Store of Value: A case for $3 million bitcoin
Before bitcoin can be considered a new form of money, it has to first become a viable store of value. In this progression, bitcoin is just entering this vital second stage. It will necessarily have to fulfill its role as a store of value before it can become a medium of exchange, or a unit of account.
In becoming a store of value, I expect bitcoin to appreciate in price significantly as investors, businesses, and even nation states(“people”) move their savings into the safe haven asset that is bitcoin. The increase of bitcoin price that may result requires long term thinking, and could result in the price of bitcoin easily exceeding $3 million per coin.
What really is a store of value?
“A store of value is the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. More generally, a store of value is anything that retains purchasing power into the future.”
People demand assets where they can reliably store their savings to preserve or increase it’s value over time. These assets are used as a hedge against the inflationary currency of nation states.
The typical asset that comes to mind with bitcoin when people think of store of value is gold. The scope of store of value should however be extended beyond gold to include; collectible art, government bonds, car & other collectibles, and real estate. These are all assets that people store wealth for protection against inflation, and preserve their savings.
Bitcoin has the potential to capture at least a portion of the value that is stored in these assets. By estimation, the total value currently stored in these assets is $263 trillion.
Is it possible to think that bitcoin will capture even a portion of this $263 trillion value? I would argue that it almost definitely will capture some of this value; the only unknown is how much of the value will it capture?
Improvement of Technology
Bitcoin is a step change improvement in the way that value is stored, and because of that it is likely to capture at least a small portion of value stored in traditional assets. When compared to the other assets used as a store of value, it is as good or better than them in relevant categories.
Liquidity: How rapidly can the asset be exchanged for money or another asset?
Bitcoin can be exchanged for USD or native currency within minutes in a global market that is open 24/7 and 365 days year. In addition, bitcoin is highly fungible and can be exchanged directly for goods at any time. Today, some people are even using it in exchange for another store of value, real estate.
Portability: How easy is it to move and store the asset?
Bitcoin is “stored” publicly on a decentralized public ledger(the blockchain) network. A person can access their funds anywhere on earth as long as they possess the private key(a random string of characters) to unlock the funds and an internet connection. Also because bitcoin is purely digital, the physical size of bitcoin does not increase as more is accumulated. Meaning whether a person has a million dollars of bitcoin or one dollar of bitcoin, the physical size of your money does not change. Unlike physical asset such as gold where the more that you accumulate, the more you are burdened with physical gold that must be moved around.
Secure: Can a person be sure their money will still be there the next day?
The bitcoin network is the most secure network in existence and has never been hacked to date. The network is antifragile, meaning the more that it is attacked, the more resistant it becomes to takeover. The economic resources required to hack the network are virtually impossible to acquire at this point.
Utility: Does the asset actually provide a useful function for a person?
Bitcoin can be used as money. It can be exchanged for virtually limitless amounts of things.
Scarcity: Is the asset reliably scarce?
Bitcoin has a maximum supply cap of 21 million bitcoin which will be reached in year 2140. Today, nearly 17 million of these bitcoin have already been issued, leaving only about 4 million more bitcoin to be distributed to miners between now and the year 2140. Note that it is estimated that about 4 million of the 17 million of bitcoin in existence today have been destroyed or lost, reducing the estimated current supply to about 13 million coins.
Store of Value: The Size of the Prize
For analysis, if we assume that bitcoin captures 20% of the $263 trillion stored in traditional assets it will achieve a price of $3.1 million per bitcoin. Additionally, for each 1% increase in the percentage of store of value that bitcoin captures, it would increase in price of bitcoin by about $155,000. This is shown graphically below.
It is an assumption that bitcoin will capture 20% of the $263 trillion stored in traditional assets. The real world outcome will likely be either above or below 20%. I assume 20% because we know from the preceding section in this article that because bitcoin is a superior technology for storing value, it will capture at at least a part(>0%) of total value stored, however it is unwise to assume that it will capture all(100%), or even a majority(>50%) of value stored. Thus 20% was assumed.
Is it too optimistic to assume that bitcoin will capture 20% of value stored? Is it too pessimistic? One can make any assumption for percent of value captured and plot the corresponding bitcoin price in the chart above. The price of bitcoin assuming different percents of store of value captured is shown below. What percentage of value stored captured by bitcoin do you think it makes sense to assume?
The point of this exercise is to provide an extended framework on how to think about the transition of value into bitcoin that will likely happen over the coming decade or more. The possible outcomes are likely tremendous and should not be ignored today given that the current price of bitcoin is only about $8,000.
The bottom line:
If you assume any percent of value stored in traditional assets will become captured by bitcoin, it will result in a substantial increase in the price of bitcoin. This price increase could easily be greater than $3 million per coin.
- I am not a financial adviser and this is not meant to be financial advice
