What Could a Bitcoin Be Worth?

What Could a Bitcoin Be Worth?

Since I work for the capital markets group of a major financial corporation, I am obligated to point out, THESE ARE ONLY MY OPINIONS.  I don’t know my employer’s opinion on the topic (or any topic), nor is my opinion based in any part on research or analysis completed by my colleagues.  I work in IT, it’s not my day job to know anything about asset valuation.  Besides, if you’re reading this as investment advice… you’re missing the point.  It’s a question of technology adoption that I want to answer.

I have had several interesting chats with friends over the last few weeks about investing in Bitcoin.  Most of the people investing in Bitcoin today are trying to make a quick buck.  Like any volatile asset, bitcoin currently provides the opportunity to do just that.  Fluctuations are often more than 5% in a day and the price of bitcoin is up 240% in the last year!  Unfortunately, it’s also a good way to lose money; the price is down 11% since last week!  As with any asset, there are transaction costs and high short-term tax rates that offer a bleak prognosis for short-term profit.  If you want to play your luck, go ahead, but it would be just that… luck.  I don’t see any reasonable way to guess whether bitcoin will be up or down tomorrow or next week or next month or even in 2 years.

Another way to think about whether or not to own bitcoin is to believe that there is some possibility that it will become an actual currency; that you’ll be able to buy just about anything using bitcoin, that some people will actually use bitcoin as their primary method of paying for things (like I currently favor my new Amex Card), that some employers will actually pay their employees in bitcoin, etc…  If you’re really a believer, you might go so far as to suggest that bitcoin could become THE global currency.  In the event that this type of scenario plays out, the demand for bitcoin would skyrocket.  The addressable market for this is roughly 80.9 trillion dollars (according to this awesome visualization, $80.9T represents all the money stored in bank accounts or cash in the world).  If, in 2040 when there will be 21 million Bitcoin, all of those accounts had the same purchasing power they do today then each bitcoin would be worth $3,852,000 2017 dollars.  That is, roughly, a way to think of the highest value a Bitcoin could have (yes, I’m ignoring the fact that technology will increase the purchasing power of the world… just go with it).

There are some really good reasons why this (or at least bitcoin becoming a currency) could/should happen:

  1. Bitcoin requires a significantly thinner financial services sector to maintain it.  Since the ledger is built in to the currency, there’s no need for banks to impose a transaction fee for their accounting services.  In some cases you could even get third parties and lawyers out of the way.
  2. If bitcoin becomes cash it also instantly puts the “unbanked” (people who do not have access to modern banking) on a similar footing to the “banked”.  Of course it doesn’t solve loans, mortgages, life insurance, etc… for them, but they could shop online and at any store.
  3. It would make international trade significantly easier under any circumstance.  If universally adopted, it would eliminate foreign exchange risk.

There are also some compelling reasons to believe this won’t happen:

  1. It removes the possibility of a central bank (at least as we know it today).  Central banks are able to ease financial crisis by increasing the money supply.  That’s not possible in the world of cryptocurrency.
  2. As it stands right now, Bitcoin couldn’t support the transaction volume.  There can only be an average of 7 or so transactions per second on bitcoin.  This is a technical limitation because of the size of the blocks that store the transaction data.
  3. Because of #2, it’s clear that some of the fundamentals of bitcoin need to be modified.  Unfortunately, a divide has emerged about HOW to do that.  It is possible that this divide could lead to bitcoin splitting in to two separate currencies.
  4. It requires reliable internet connectivity to be universally held by all people in all places.

Ultimately, I think bitcoin is only a reasonable investment if you believe in the long-run.  Even if you do believe that bitcoin will be a currency, it’s only a reasonable investment as a “black swan”.  That is to say, it might be a good idea to have some exposure in your portfolio to the possibility that bitcoins will be worth WAY more than they are right now, but also recognizing there is a much higher chance that they’ll wind up being worth nothing.