Yes you read that properly.
Could we see a market cap on Bitcoin of $40 trillion?
Before we get into this, anyone who follows my works knows I am far from a Bitcoin maximalist. Actually, I feel most of then are pretty naive when it comes to monetary matters. They also tend to overstate what Bitcoin will end up being due to many of these same factors.
That said, I can see a place where Bitcoin has a major role. Anyone who saw what I wrote about the last few months probably can guess where we are going with this.
So what will it take for Bitcoin to reach $40 trillion in market cap?
Collateralization
Simply put, we need to collateralize Bitcoin. This is its grand opportunity. Here is where we can see the world financial system instantly transformed. It will allow for massive expansion of the global economy while stabilizing the financial system (contrary to what the likes of Powell, Warren, and other establishment tyrants tell you).
It also solves one of the largest needs the financial world has.
Quality collateral is missing. We are woefully under represented there. There is no other way to describe it. In a world where there is roughly $300 trillion in debt, the fact that we have only US Treasuries as pristine collateral exemplifies the imbalance.
How bad is it?
The total US Treasuries outstanding are roughly $20 trillion. This is the maximum amount of debt that can be backed by this high quality form of collateral. However, not all Treasury securities are used as collateral. Hence the number is much lower.
We also see a situation where the private sector offers nothing. All the experiments over the years by the banking and financial system amounted to zero in this area.
Here is where Bitcoin could provide a solution.
$40 Billion Market Cap
Bitcoin, as so many point out, is capped. There will only ever be 21 million of them created. This could be an advantage when looking at the collateralization although not really required.
What is more important is the fact that Bitcoin is fully transparent. At the same time, it has enough liquidity to provide any lender the assurance of quick return of the capital put out. These two factors make Bitcoin very appealing as a unit of collateralization.
All of this leads into the area which is most important: trust.
Bitcoin, since it is tied to a permissionless blockchain, has the trust of whomever uses it. This means that anyone will accept Bitcoin as collateral if the system starts to embrace it. Without questioning the value of what is being put up, lenders can accept this for the attributes just mentioned.
Of course, to be legitimate, there has to be a lot of Bitcoin to back the debt. Since the number of Bitcoin is ultimately fixed, the only thing that will change is in USD terms. That is fine since most international financial activity occurs with the USD as the unit of account. Having Bitcoin backing swap agreements and whatever else the international banking system does is probably a sound idea.
It also will remove the bank run situation that occurred leading up to the Great Financial Crisis.
Therefore, we could see Bitcoin acquired for the purpose of collateralization. This will put a lot of upward demand. When you have institutions out there operating with billions of dollars, having Bitcoin as a stabilizing factor could work.
How Likely Is This?
The question is how likely is it that Bitcoin will ever become a unit of collateralization? In my view, it is most probable. The reason is who is buying Bitcoin.
We are seeing Wall Street starting to get involved. It would be a mistake to presume this will not end up on their balance sheets at some point. In fact, we should believe that it will end up with governments, central banks, and sovereign wealth funds. They are all going to join the party.
Where we see this shifting is when they are holding this asset. To them, having it sitting on the balance sheet is a waste. Thus, we can also presume they are going to put it to work.
Much of the financial world exists outside the view of the public. Internationally, there is an entire set of rules based upon the idea of balance sheet banking. This is nothing new. Hence, the idea of using the Bitcoin on one's balance sheet as collateral is as sensible as putting up 3 month LIBOR futures.
Of course, the idea is that Bitcoin will be more solid than the other forms of collateral that is utilized.
Big money could move Bitcoin higher. It only makes sense for these institutions to push things in that direction since, the more value it holds, the more they can borrow. Institutions like this live to leverage. That is how they became so powerful.
Bitcoin is just another weapon for them to use in this game. However, the qualities it presents could make it better than anything else out there. The counterparty risk with the asset itself is non-existent. This provides the financial community with a powerful unit of collateralization.
It would not surprise me that we see this unfold within the next 5 years (the collateralizing, not the market cap). Over time, this will cause the value of Bitcoin to increase substantially.
What do you think? Do you think Bitcoin could push these levels as it gets adopted as collateral?
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