After spending about two hours writing this post and just milliseconds before posting, my laptop suddenly shut down. Luckily Steemit had saved my post somehow... Suffice it to say, I had a mini-heart attack! Enjoy.
I recently read a paper called "An (Institutional) Investor’s Take on Cryptoassets" and thought it would be nice to share it with you and give you a summary (since it's 26 pages long). It's written by John Pfeffer who has worked in private equity and advised on turnarounds while with McKinsey in Europe and Latin America.
The paper takes the perspective of a long-term investor on cryptoassets. It breaks cryptoassets down into three categories, being: Network backbone (e.g. Ethereum), DApps, and Money (payments and monetary store of value). The last category is the one I want to focus on in this post.
Pfeffer outlines three uses of money: store of value, means of payment, and unit of account. He then argues that it's unlikely for one cryptocurrency to become the primary crypto for all of these uses. In other words, it's most likely that there will be one crypto to make payments with and another as a store of value. The cryptoasset most likely to become the dominant non-fiat store of value is Bitcoin.
Next, the author estimates the value of Bitcoin as a dominant store-of-value crypto to be between 25% - 78% of total gold stocks, which would translate to 1.9 to 6.1 trillion USD (read the paper for the exact calculations). Then, it considers Bitcoin displacing non-gold international reserves (i.e. mostly fiat reserves), which adds another 2.8 to 8.5 trillion USD in potential value. The total value ends up at 4.7 to 14.6 trillion USD. With a maximum supply of 18.2 million BTC (assuming 2.8 million BTC have been permanently lost and cannot be recovered), the value per BTC ends up at 260,000 - 800,000 USD!
Finally, we can produce a formula to decide whether or not Bitcoin is worth investing in. To simplify, we make the following assumptions:
- Bitcoin either becomes the dominant store of value or it becomes totally worthless
- We take the current BTC price as $15.000
Now we can calculate the required probability (p) of BTC becoming the dominant store of value to break-even as follows:
Current BTC price = p * future BTC price
$15.000 = p * $260.000
$15.000 = p * $800.000
We end up with a break-even value of p between roughly 1.9 and 5.8%. This means that if you think the probability of Bitcoin becoming the dominant store of value is greater than 5.8%, you should definitely invest in Bitcoin. If you think it's somewhere between 1.9 and 5.8%, you should maybe invest and if you think this probability is lower than 1.9% you should not invest any money in BTC. As an example, if we take a probability of 10%, then the value of Bitcoin as a dominant store of value is between 26.000 USD and 80.000 USD, representing a significant upside to the current market price of $15.000.
Summary:
- Bitcoin has the potential to become the dominant store of value
- This gives Bitcoin a potential value of 260.000 to 800.000 USD
- If you think the probability of this happening is larger than 5.8%, you should invest in BTC
Image credit: unknown
I'm a new writer on Steemit trying my best to deliver high-quality content.
Please consider upvoting or resteeming my posts!
You can also support me by following me or donating:
BTC: 1NQLE91WbHHMDCm2rbyg6yadhz423YsMnM
ETH: 0x050451c41c91a72683c99472f0566b55a4c6627c
LTC: LiVkom4hFT1y3iJrsgaQx1JfiUuXscPhg8
Thanks!
-longcat
