Index (CPI), also soared to 6.8% year-on-year, the highest level since June 1982. The situation at the time strongly favored scarce assets, while stock market investors were worried about global supply chain disruptions and COVID-19 affecting economic activity.
U.S. CPI inflation year-over-year (left, purple) and Bitcoin. Source: TradingView
The latest CPI inflation data for January 2024 shows a year-on-year increase of 3.1%, still above the Fed's guidance, but moderately controlled. It may be naive to assume that the current inflation risks are comparable to those when Bitcoin reached its all-time highs. Data shows that investors expect earnings of S&P 500 companies to grow by 10.9%, up from 3.8% in 2023. Therefore, investors have little incentive to seek alternative assets compared to the end of 2021.
Spot ETFs will transform Bitcoin into a mature asset class
Since launching on January 11, the spot Bitcoin ETF industry has received an impressive $4 billion in net inflows in the U.S., with assets exceeding $35 billion, or 3.5% of Bitcoin's market cap. In comparison, total gold ETF holdings are $210 billion, equivalent to 3% of its market cap, excluding the ~50% devoted to jewelry and medals. This does not mean that Bitcoin ETFs are close to their limits, but provides a rough indication that the asset class is more mature than it was in November 2021.
A key selling point for Bitcoin is the institutional inflows that have occurred. However, its price is still 25% below its all-time high of $69,000, and even lower if adjusted for inflation or total fiat money supply.
Bitcoin adoption has increased, but bullish estimates of prices of $100,000 or higher have yet to materialize. On the bright side, a $3 trillion company was a distant dream in November 2021, but it became a reality for Microsoft and Apple. Therefore, as long as the dollar continues to depreciate, Bitcoin has the potential to surge above $70,000, but this is unlikely to happen before the halving in April.
