The Case For A $5 Million Bitcoin
Updated: Oct 27, 2021
The following is for entertainment purposes only, and does not constitute investment advice. Please do your own research and determine your personal risk tolerance prior to investing. Please seek a professional for individual advice. The author has a financial interest in Bitcoin and is long Bitcoin and Ethereum.
Bitcoin just used to be something your smelly, hermit friend Tim in I.T used to talk about, going full Charlie Day with his cork-board and red strings. Some secretive internet coder, Satoshi Nakamoto, decided to write a complex algorithm that creates this...thing. This digital token that does...what, exactly? Well back then, nothing. But in 2010, something amazing happened. A Florida man asked if Papa John's would accept payment for his two pizzas in Bitcoin, and they said "yes" astonishingly enough. This marked the first time that a digital currency was used in a commercial transaction, and it set off a chain of events that suddenly gave the currency value. And that value began to explode.
Nine months after the pizzas, Bitcoin had grown in popularity, and price. Bitcoin reached $1 per coin, making the costs of the two pizzas $10,000. By 2015, they were worth $2.4 million. By 2021? At Bitcoin's all time high of $63,000 per coin, those pizzas were worth a cool $630 million, meaning you could swap a large pepperoni for "The One" mansion in L.A.
However, despite the massive price appreciation in the last decade, the concept of Bitcoin has changed somewhat. Despite it's initial intention to be a currency, incredibly limited transaction speeds and confirmation times have deemed the network it sits on too slow to actually function as a viable payment method. This has given rise to alternatives like Ethereum and Solana that function as more payment-ready networks, while Bitcoin has evolved into a type of digital gold that functions more as a store of value, or hedge against inflation.
This hasn't stopped Bitcoin exposure to more avenues of growth, though, and investors are more bullish than ever. Today, we're going to chat about how Bitcoin is growing, why institutions and countries are suddenly diving in, and one investors extreme prediction based on a tried-and-true technical signal that could see Bitcoin shatter asset appreciation records.
Bitcoin Is Still The Crypto King
There are currently more than 4,000 types of crypto currency available to consumers today, all looking accomplish different things. Tokens to serve as actual currency, others as rewards for completing actions, and some as overt pump-and-dump schemes. Yet, Bitcoin prevails. Why? Because it's the biggest and the most approachable. Bitcoin has the institutional familiarity and the track record of growth that is starting to attract bigger whales. Namely, institutions.
Twitter troll king Elon Musk announced earlier this year that Tesla will now hold Bitcoin on their balance sheet, as well as accept it for payment for cars (this was later rolled back). After this announcement, the dominoes began to fall, specifically around the company MicroStrategy Inc.
MicroStrategy is a business intelligence and mobile software company based out of Virginia. At least, it was until it dove headfirst into Bitcoin. In June of this year, the company disclosed that it owns over 100,000 Bitcoin, now worth approximately $5 billion at time of writing, with a cost basis of $26,080 per coin (meaning they've returned about 100% in four months on their investment). This is thanks to their CEO, Michael Saylor. Saylor is a Bitcoin bull (obviously) who decided to invest in Bitcoin for a couple of reasons:
Strong return on investment, as evidenced by the total return so far
Increased brand value thanks to the gimmick. Saylor estimates that this enhanced the brand's value "by a factor of 100"
Shareholder returns, giving shareholders better returns due to capital gains on the Bitcoin. It also gives investors an avenue to indirectly invest in Bitcoin.
Saylor didn't stop there, however. In a public statement earlier this year, Saylor predicted that Bitcoin is on course to hit $5 million per coin "in the next couple of years" and stated that it's "a screaming buy." But how did he get to this number?
Why Bitcoin Could Flourish
There are several tailwinds in favor of Bitcoin brewing at the moment. MicroStrategy is not the only major investor in the currency nowadays. The headlines of Tesla and MicroStrategy earlier this year could serve as another "pizza moment" in the history of Bitcoin, this time through the lens of institutions. While the pizza order lent credibility to the currency for retail investors, Tesla and MicroStrategy holding the currency on their balance sheets has started to lend credibility to institutions and investment houses. Wealthy people are now able to gain exposure to Bitcoin through institutions like JP Morgan's wealth management division (despite CEO Jamie Dimon claiming the currency is "fool's gold"). CNBC's annual survey of millionaires now sees younger generations of affluent people owning Bitcoin in their investment portfolios. And now, we have countries investing in the nascent currency.
Last month, El Salvador became the first country to declare Bitcoin as a national currency. This was an attempt by their president, Nayib Bukele, to help alleviate some of the stress on the financial system with a vast percentage of his country finding themselves without bank accounts. Additionally, 25% of El Salvador's GDP is made up of remittances, which is money being sent home from foreign nationals. Bitcoin could help alleviate the speed of the transfers, as well as the fees incurred with each transfer, putting more money into the hands of citizens, faster. If this experiment works in El Salvador that can establish a decentralized currency system with rapid transfer networks, then this could easily be duplicated and replicated in other countries in the coming years.
There is one more tailwind to Bitcoin that we have to talk about in its quest for Saylor's magic $5 million number, and it's a doozy: The Stock-To-Flow (S2F) model. S2F is one of the most widespread technical models used to track the price of Bitcoin. Unlike a stock that has underlying assets and intrinsic value, Bitcoin doesn't really have that. As a result, analysts have to look to other variables in order to derive estimates on what Bitcoin's price could look like moving forward. That's where the S2F model comes in. The idea can also be applied to metals like gold and silver, and is based around scarcity of the object. Gold, unlike standard currency, is a finite resource; we aren't printing any more. Bitcoin is much the same. Bitcoin was only ever designed to have 21 million coins. Once all of those are mined, that's it, it's over. This gives us an endpoint in which to base value calculations, again similar to gold.
Back to the model. According to popular S2F analyst "PlanB" on Twitter, Bitcoin's value is set to rocket over the next three years, and other crypto-oriented analysts agree. His blog post from earlier this year using a time-and-supply-bound analysis to arrive at a per-coin valuation of $288,000 by 2024. However, you're not here for "$288k Per Coin." You're here for "$5 Million Per Coin," so let's get into why it might explode. In a recent interview, PlanB gave his reasoning for a potential $5m price target, and it all has to do with the next halving event:
“Maybe that all-time high could be reached this year and the low the year after in 2022 but after that there will be another halving in 2024. So 2025 and the years after that will be actually much much more interesting than the next two years. And yes, the S2F models predict prices ranging from $1 million (for the normal stock flow model) to 5 million (for the stock flow x model)" - PlanB on "The Wolf Of All Streets"
But how accurate is the S2F model? The answer is "Ehhhhh." Early on in 2019 and 2020, the model was almost dead-on, predicting nearly every price movement with eerie accuracy. However, it's strayed a little in the last 12 months, failing to predict the insane asset volatility that saw the $63k all-time high set earlier in 2021. The dips outraced the S2F predictions, as pointed out by PlanB himself on Twitter:
The model also indicated that Bitcoin should be around $115k by August, which was about 250% higher than where it actually was. So, long story short, it's not perfect. However, it's one of the better predictors that we have in assessing the technical movements of the asset, so it's a little bit of the blind leading the blind.
The Bottom Line
Even with all of this research and math behind it, the truth is: we have no idea where Bitcoin could go. At time of writing currently, Bitcoin has smashed through $54k per coin and just re-crossed a $1 trillion market capitalization. If Bitcoin were to get to $5m per coin, the total Bitcoin market capitalization would be $100 trillion. To put that in perspective, here are some other common global market caps:
Global Investment-grade Real Estate Market - $10.5 trillion
Global Bond Market - $32 trillion
Global Equities Market - $93 trillion
So if Bitcoin were to hit $5m per coin, it would exceed the market cap of the global equities market. Could it? Sure! Could it fall short? Also yes. The truth is, no one really knows how this is going to go, especially when we run out of coins and it suddenly becomes a scarce asset. All we know is that Bitcoin seems here to stay. Are you in?
Do you own Bitcoin? Where do you think it's headed in the next few years? Let me know in the comments below! And don't forget to sign up for my email list to get these in your inbox as soon as they post!