1 million-dollar Bitcoin? I am sure that is not new to you. Some so-called experts have put their predictions for the coin anywhere from a couple of hundred thousand to a even few million. And for your information, Bitcoin is trading at around USD 16,600 at the point of writing.
Those who know me knew that I don't lean toward the camp of making forecasts when it comes to investing. Not that I am against it, there are portfolio managers who succeed in making sensible calls, and they also managed their risks well. And I hold great respect for those who find a consistent edge in this area. But it is just not my cup of tea.
However, I feel I got to write something after reading this piece where Cathie Woods makes a call for a 1 million-dollar Bitcoin by 2030. It is one thing to just talk about where she thinks the direction is headed and her views. And it is another to pin a number and time stamp to it. Having said that, she is not the only one, and it's also not her first time making extreme calls such as this.
$1 Million-Dollar Bitcoin - Where Did That Even Come From?
It is a fine line between making a probabilistic call vs a fluffy call.
The former is backed up by sound fundamentals, historical evidence, and statistics. The portfolio manager is well aware of the assumptions he makes. On top of that, he got a calculated sense of how probable his call will materialize while fully recognizing there are other possible scenarios. And he factored all these including the risks involved into his overall investment plan and strategy.
The latter, on the other hand, is hardly based on any substance. If I were to sound a little bit extreme, then all he has is just a story. One where all the stars align and then what he wants magically appears. There is simply no basis to back it up. And if anyone probes further, it will fall apart.
Some Questions To Think About
Everyone likes a good story, especially one that tells of great rewards. That ramps up your emotions. But don't let that stop you from asking questions. I am not an expert in cryptocurrencies, but you don't need to be one to ask sensible questions.
What a 1 million-dollar Bitcoin mean?
As of November 2022, there are about 19.216 million Bitcoins in circulation. And at this point in time, the price of Bitcoin hovers around $16,690. That gives it a market capitalization of approximately $320 billion. If a single Bitcoin is worth $1 million, notwithstanding the fact that the number of Bitcoins in circulation grows over time, that means a market capitalization of more than $19 trillion. That far outstrips Gold which is now at around $11 trillion. And to achieve that, Bitcoin has to grow at a compounded rate of 67% every year for the next 8 years. Now, excluding the earlier years, since 2014, Bitcoin's compounded annual rate is only half that.
What is the underlying basis for it to even sustain this annual rate of return?
One of the most contentious debates about Bitcoin as an asset is its utility. Because if it doesn't generate cashflows like a business and there is no usage for it, then it theoretically doesn't have any intrinsic value. So how is it trading at where it is now? Well, if Tulips, something perishable, during the Tulips Mania in the 1600s can top $1 million in today's money, then we have to accept the fact that some things just can't be explained from a rational perspective. The power of belief, perception and greed can be astounding. And with increasing participation and attention, businesses around the world will come on board to give people what they want. It is just business. What Jamie Dimon says sums it up nicely.
I personally think that Bitcoin is worthless,” Dimon said. “Our clients are adults, they disagree, that’s what makes markets, so if they want to have access to buy yourself Bitcoin, we can’t custody it but we can give them legitimate, as-clean-as-possible access.” - Jamie Dimon
If the fundamentals are never there to begin with, then it is only a matter of time before things start heading south.
What about blockchain and its potential?
Whenever Bitcoin comes under fire, people will bring up Blockchain as a defense. Yes, people will agree that Blockchain has potential. But there is a distinction between the two. Bitcoin is a product. Blockchain is a technology. They are not the same. And what about their relationship? Bitcoin rides on Blockchain and that pretty much sums it up. Will Blockchain's potential be greatly undermined or vanished simply because something bad happened to Bitcoin? No, I don't think so.
What about replacing the Fiat Monetary system which will eventually collapse?
Will it even collapse? And by 2030? What are the chances of that happening? How many stars need to align for that to occur? That is something too remote to even think about. And on top of that, we are looking at Bitcoin coming in as the solution? That is as likely as asking nations to give up a good part of their control over the money supply. And note we are not talking about replacing emerging currencies whose countries are facing extreme circumstances such as hyperinflation scenarios. We are talking about major currencies such as USD, EUR, and JPY. With the kind of day-to-day movements Bitcoin experiences, it is hard to imagine it being used as a currency.
What about the benefits in terms of time and costs of using a digital currency?
These are appealing points. But that does not mean the solution is Bitcoin. Countries are already looking into it with China at the forefront in terms of developing its own digital currency. These are digital currencies issued and controlled by the respective governments. I am not ruling out businesses out there who might decide to accept Bitcoin. At least, Tesla did at one point in time, until it don't. Well, that is Elon Musk for you. But if we want to see widespread adoption, there needs to be legitimacy. And only the governments can give this.
What about Bitcoin acting as Digital Gold and being a hedge against downturns?
If you follow the markets closely, you will be able to see this for yourself. Bitcoin does not behave in any way like a hedge. Even prior to 2022 which is year where almost every asset falls, Bitcoin tends to crash together with risky assets such as stocks. It exhibits the same behavior as that of a risky asset. Bitcoin is an innovation borne out of excessive liquidity in the system where loads of money are hunting for higher yields. But there is something good out of this because without Bitcoin or cryptocurrencnies in general, these money might have pushed your traditional assets to even more bubbly levels before 2022.
Bitcoin and other asset performance when S&P 500 drops more than 5%
Conclusions
These are just my thoughts. I am not invested in Bitcoin or cryptos, and neither am I against anyone who invests in them. In the end, I may be wrong and Cathie Woodsturns out to be right. But that is absolutely fine. It is not the predictive outcome I am after, that is not within anyone's control. It is the process that is important. That is something we can all manage. Personally, I have no issue with anyone making calls, but I would expect more from a professional fund manager.
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