If not now, when. If not Bitcoin, what?
If there was ever a time for Bitcoin to “shine” (no gold pun intended), it is now. Below we make a prediction of where it will trade in twelve months. And here we need to insert the necessary disclaimer: this is not financial advice, simply the ramblings of an editor who is self-isolating and has had too many glasses of Lagavulin at midnight.
The Hedge Funds
Rentech (Renaissance Technologies), one of the most prominent hedge funds out there, recently added bitcoin futures to their list of potential investments.
People who know Renaissance also know that they often invest in long-short strategies… meaning, the fact that they have announced that they may be holding bitcoin futures doesn’t mean they will necessarily go long. Nevertheless, the announcement is a piece of the bigger puzzle that investors are putting together around the future of bitcoin.
What is more interesting to us are the recent comments from Ray Dalio in a Ted interview on diversification and how to achieve it. We will save you some time and quote him directly from the video (you really should start watching around minute 26):
You should think a little bit unconventionally. Do you have a little bit of gold? Do you have a little bit of, um… asset… in case this monetary system breaks down and money is redefined, do you have a little bit of that?
I know it looks we are grasping for straws here, but what asset is he talking about? If Ray Dalio was buying bitcoin, he would not say it as he generally does not tell people what to buy (but rather how to think). Moreover, he will be sticking his neck out there for an asset that traditional money managers have long viewed with caution. But is gold really that “unconventional” to use his words? As a matter of fact, we can’t think of anything more conventional than investing in gold!
If he is indeed suggesting bitcoin, that would also align with the “schmuck insurance” concept Chamath Palihapitiya has been so fond of, and with which we would agree.
All this is anecdotal and speculation, but certainly something that titillates bitcoin bulls. And it does align with the whole concept behind bitcoin, namely a scarce asset with minimal inflation, which should be expected to do well when governments are running the printing presses. So far, gold 2.0 is still gold based on how both gold and bitcoin have performed over the last few months. However, money printing takes a long time to make its way fully into asset prices and we wouldn’t count bitcoin out as of yet.
12 Month Bitcoin Price Prediction
Just for kicks, let’s do a back-of-the-envelope prediction on the price of bitcoin. We will use a high-level version of the approach described in the book Superforcasters. Let’s take several predictions based on different inputs and methodologies and average them.
Prediction 1: Bitcoin price stays where it is today. Easy, $8,800.
Prediction 2: Bitcoin price return is in line with the return of a top hedge fund, in line with our discussion above. Let’s say a good hedge fund returns 20% per year, or 25% before fees. Assuming this, we get $8,800 * 1.25 = $11,000.
Prediction 3: Bitcoin performs like it did afterthe prior two halvenings. As you may know, the supply of new bitcoins will halve starting mid-May (the halvening), which historically has been associated with an increase in price. After the last halvening, BTC price went up ~300%. Using this as a guide, we get ~$35,000. However, we also know that the 300% price increase in the last halvening was substantially lower than the 8,800% prince increase after the first halvening. In light of that, let’s lower our assumption to 100%, leaving us with a price of $17,600.
Prediction 4: Bitcoin is correlated with the market and performs accordingly. Well, now we have to predict where the market will be, not very helpful! Assuming a 30-50% decline, we get $5,000 or so.
Prediction 5: Bitcoin performs the next twelve months as it has performed the prior twelve months, which was posting about 50% return. This gives us $13,200.
Averaging all of the above, we get $11,120 for the price of BTC twelve months from now, or a 20%-30% increase. Looks like quite the modest gain, especially for an asset this volatile, plus it won’t make any headlines… so, let’s add one more prediction to the average:
Prediction 6. Bitcoin performs exactly like after the most recent halvening, growing by 285% to $33,880. Using this number in the average instead of the one in prediction 3, we get: $14,376. So there you have it, between $11 and $15 thousand. Since we are long, we will go with $15,000.