Why am I optimistic about the price of BTC in the long term but not so in the short term?
Updated: Dec 11, 2021
I have always been an advocate of having Bitcoin in your portfolio.
I was first dabbling with cryptocurrency in 2017. That was when the price of BTC was really low. Unfortunately, I was adopting all the wrong strategies of converting the BTC I hold into some other coins and I ended up losing a lot of sats along the way. My early involvement in cryptocurrency thus didn't really give me a good advantage in my portfolio. It was only in this year that I figured the best option for me so far is to just simply buy and hold BTC. If you are new to my blog, you can look at all these past articles that I have written on BTC.
In some of my articles on portfolio composition, I have also always highlighted the high reward to risk ratio of Bitcoin and no other asset probably comes close to it. You may read it here.
This year has been a great year for Bitcoin so far. I'm not just talking about the prices. The advancement that Bitcoin has made into mainstream use has been fantastic this year. El Salvador has adopted Bitcoin as legal currency. Bitcoin futures ETF have been approved this year. These are very clear examples that Bitcoin is now starting to become mainstream and you wouldn't have imagined all these becoming a reality 3 years ago. Who could have thought that a whole country of people will be using BTC for their daily living in 2021?
And this is exactly why I believe that Bitcoin has moved past the "tipping point". A point where there is no more turning back. A point where we can no longer dismiss Bitcoin as something that is tulip mania in nature and will soon collapse into nothingness. Time and time again, people have been dismissing Bitcoin yet the same group of people have been proven wrong every time. With each advancing year, Bitcoin is making more and more progress and I really don't see how Bitcoin can or will be ignored from now on. There are arguments that there are some other coins which have superior technology to Bitcoin's and will replace it. I personally don't believe in that as I don't see how all the commercial progress that Bitcoin has made (ETFs approved, countries' adoption of it as legal tender) can be replaced by any other coin. From the way I'm seeing it, the boat has sailed and it's too late for any other coin to catch up with it. If you are thinking Ethereum will soon replace Bitcoin, I'm thinking that both of them serve very different purposes and I am seeing them more similar to the digital equivalent of gold and silver.
I guess the easier way to think about how the price of Bitcoin will be in the long term (by 2030) will be to compare its market capitalisation to that of gold since I have always imagined Bitcoin to be a "digital gold" anyway. As it currently stands, the market capitalisation of gold is $11.7T while the market capitalisation of Bitcoin is $1.1T so we are talking about Bitcoin having only 10% of gold's market capitalisation now.
Gold has returned an average of 10% between 1971 and 2019. Of course, we all know that the returns of gold have been lesser than 10% in the recent decade. Let's say, return to the mean does not apply here and we want to be more conservative. In such a scenario, we can probably assume the market capitalisation of gold to grow only 5% from now till 2030. If Bitcoin maintains the same ratio of its market cap to that of gold, the price of Bitcoin will be around $90,000 in 2030. This is to me a very extreme scenario where I'm super pessimistic about the growth of Bitcoin and gold. But yet, it is still a modest 5% growth every year. If the ratio of Bitcoin market capitalisation to that of gold's continues to increase to just 20% (which is roughly what Apple market capitalisation to that of gold's now), the price of Bitcoin will be easily ~$200,000 in 2030. And again, I think that is still being very pessimistic.
Given how things have progressed over the history of Bitcoin, I won't be surprised that Bitcoin will eventually reach 50% (or even more) of market capitalisation of Gold by 2030. This will translate to a price of ~$500,000 per Bitcoin in 2030 and mind you there is based on a very conservative growth of 5% of gold's market capitalisation from now till 2030. You can probably tell from here that there is tremendous upside for Bitcoin here. Like all investments, there are always risks but I strongly feel that the reward to risk ratio for Bitcoin here is extremely high and this is why I am very optimistic about the price of Bitcoin in the long term.
However, I can't say I am that optimistic about the price of Bitcoin in the short term (in 6 months). There are a few reasons for it.
If you know about the on-chain analysis of Bitcoin, you have probably heard of MVRV score. It is usually used to determine if Bitcoin is overvalued or undervalued. Here is a picture of the chart.
The current MVRV score of Bitcoin might seem low now and quite a number of people have argued that the Bitcoin has not reached its highest price in this halving cycle since it's expected that the red zone will be reached in every cycle.
However, I see an uncanny resemblance when I take the 200-day average of the MVRV score and compare it with the price of Bitcoin.
You can see that the price of BTC follows the trajectory of 200-day average of the MVRV score pretty closely. While we might not have entered an overvalued territory of MVRV score in this halving cycle, the 200-day average of MVRV score has already reached its peak in the earlier half of this year and the 200-day average of MVRV score has been on a decline ever since then. Granted Bitcoin still makes new highs recently, I am not expecting a dramatic increase of Bitcoin price in this halving cycle. I love to be wrong on this though.
Another reason why I'm not too optimistic about the price of Bitcoin in the short term is that various models which predict a floor price of at least $100,000 for Bitcoin by the end of 2021 seem increasingly invalid as the days go by. There is still more than a month to the end of 2021 and there is definitely a chance for that to happen. But I'm just not too optimistic about it. Again, I love to be proven wrong here.
No matter how the short term price movement of Bitcoin is, I think the bigger message here is that I am super optimistic about the price of Bitcoin in the next few years. I will be looking into increasing my portfolio's allocation to Bitcoin in the coming years and I am confident it will be a driver of my portfolio's future gains.
Let's revisit this post in 4 years' time.
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