Ecoinometrics - Could one Bitcoin be worth $1m by June?
Probably not, but let’s entertain the idea anyway.
You might dismiss the idea of one Bitcoin being worth $1 million by June as stupid. I won't blame you. It kinda is. Still, there are things to learn by considering this as a thought experiment.
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Could one Bitcoin be worth $1m by June?
Balaji's bet
Here is Balaji's bet: by June 2023 one Bitcoin will be worth $1 million.
Obviously the first thing to address is that Balaji is doing a publicity stunt with this kind of bet.
The worst thing that can happen to him is losing a couple of million US$. That's not the end of the world. Meanwhile everyone is talking about this (including us right now).
So publicity is the objective here. That's why this bet has to be outrageous. It has to provoke strong reactions. And judging by the responses we got from tweeting about it yesterday this is working.
Most of the responses fall within three categories:
"No". About 95% of the time.
“Maybe, hyperinflation could happen”. Small minority.
"Are you dumb?". If you have been posting long enough on Twitter you are used to that.
Unsurprisingly the vast majority of people think the probability of this happening is pretty much 0.
But still, as a thought experiment, could this really happen? Let's put on our thinking cap.
Unrealistic growth expectation
One million dollars for a Bitcoin seems a bit much if we are talking about such a short time frame. That comes out to a 3,600% return in 90 days.
But Bitcoin is known for its periods of exponential growth. So has there actually been some occasions in the past where Bitcoin rose 3,600% in 90 days or less?
Let's look at the historical data to figure this out.
Starting from the first time we have daily prices available for Bitcoin (sometimes in 2010) we compute the largest return for each rolling 90 days period.
Each largest return value is one point on the chart below. The value of the return is read on the horizontal axis. Each point is coloured based on Bitcoin's price at the start of the 90 days period. The result is the distribution of largest Bitcoin moves over a 90 days period.
The level of returns required to get to $1m is marked with a dashed line.
Take a look.
Surprisingly (or not) Bitcoin has risen by more than 3,600% in 90 days before. The bad news is that last time that happens one Bitcoin was worth about $1... Moving a market whose total size is something like $500bn is a completely different task than pumping an asset whose market cap is about $10m.
And as you can see on the chart above, the orange/red zones (Bitcoin closer to today's price) don't show any move close to 3,600% over 90 days.
Now that being said looking at historical data is never enough. There is always a chance what's coming next is a black swan event. This is the kind of events that by definition has never been seen in the data before but which is in the realm of the possible when you think about it from first principles.
So let's try to reason about this. What does it mean to see a 3600% growth of Bitcoin's value in 90 days when starting from a $500bn market cap?
Well let's put that in context:
BTC at $27k has a market cap equivalent to that of Tesla ($500bn).
BTC at $100k has a market cap equivalent to that of Apple ($2.5tn).
BTC at $500k has a market size equivalent to that of gold ($10tn).
BTC at $1m has a market size equivalent to that of the entire US Treasury market ($24tn).
Thinking in terms of market expansion, going to $1m per coin is a massive ask. And when you put that on a chart the move looks steep to say the least.
The following chart shows the monthly evolution of Bitcoin's price (vertical axis, log scale) in orange. The trajectory Bitcoin would have to take for Balaji to win his bet is in black. Corresponding market size levels in red.
Is it realistic to think that under some circumstance Bitcoin could become larger than the current size of the entire US Treasury market in less than 3 months? No it isn't. Unless...
Unless hyperinflation hits the US$
You have seen how much it would take to get one Bitcoin to $1 million. That's very much unrealistic in the short term. But to be fair Balaji's reasoning isn't that Bitcoin will overtake mega caps, gold and the sovereign debt markets overnight.
What he is actually saying is that hyperinflation will hurt the value of the dollar so much and so fast that one Bitcoin will be worth $1 million in hyperinflated US$.
But of course there are some assumptions behind that:
You assume hyperinflation happens fast. Something like the US$ losing 97% of its value in 3 months.
You assume money will flow in (or at least not out of) the spot Bitcoin market.
You assume the government won't come for your coins.
Are those assumptions realistic?
(1) Bitcoin in its current state is many things at the same time. By design it is a store of value. Based on the adoption curve it is still a growth asset. And the way it has been traded in the past couple of years it is a risk asset. So it is hard to pinpoint which model to use to guess what Bitcoin would do during a hyperinflation event.
However store of value or growth play or risk asset, those categories should nominally benefit from inflation of the monetary kind. There are plenty of examples for that over history:
The German stock market easily did more than 100x in 3 months during the early part of the hyperinflation of the Weimar Republic.
Venezuela had many hyperinflation episodes where the stock market did 30x+ in a matter of months (2017, 2018, 2020).
The stock market is Zimbabwe also did 30x+ during recent hyperinflation events.
So obviously it is possible. But 90 days is a pretty short. And none of those currencies were the world reserve currency when that happened. Once more, over such a short period of time we are talking about something unprecedented.
(2) At this point everyone who should have heard of Bitcoin knows about it. The digital gold narrative isn't dead and that means the odds are good that people will at least hold on to their coins during a hyperinflation event.
That being said how many investors are there who are ready to self-custody their coins? I don't have the answer but that might limit the solid base that's needed to really grow Bitcoin's market.
(3) If the US government had to fight against hyperinflation it will almost certainly put in place some capital control measures. Now as long as you self custody your coins and follow best security practices it isn't easy for the government to get to your coins. The only recourse they really have is violence. So you better hope we won't get there.
So indeed Bitcoin to $1 million during some hyperinflation event isn't completely stupid. Most likely Bitcoin wouldn’t be the only asset appreciating significantly during that period.
But it isn't a guaranteed either.
That being said no one is a winner in that situation. The damage to the global economy would be terrible.
Place your own bet
Again, in the short term some extreme events would need to take place in order for Bitcoin to appreciate to $1m per coin. And while you might be happy to have preserved some of the purchasing power of your cash by owning BTC you probably won't like what the world would become with a hyperinflated US$.
Not that hyperinflation seems to be the most likely path either.
The Federal Reserve has been fighting inflation by raising the Fed Funds rate aggressively. The goal doing that is to tighten the financial conditions to the point where the economy will slowdown taking inflation down with it.
Banks having a hard time and being unable / unwilling to lend is what needs to happen to tighten financial conditions. So no, the Federal Reserve is not surprised to see banks in difficult situations.
At the same time they don't want to have a massive banking crisis on their hands while it is still unclear whether or not inflation is under control.
That leads to this situation where the Federal Reserve needs to take steps stabilizing the banking system while at the same time creating enough pressure to get inflation down.
Tight rope to walk for sure and we'll discuss more about what it means for the macro picture on Wednesday.
But if you had a bet to place on Bitcoin what should it be?
Since the troubles in the banking sector became obvious last week Bitcoin has experienced some positive momentum.
Based on what typically happens following this kind of price action you'd expect Bitcoin to continue pushing towards $30k within 7 to 30 days.
So why not hop on the trend:
If somehow hyperinflation hits the US economy in the next 90 days you will be happy to have put some cash in a hard asset.
If we get some QE-light, as many investors expect, Bitcoin should also benefit from that tailwind as would all risk assets.
If the Fed merely decide to pause the rate hikes there still is some chance that the "pivot soon TM" trade floats Bitcoin higher.
And even if the US economy suddenly plunges in recession territory taking down risk assets with it, having bought BTC below $30k is probably a good enough entry point for a 5-10 years investment horizon. Could there be better entry points later during the recession? Sure. But a bird in the hand is worth two in the bush.
Tl;dr as long as you are reasonable with your risk management now isn't a bad time to buy Bitcoin whether or not you think the global financial system will collapse.
Regardless this Balaji bet is entertaining in how outrageous it is. So for the fun of it we’ll follow along every day until June by updating this chart.
That’s it for today. If you have learned something please like and share to help the newsletter grow.
Don’t forget to checkout other resources on the Ecoinometrics website such as:
A dollar cost averaging performance calculator for the stock market.
Which assets really hold up against inflation over the long run.
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Cheers,
Nick
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