With the introduction of bitcoin exchange-traded funds, and the historic ‘ halving’ of the coin that just occurred, along with the 160% increase in bitcoin’s price in 2023 and more than 50% so far this year — everyone is paying new attention to cryptocurrencies these days. Recently, JPMorgan Chase said blockchain technology should save banks $120 billion a year, and predicts the sector will add nearly $2 trillion to global GDP by 2030.
Perhaps you have seen the bitcoin price predictions ~ AllianceBernstein predicted bitcoin’s price could be $150,000 by next year; JP Morgan says it will reach that price by the end of the decade, and Cathie Wood (CEO of ARK Investments) predicts $1.5 million, with Michael Sayler (Entrepreneur and bitcoin evangelist) says bitcoin will reach $5 million. Interestingly, there seems to be no one predicting that its future price will be lower than today’s.
The question of bitcoin’s future price isn’t just academic; rather, it has strong implications for portfolio modeling and asset allocation. If anyone with any degree of confidence that bitcoin might outperform other asset classes, the should be compelled to add it their diversified portfolios.
Thus, the question is – should investors have this confidence?
A study by Franklin Templeton – who recently launched the first bitcoin only ETF (EZBC) – found that more than 75% of financial advisors who work at independent RIAs said over the next few years they plan to allocate an average of 2.5% of assets they manage to bitcoin. Considering that RIAs collectively manage $8 trillion today, that translates into potentially more than $150 billion of flows into crypto.
If RIAs are planning to allocate to bitcoin, then what might family offices, pension funds, endowments and other institutional investors allocate? How about wirehouse financial advisors? And retail investors themselves?
The Math Revealing Bitcoin’s Future Price
There are many formulas to attempt to predict bitcoin’s future price but, in the end, bitcoin’s price is entirely about supply versus demand. Of all the assets in the world, bitcoin is unique in this regard: It is the only asset whose supply is finite.
Companies can issue more shares or engage in stock buybacks; governments can print more money or change zoning laws to alter the availability of real estate; and more gold is pulled from the ground each year, increasing its supply. But there will only ever be 21 million bitcoins — never more, never less. This one fact allows us to engage in simple arithmetic that we can’t do with any other asset.
Let’s start by looking at the size of the world’s financial assets.
As of December 31, 2023:
- Global equity market ~ $123 trillion
- Global debt market ~ $138 trillion
- Global real estate market ~ $379 trillion
- Global gold ~ $14 trillion
- Global cash ~ $53 trillion
- Other global assets ~ $27 trillion
- Bitcoin ~ $0.8 trillion
= Total ~ $738 trillion
If all the advisors, investors and institutions that manage these assets were to allocate just 1% of their portfolios to bitcoin, the total flows could be $7.4 trillion. Of the 21 million bitcoins that will ever exist, 19.4 million exist today — meaning the flows would increase each bitcoin by about $378,000. Add in bitcoin’s current price — $65k as of May 2024 — and you get bitcoin’s future price: roughly $420,000.
You can see how the experts get to their seven-figure predictions: They simply presume a larger average allocation to bitcoin than just 1%. A 5% allocation, for example, would put bitcoin’s future price at $1.9 million.
To decide what price you believe bitcoin will reach, you need to answer only two questions:
What percentage of the world’s investors will allocate to bitcoin? And what will be their average allocation?
Of course, not everyone equally owns the world’s assets, not everyone will invest and investors won’t allocate equally. Furthermore, this analysis only applies to bitcoin; if investors choose to invest in crypto, they can also choose from ethereum or some other digital coin instead.
This is certainly NOT a recommendation to invest in cryptocurrency, namely bitcoin. It is simply an interesting perspective to consider given bitcoin is the one financial asset that is FIXED at 21 million coins – forever.