Three reasons why bitcoin could go to $100,000

Bitcoin © Getty Images
Cryptocurrencies are now an asset class of their own

$100,000 bitcoin!

I thought that would get your attention.

A stupid, unfounded prognostication?

Probably.

But here are three reasons it could happen.

How to justify an extraordinary headline

When competing for readers in the ultra-competitive universe that is the world wide web, it pays to have sexy headlines. And one of the delicate tightropes my editor, John Stepek (who writes them) has to walk is to make the headline alluring, while staying truthful to the piece.

Get this wrong (and he very rarely does) and yours truly gets the headline fired back at me two years later by petty trolls anxious to undermine my every utterance.

So just to qualify this headline (which actually happens to be one that I did write), I am describing why bitcoin could get to $100,000. I am not saying that it will.

1. Portfolio allocation and career risk

Cash, stocks, bonds, commodities, real estate, gold – these are different asset classes. There is crossover between them, of course, but they are each in themselves classed as different assets.

Bitcoin and cryptocurrencies are a new asset class. They have qualities of cash, qualities of gold and, as the ICO (initial coin offering – launches of new cryptocurrencies) movement grows, they will have qualities of shares too, but they are in themselves an asset class. As the space grows, crypto could become a core feature of portfolios, just as other assets now are.

With the market currently rising as it is, investors will demand it of their fund managers and financial planners, who will then have to deliver, or many will take  their business elsewhere.

It’s a process that financial blogger Josh Brown, aka The Reformed Broker, calls “institutional ass-covering”. He argues that the career risk involved in not being in an asset-class that is rising, is what fuelled the hedge fund mania of the 1990s and the commodities boom of the 2000s.

More and more crypto products will be invented to meet this rising demand, including, eventually, a proper bitcoin exchange-traded fund (ETF) of some kind (we’ll get there eventually). This is the gradual institutionalisation of the space.

The total value of the global stocks is around $80trn. The government bond market is perhaps twice the size. The current bitcoin and crypto market cap is sub-$200bn. It’s tiny in comparison.

My colleague Charlie Morris points out that by the end of its 70s bull market, the global gold market reached a value equivalent to the size of the New York Stock Exchange (NYSE). The same happened with Japan by the end of the 80s, dotcom by 2000 and commodities by the end of the bull market of the 2000s.

It’s pretty clear that crypto is the bull market of this decade. The current value of the NYSE is around $20trn. Even if the market cap goes to a fifth of the size of the NYSE, then at $4trn, that would make the crypto market 20 times bigger than it is today, with bitcoin comfortably surpassing $100,000.

It “only” needs to rise around 14 times from today’s price of $7,100. Cripes it’s gone up 14 times enough times in the past!

2. “It’s another one of those”

This brings us to bitcoin’s “previous”. What it has done before is often a guide to what it might go on to do in the future. It’s why technical analysts look for “fractal patterns” – chart patterns that repeat.

If you read my piece last week, you might remember billionaire hedge fund manager Ray Dalio’s principle of asking “which one of those is it?”

Fractal patterns, in a way, follows that principle. Below is a log chart of bitcoin since shortly after its inception. Log charts measure percentage gains rather than price.

bitcoin price chart

I’ve marked the major highs in bitcoin’s evolution – $30, $200, $1,200 – with round numbers. I’ve put little red curvy lines marking the crash lows, which have followed (notice how it always seems to make a double bottom).

On a log chart, the current move, compared to those in the past, looks almost sober. If it were to enjoy a final spike such as in 2011 when it went to $30, or 2013 when it went to $1,200, lord knows where it would take us on the chart.

You can see that it went from $2 in late 2011 to $1,200 in 2013. A move of similar percentage magnitude from the 2015 low of $200 would take it over $100,000.

3. Satoshi Nakamoto, the architect of bitcoin, was a gold bug

Nakamoto understood gold’s role in the history of money: the value of its scarcity; the importance of its independence; the energy-intensive process you have to go through to produce it and so on.

He intentionally designed bitcoin to be a digital replica of gold.

Gold, much as I love it, is an analogue asset in a digital age. It’s why it’s often described as a barbarous relic (although this is in fact a misquote – Keynes was actually talking about the gold standard when he made the remark).

Nevertheless, bitcoin is digital gold. (By the way, searches for “bitcoin” on Google already exceed those for “gold”.)

There are roughly 190,000 tonnes of gold in existence.  The value of a tonne of gold is about $40m. Thus the value of all the gold in the world is currently around $8trn.

Let’s say all the 21 million bitcoins there will ever be are mined. If the value of those 21 million bitcoins were to match all the gold that has ever been mined, you’re looking at a price of $380,000 per bitcoin ($8trn/21 million).

Once upon a time – in fact even at the beginning of this year – the idea of one bitcoin exceeding the price of an ounce of gold seemed far-fetched. The ultimate target for die-hard bitcoin bugs must be market cap parity.

Then again… a swift reality check

Folks, I’ve enjoyed writing this article. I hope you’ve enjoyed reading it. Please don’t take these price projections too seriously. Yes, bitcoin could go a lot higher. But sentiment is also monumentally frothy. Given previous corrections, bitcoin could fall below $1,000 as easily as it goes to $10,000.

I’ll enjoy looking back in five years time and considering how stupid or prescient these projections are.

  • Katrina

    I can guarantee that in 5 years time, the price of bitcoin will be $0. I don’t know if it will go to $100,000 along the way.

    • Nico Metten

      I don’t know about the 5 years, hard to put a timeframe on it. But yes, it looks like the end price cannot be anything but near 0. It is a classic bubble. As such, it can of course go to ridiculous highs first. But once it pops, who is going to catch that falling knife, without any intrinsic value?

      • Lachlan Sean C

        You should look into what intrinsic value is.

        • Nico Metten

          I have never heart a good argument for an intrinsic value of bitcoin. An intrinsic value would need to be a use value. That is to say, bitcoin would need to be useful for something else but being money. But it is not. What is useful, is the blockchain technology. Very useful indeed. Trouble is that technology is not scarce. It is in the public domain. Everyone can, and many are using it. Bitcoin is not the only application of it. In fact, right now there are even multiple bitcoin applications of the blockchain. Something that is useful, but not scarce in the long run has no monetary value. Air is a good example of that. What is scarce is the individual bitcoin unit. But the individual bitcoin unit is not useful. So you have the situation that what is useful about bitcoin is not scarce, and what is scarce is not useful. That is why it does not have an intrinsic value. And that is different from gold. The individual gold coin actually has the useful gold in it. So with gold, what is scarce is also useful. Once bitcoin runs out of new buyers, as it eventually has to, as new buyers are naturally limited, no one will stop it from falling. There will be no value investors buying into the panic selling. A lot of people will get burned, and the whole thing is finished. Thus is the nature of Ponzi schemes. The fact that prices are going up, is completely irrelevant. If anything, it is hurtful to bitcoin. It would be better if prices were stable, because then it could be used as a store of value and medium of exchange. Now, everyone is just speculating that prices are going up. No one is accounting in bitcoin, and hardly anyone spends it. All these people will try to cash in, once prices are perceived to not go up further. But again, at that point there will be no buyers. I know that none of this is going to convince a true believer. They will always have to get burned before they believe it.

          • Nigel Timperley

            There’s no need to be a true believer or a true sceptic, you know. You can just be a normal investor with a balanced view of risk who acknowledges that none of us knows the future. So: I invested £X, knowing I could safely lose it all without it impacting my lifestyle one bit, waited for Bitcoin to rise in value, then sold an amount of my holding that was worth a bit more than £X. I am holding the balance as a risk-free investment, knowing that my seed capital is off the table and I can quit worrying about whether my crystal ball is faulty. It’s fun, and it might just be profitable.

            • Nico Metten

              Yes, of course you don’t need to be a true believer to be in bitcoin. There are quite a few people who know it is a bubble, but are comfortable, or simply enjoy the ride of, trading a bubble. But there are true believers, who will not let any argument count. They think, bitcoin is a sure thing. They are the ones who will really get burned in the end.

              • Nigel Timperley

                I wasn’t really disagreeing with you – or agreeing. I just find bitcoin makes people fight and instead suggesting a pragmatic way out of the squabbles. Clearly, there are no sure things in investing… well, I haven’t found any. Good luck with whatever you put your money into anyway. cheers

          • Loz Blanko

            I suspect the intrinsic value may not be clear to us yet. I don’t see how any blockchain technology can ever work or survive without an incentive mechanism behind it such as Bitcoin and I’m pretty sure blockchains are going to become revolutionary. Perhaps we are looking at it wrong. What if Bitcoin is going to be as fundamental to the internet as electricity is? I don’t really know how to explain what I’m thinking any better but I definitely wouldn’t bet against Bitcoin at this stage.

      • James

        “Precious metal values comes from nothing less than their efficacy as a medium of exchange – as a form of money. It may sound weird at first, or perhaps tautological, to claim that gold is valuable because it can be used as value, but this is precisely the point. Bitcoin falls into this asset class”

        http://moneygenerationxyz.com/forever-blowing-bitcoin-bubbles/

        • Nico Metten

          Gold is well established as a store of value. And it is increasing also used again as a medium of exchange. It did become money, because it had intrinsic value. And that intrinsic value still puts a floor into how far the price of gold can fall.

          Bitcoin cannot become money, without intrinsic value. At least not on a free market. Sure, if a government were to force people to use it to pay taxes, then that might change things. But that is unlikely to happen. Bitcoin is currently not used much as a store of value or a medium of exchange. It is mostly a speculative asset, in which people invest in the hope to getting rich quick. Just read this article, or almost any other article on crypto. Just read the comments or listen to crypto experts. It is all about how much money you can make. But bitcoin cannot be both. It cannot be money and an asset to get rich quick. For it to be money, it needs to be widely used for business. but for being used for business, prices would need to be stable. For currencies that are used for business, a 1% daily move is already huge. That means, that for bitcoin to become money, all the people who are just in it for the capital gains need to leave. But if they leave, who is left? A handful of idealists, using bitcoin in insignificant economic transactions, like buying a pint in a pub. The irony is that people think prices going up is the breakthrough for cryptos. It is the opposite. Bitcoin becoming a speculative assets extinguishes any hope that it can ever function as money. I was hopeful about bitcoin years ago, before prices went ballistic. Now that they have, it is over.

          • James

            There is no intrinsic value in gold for it is a non-value producing asset…

    • Miloslav Hájek

      😀 😀 ok i am rather selling

  • Paola Crawford

    the most enjoyable speculative play I’ve ever done – if it falls now – I will definitely buy more

  • Miloslav Hájek

    I can guarantee that in five years bitcoin market cap will exceed that of gold.

  • adamant

    Human nature is a funny thing, all those who missed the boat in BTC because they were convinced it was Tulips, Ponzi, Bubble, Scam and pontificated how it would collapse are still doing it and so desperate for it to happen.

  • Mario Miniaci

    I get the ‘bitcoin = rare = gold’ thing; my only worry to date (proved in a timely way by Ethereum a few times) is that it’s based on computer programming, and one thing we all know is that computer programs are buggy. The chance of a vulnerability/patch/bug coming along and simply wiping out your digital asset is just too scary. If I were, say, North Korea, I’d have people working on this already in order to knock it all over in a year or two.

    • jman0war

      It’s not possible. Your bitcoins exist only in the blockchain, which is immutable (cannot be changed). Your private key however, that you use to ‘unlock’ those bitcoins are yours to lose.

    • Loz Blanko

      If I were North Korea, I would be racing to get as much Bitcoin as possible, not trying to knock it over.

  • Charlie D

    Perhaps China will offer to convert the Yuan to Bitcoin, instead of gold on its Shanghai exchange to create a PetroYuan.

  • Horiboyable .

    The issue I have is that the state could just declare it illegal. Hell the Saudi’s have just confiscated 800 billion from Princes. The state will always turn on their citizens when they are broke, nothing is safe.

  • polidorisghost

    If I wish to buy (and sell!) bitcoin, which Banks can I trust to handle such transactions?

  • seriousgames

    Well I would have agreed with the idea of Bitcoin hitting $100K or more a few weeks ago but looking at Bitcoin there is no way. It’s going to be worth exactly $0 as almost no one will be using it soon. Why? Cost of transaction. Right now cost of transaction is between £6 to £9 per transaction. That will only increase. So if you want to buy something with Bitcoin for £100, you might have to pay £500 in transaction fees! That is the point where a currency becomes completely worthless – it costs more to transact than the value of your transaction..

    Not saying crypto currencies are dead. But Bitcoin transaction fees are already starting to choke it. Another year and it won’t be worth accepting them because they cost too much.