President and co-founder of ISBX, a leading app development agency in Los Angeles. Prolific angel investor and cryptocurrency enthusiast.
You’ve probably read it on a multitude of news outlets, but the decentralized virtual currency Bitcoin is on a seemingly unstoppable tear, rising over 54% in value the first two weeks of August alone. As of late August, its value was at $4,625 per coin. Taking an even wider step back, Bitcoin has outperformed virtually all major asset classes, rising over 520% in a one-year period.
But is this staggering trend sustainable, or are we merely in a bubble? There are a number of drivers behind a doubling of the value of the currency – and I think there’s a case for a $10,000 coin in our near future.
Scarcity
It’s important to note just how scarce Bitcoin is. There are currently a little over 16.5 million Bitcoins in circulation, representing about $71 billion. That may seem like a lot, but compare that to how much currency is in circulation in the world – about $5 trillion worth – and Bitcoin is just a blip in the currency radar.
On top of this, it is estimated that some 25% of all Bitcoins mined are lost forever, either because of improperly generated wallets, lost keys, discarded hard drives or carelessness.
So what does this scarcity mean, really? For starters, it limits the total possible supply of Bitcoin that can be owned. This means that if the demand continues to increase, the price must go up.
What Demand?
With the supply of Bitcoin limited, the reality is that enough people have to want it and use it in order for its price to go up. This presents a bit of a problem for some people, like billionaire investor Howard Marks, who said on CNBC, “There is no intrinsic value in Bitcoin.”
There are definitely two sides to the debate about the value of Bitcoin, however: It’s no accident that Bitcoin’s total market value is higher than the likes of Netflix, General Motors and American Express, seemingly eating entire large cap companies’ worth of market share growth in just a few weeks.
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So what exactly is powering this massive surge in growth? Below are a few reasons I think Bitcoin has started to gain larger adoption, and why this trend has good potential to increase over the foreseeable future.
• Utility Value. Perhaps the largest use case for Bitcoin is as a fungible instrument: It can be used like fiat currency, to buy and sell goods of value as a form of currency exchange. It is also very fast and inexpensive to move in comparison to traditional banking.
• Increased Accessibility. Bitcoin is becoming increasingly easier to purchase and trade. CoinMarketCap lists over 75 exchanges that actively traded at least $1 million in Bitcoin within the last 24 hours, and according to Coin ATM Radar, there are over 1,400 Bitcoin ATMs currently operating, which represents a 100% increase in circulation compared to just a year ago.
• Highly Liquid. Due to very high daily trade volumes and a strong open order book, Bitcoin can be purchased and sold almost instantly in relatively large amounts. It can be converted to other currencies or to a local currency at a moment’s notice.
• Store Of Value. Although it wasn’t designed as a store of value, Bitcoin has proven to be a fairly good instrument to store or increase value over its lifetime. Just $1,000 invested in 2010 would be worth of $70 million today.
• Non-Banked. Cade Metz made a case in a Wired article about how Bitcoin might thrive in the developing or emerging markets where local currency may be unstable due to political issues or where the majority of the population is non-banked. In these areas, Bitcoin may be the best alternative to fiat, since all that is needed is an internet-connected device such as a smartphone.
Big Money
All of the above reasons make a strong case for the continued use and growth of Bitcoin, but perhaps the biggest case for the argument supporting Bitcoin’s growth to $10,000 per coin is the future potential for “big money” to join the party. I’m not talking about some pie-in-the-sky possibility; this is something that’s already starting to happen. Take, for instance, a few examples:
• Grayscale’s Bitcoin Investment Trust is currently the only publicly quoted and traded security which places a 91% premium on Bitcoin’s price, trading it at $7,690 per share (as of late August). If the public markets are willing to place a significant premium on Bitcoin, it means the investors are willing to bet that the price of Bitcoin will increase to support this investment.
• CBOE Future Exchange’s decision to support Bitcoin futures trading on its exchange starting late 2017. This marks the first major U.S. exchange to allow Wall Street to speculate on Bitcoin’s price.
• Bill Miller, the former Legg Mason chairman and CIO, put 1% of his net worth in Bitcoin in 2014. Forbes recently reported the value has increased ten-fold and is now a top holding in his $2 billion hedge fund.
• The Winklevoss twins’ current market estimates of their Bitcoin holdings based on their last ownership claim peg their stake at around $4.3 billion, assuming they haven’t sold any. They are known for their efforts to list COIN, a proposed ETF that was shot down by the SEC in April. They are currently appealing the decision.
• Mark Cuban previously said Bitcoin is a bubble; he now backs a cryptocurrency fund.
More money going into Bitcoin means the price has to go up. People will continue to buy Bitcoin if the prospects for its future growth look good. My bet is that big money is already quietly moving money into the currency, and very soon more and more mainstream news outlets will start covering the cryptocurrency. When just about anyone you bump into has heard of Bitcoin, that will be when Bitcoin is well north of $10,000 per coin. It’s not a case of if, but when.