Famed investor Paul Tudor Jones recently marveled at the loyalty of Bitcoiners, complementing them as “religious zealots” because fully 86% held on through the “Crypto Winter” beginning in 2018 that took Bitcoin to one-sixth of its former price.
So why do hodlers believe so strongly in Bitcoin?
Of course, many of us love Bitcoin because it represents liberty against oppressive governments. But here I’m just focused on Bitcoin investors in general. After all, millions of superfans loved Steve Jobs and Apple Computer throughout the 1990’s, but investors certainly did not. Love alone simply doesn’t explain 86% of investors calmly holding through a 6x drop in price.
In my last article on Bitcoin fundamentals I broke down what it means to “have faith” in Bitcoin as an investor. Namely, that you think it will displace things like gold or US dollars as a store of value or medium of exchange, while surviving regulatory and competitive pressures. More formally, you believe that demand for Bitcoin will grow faster than supply, relative to any other asset you could park that money.
Starting with Bitcoin’s supply, it’s gloriously easy to predict since Bitcoin is a completely transparent protocol with an effectively unchangeable supply schedule. Today there are 18.7 million Bitcoins, over the next 30 years they will grow to 21 million, and that’s it. So a 12% increase over 30 years, or just under 0.5% per year.
That means that, all else equal, if Bitcoin demand doesn’t grow at all over the next 30 years, then Bitcoin’s 2050 price would be about 12% lower. Of course, constant demand for Bitcoin is not going to happen, simply because a main reason for holding Bitcoin is specifically to speculate on future money demand. So Bitcoin demand will either be a lot higher or a lot lower — the demand distribution has what statistics calls “fat tails,” meaning extreme results are likely.
So if, indeed, a lot more people want Bitcoin in 2050, the price will rise roughly in tandem, minus that new supply. For example, let’s say 2050 Bitcoin demand rises to today’s gold demand — gold today is about 15 times bigger than Bitcoin. You can just put that together with the supply and get about a 13x jump in purchasing power (1500%*88%=1320%). That translates to about $500,000 per Bitcoin in today’s purchasing power. By the way, I sketched some other scenarios here using the same process.
Of course, Bitcoin doesn’t exist in a vacuum, since investors have an opportunity cost in whatever else they could’ve bought instead. For example, they could’ve just left the money in US dollars in a bank or the back yard.
So we next want to ask what’s going to happen to the dollar. The starting scenario for any long-term prediction should be the past — the “naive forecast.” Over the past 30 years, the number of US dollars in existence has risen by about 6 times, while demand for dollars has gone up about 3 times. This is why a US dollar today buys only half of what it did 30 years ago — 6 times more dollars chasing 3 times more demanders. So, if the dollar keeps trucking at that same rate, a 2050 dollar would only buy half what it does today.
Of course, there’s no guarantee the dollar keeps doing what it’s been doing. Covid, for example, has radically changed the pace of money creation, which could cause a drop in demand as people come to realize the dollar is weakening. Meanwhile, an economic crash could radically reduce demand all on its own. Still, for the moment, I’ll just take that naive forecast as a big-picture trend, so a halving of the dollar’s real value.
Now, you can just put them together: 15x rise in Bitcoin demand discounted by supply to 13x purchasing power. Up against 2x drop in dollar’s purchasing power yielding 26x jump in Bitcoin purchasing power — about $1,000,000 in those shriveled-up future dollars. In concrete terms, a Bitcoin that today buys a $36,000 car might, in 2050, buy today’s $500,000 house that, in 2050, lists for $1,000,000. Meanwhile, that same $36,000 hodled in a dollar bank account would, instead, buy half a car in 2050.
Now, this example is based on Bitcoin becoming a gold replacement hence reaching today’s $10 trillion gold demand — something I personally think is likely since any goldbug under the age of 60 seems to be flipping from the yellow metal to the orange pill. But if, instead, Bitcoin is really shooting towards being a US dollar replacement, then those numbers skyrocket ten-fold or more — if you’re curious, check out my article on hyperbitcoinization if you haven’t yet.
Meanwhile, if you think the dollar is doomed because the US government and Federal Reserve have become even less responsible than they used to be, then Bitcoin’s future price measured in future dollars can get ridiculously high. After all, this very day a Bitcoin is worth 11,000 trillion Venezuelan Bolivars, which sounds like a number you made up while you were high. Incidentally, back in 2010 when hungry Bitcoiner Laszlo Hanyecz bought his pizzas, a single Bolivar bought about 400 Bitcoins.
We’re not quite in Bolivar territory yet, but central banks worldwide have broken new inflationary ground this past year, with the Fed growing M2 money supply by 30% in just these past 14 months — blowing past the inflationary 1970’s. In the unlikely event that pace kept up until 2050 it would imply a 500-fold increase in the amount of dollars, in which case a future dollar would be very lucky to fetch what a penny buys today. In those kinds of scenarios, once you account for savings flight from a hyperinflationary currency, a Bitcoin could be worth billions of future dollars
So that’s the big picture. Now, like any good speculator, we want to stress-test. What could go wrong?
The main risks to Bitcoin since the start have been technical and regulatory. Technical risk has dramatically declined with time (the “Lindy Effect”) as so many smart hackers tried and failed to kill it, in what turned out to be an evolutionary gauntlet of epic levels.
One might pause here to note that the world’s fiat banking system has its own technology vulnerabilities as well, given the frequency and scope of bank and database hacks. Fiat currencies hobble along on comically outdated systems held together by baling wire and duct-tape. Systems that only survive because they use your tax dollars to chase down hackers and because central banks run basement printers to replace money banks lose. Then there’s the “petrodollar” question of the US military being used to encourage certain countries to price their exports in dollars.
Beyond pure tech, this means that owning a dollar is a gamble on all of these dollar welfare mechanisms continuing, and also that governments manage to pull them off competently — an increasingly unrealistic assumption.
The other big risk to Bitcoin is regulatory. Not the risk that Bitcoin would be “banned” — it cannot be banned. Rather, the risk that users are threatened by governments so they become afraid to use, or to own, Bitcoin.
Such user restrictions would, at first pass, reduce Bitcoin demand. But the effect would probably be muted for two reasons. First, many people would ignore the ban, perhaps pretending to have lost their keys in a tragic boating accident. Second, any government that energetically hunts down crypto users may paradoxically convince yet more potential users, at home or abroad, that they have to protect themselves.
Both are historically reasonable; FDR’s gold seizure, for example, only caught about half the gold, despite threats of seizure and prison sentences for keeping your gold. Since Bitcoin is much easier to “hide” — it is impossible to prove whether you forgot your password — we might expect a much higher rate of disobedience than gold.
Now, such user threats would still affect institutional demand, since institutions are “hostages” in the sense that it’s easy to prove if they own or use Bitcoin, plus it’s easy for governments to punish them. This would be rough for institutions, but also great for new Bitcoiners who no longer have to “outbid” banks when buying fresh Bitcoins.
Meanwhile, as in technology, we have to consider the dollar’s risks as well. The dollar won’t be banned altogether, but it’s also eminently at the mercy of every regulatory whim dreamt up by the geniuses who run governments. These include increasing restrictions on who can spend fiat, who can save in fiat, and who can keep their fiat. Personally, I’ll take a regulation-proof Bitcoin over the regulatory hangman that the US dollar is rapidly becoming.
In sum, going by history, there are excellent reasons to have faith in Bitcoin if your alternative is the US dollar. And there are yet more reasons compared to other countries’ trash money. Meanwhile, the existential risks to Bitcoin are rapidly approaching, if not already beating, the risks to fiat.
Put together, these make Bitcoin a better option not only compared to today’s $10 trillion in gold demand, but for a large and growing chunk of today’s $120 trillion paper demand. In which case even the 26x estimate I modeled by 2050 may be too low.
If so, the single biggest Bitcoin risk to an investor is not market gyrations this week or even this year, it’s the long-term consequences of not owning enough Bitcoin.
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