Bitwise: Bitcoin can rise to $200,000 due to dual drivers

Author: Matt Hougan, Chief Investment Officer of Bitwise; Translated by: 0xjs@Jinse Finance

People often make a mistake when assessing Bitcoin, which leads them to significantly underestimate its potential.

Last week at dinner, a financial advisor asked me a great question:

Does Bitcoin have to rise to $200,000 for the dollar to collapse?

This is a great question because it reveals the ambiguous logic that many people use when talking about Bitcoin. In my experience, they often say this:

Bitcoin is digital gold, while the United States is abusing the dollar; therefore, Bitcoin is valuable.

These words are not wrong - oh, I may have said something similar on CNBC too. But this way of speaking is very lazy. Specifically, they conflated two different arguments.

This confusion is harmful because it greatly underestimates the full potential of Bitcoin and the likelihood of its success. If you separate these arguments and consider them individually, you will have a better understanding of Bitcoin.

Argument 1: Bitcoin Will Succeed

When you buy Bitcoin, your first bet is that it will succeed. To me, this means that one day it will be able to stand alongside gold as an established and widely recognized store of value, held by various types of investors.

In the past 15 years, Bitcoin has made significant progress towards this goal. It has evolved from nothing into an asset worth over $1 trillion, held by 60% of the world's large hedge funds, many large asset management companies, and even some countries. It has gone through bull markets and bear markets, scandals and breakthroughs, and has faced various regulatory regimes. Now, most people acknowledge that it will continue to exist.

But it is still immature. Nowadays, most institutional investors still do not hold Bitcoin. Many financial institutions still prohibit holding it. The media still does not trust it. And many people still do not understand it. We do not often hear such a situation regarding gold.

A simplified, zero-sum view of this argument is that Bitcoin will take over the market for gold. However, I believe 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. The market cap of Bitcoin is 1.3 trillion dollars, only 7% of gold's 18 trillion dollar market cap. I don't know if the mature market cap of Bitcoin will be half of gold, equivalent to gold, or double that of gold, or if it will attract a new group of investors. But I am sure it will not just be 7%.

So, investing in Bitcoin is betting that it will continue to develop along its current path from a small ecological niche market to the 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 the market value of Bitcoin grows to be comparable to that of gold, then each Bitcoin will be worth approximately $900,000.)

Argument 2: Governments around the world will continue to devalue fiat currency

When you buy Bitcoin, your second bet is that the governments of the United States and other countries will continue to print money and incur 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, further expanding the market size.

In the United States, we currently have $36 trillion in federal debt - and an additional $1 trillion is added every 100 days. This year, we will spend $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 opinion, such a scale of debt and money printing will greatly expand the size of the "value storage" market, as investors will seek a safe haven from this madness. Could the current market size of $20 trillion become $50 trillion in 10 years? Or $100 trillion?

I want to state the obvious: if the "store of value" market expands threefold in the next 10 years, and Bitcoin merely maintains its 7% share of that market, then the price of Bitcoin will also triple.

(It is worth noting that many people in the Bitcoin community - myself included - believe that Bitcoin has other uses beyond the traditional "store of value" purpose. For example, I believe that one day Bitcoin will be used as an alternative currency to settle international payments. Any other use case arguments like this are considered 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.

What I mean by mutually independent is that as an investor, you only need one of the arguments to hold true in order to achieve success.

Imagine that the market capitalization of Bitcoin grows to 25% of the current gold market, with no other changes. No market expansion, no new use cases, and no concerns about the spiraling debt. Great! In this scenario, the price of Bitcoin would reach $214,000, roughly four times its current level.

Or imagine that Bitcoin's market share has not increased, but the "store of value" market size has tripled. That would be great! Then Bitcoin's price would also triple.

If both of these things happen (it would be even better if those additional opportunities could be realized), that would be really great. The good news is that I think this is the most likely scenario.

So, for my consultant 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 around the world continue to abuse their currencies, Bitcoin is also maturing, and it may not only reach this price point but also far exceed it.