Author: 3HOUSE user @tokTiker
One of the biggest stories of the year so far amidst the recovery of bitcoin price is the super bullish prediction by former Coinbase Chief Technology Officer (CTO,) Balaji Srinivasan, that the price of bitcoin will hit US$1 million by June 17, 2023. We have heard similar calls in the past from the likes of Cathie Wood (CEO of Ark Investment), Arthur Hayes (Ex-CEO of Bitmex) and Mike Novogratz (CEO of Galaxy) but not within such an ambitious timeframe.
At the time of writing, the bitcoin price is trading near US$30,000. In order for it to reach US$1 million by June 17th, we need the price to trade 33 times the current levels within 3 months! This, in my humble opinion, is nothing short of an irrationally exuberant, headline-grabbing prediction.
Despite this, let’s analyze the possibilities more objectively and consider what are the key drivers and challenges that bitcoin will encounter along its path towards US$1 million.
Let’s take a look at what are the factors that could propel bitcoin price to astronomical highs:
a) Increasing mainstream adoption
One of the strongest arguments in favour of higher bitcoin price is growing demand for bitcoin. The growing demand is fuelled by either more capital flowing into the ecosystem or growth in the number of users holding bitcoin.
A relevant metric we can use as a reference in terms of bitcoin adoption is the number of non-zero bitcoin wallet addresses. As we can see from Figure 1, the number of wallets with bitcoin has been growing exponentially since 2010 despite multiple market crashes over the years. When we measure the number of bitcoin holders as a percentage of the world’s population, we are only at 0.36% of global adoption.
Figure 2 below illustrates where we are today based on the network effect theory of any new technology adoption cycle. If we apply the 30X multiple we need for bitcoin price to hit US$1million and assuming that the number of bitcoins per wallet remains constant, we need close to 10% (30 X 0.36%) of the world’s population to adopt bitcoin. When we extrapolate this number based on the S-curve adoption cycle in Figure 2, this is only achievable by 2030.
b) Safe haven currency
Bitcoin has a fixed supply of 21 million coins, which makes it a scarce asset when compared to fiat currencies like the USD. Record doubling of the USD money supply between 2020-2022 drove US inflation up to 9.1% in June last year. After decades of monetary expansion, the US Federal reserve had to aggressively raise interest rates from near zero to now 5% in the last 12 months in its effort to tame hyperinflation risk.
This unprecedented move shook the traditional banking system causing the collapse of Silicon Valley Bank, Credit Suisse and crypto-friendly banks Silvergate and Signature. Besides rattling the banking system, major stablecoin USDC also briefly lost its peg to the US dollar, sending shockwaves to the cryptocurrency market. As financial markets suffer, bitcoin continues to display its resilience and proved to be a reliable store of value in times of financial crisis.
c) Inflation and portfolio hedge
Some analysts predict that the Fed’s tightening cycle will end before 2023 and will cut interest rates next year to save an ailing economy that is going into a recession in the second half of this year. Interest rate cuts will lead to unattractive yields in USD-assets and potentially trigger risk of higher inflation.
These scenarios will encourage institutional investors to hedge their portfolio into bitcoin as an asset class that will generate higher returns and protect against inflation risk due to its limited supply. In addition to hedge funds and asset managers, more pension funds and endowments are allocating capital into cryptocurrencies as a portfolio diversification strategy.
In the last few years, we have also seen improvements in investment and regulatory frameworks in the cryptocurrency market such as licensed custodian services, exchange-traded products and regulated intermediaries to attract institutional investors.
d) Technological advancements
There have been several significant technological advancements in the Bitcoin network in recent years, such as the implementation of the Lightning Network, Ordinals and the development of sidechains. Advancements such as the Lightning Network have made bitcoin more scalable and enable faster and cheaper transactions on the Bitcoin network.
As the network effect kicks in and bitcoin becomes more efficient and user-friendly, we could see increased adoption of bitcoin. According to a report by CoinShares, "the liquidity and network effects created by the increasing number of participants in the Bitcoin ecosystem have led to a self-reinforcing loop of demand, as new investors are attracted by the growing liquidity and security of the asset."
While there are factors that could catapult the price of bitcoin to US$1 million, there are strong headwinds ahead.
a) Regulatory risks:
One of the biggest obstacles that is keeping bitcoin from reaching US$1 million is regulatory risks. Governments and regulatory bodies around the world have expressed concerns about the potential use of bitcoin for illicit activities such as money laundering and terrorism financing. According to the latest Chainalysis Crypto Crime Trends report, cryptocurrency illicit activities climbed to US$20.1billion in 2022 but it’s only 0.24% of the total cryptocurrency volume. This number is insignificant in comparison to the estimated amount of money laundered globally (which is 2 - 5% of global GDP, or US$800 billion - US$2 trillion) but governments are relying on these weak arguments to justify their actions to impose stricter regulations on bitcoin and cryptocurrency market.
Since the beginning of the year, the SEC, the DOJ, and the CFTC have taken a series of enforcement actions against the major players in the crypto industry. The SEC has sued Coinbase, Kraken, Genesis Global Capital, and Gemini Trust Co. for offering unregistered securities. The SEC also brought legal actions against Bittrex and Binance, forcing these exchanges to cease their U.S operations.
In a recent hearing before the House Financial Services Committee, SEC Chair Gary Gensler explained the agency’s tough stance towards crypto by stating that, “I’ve never seen a field that’s so noncompliant with laws…It’s not a matter of a lack of clarity. I think [crypto] is a field that, in the main, has built up around noncompliance, and that’s their business model”.
Such regulatory scrutiny poses significant risks for investors where governments could take draconian measures to ban or sanction the use of cryptocurrencies or impose heavy taxes that could deter mainstream adoption and capital flow into bitcoin. This may not exactly be the safe haven that investors are expecting.
b) Competition from CBDC, the antithesis of bitcoin:
Central bank digital currencies (CBDC) are digital currencies issued by central banks pegged to the local fiat currency like the USD or RMB. Unlike bitcoin, it is a centralized digital version of cash and need not be built on blockchain. As such, CBDC has little or nothing in common with bitcoin or cryptocurrency despite many presuming their similarities.
There are conspiracy theorists alleging that the tough stance taken by the US government against bitcoin and cryptocurrency is an attempt to buy more time for the Fed to create US dollar CBDC. China is one of the first countries to issue its own CBDC and the US needs to step up in order to defend the US dollar’s hegemony.
The creation and utility of bitcoin is inherently designed as an antithesis to the current fiat currency system. Bitcoin’s decentralization, censorship-resistant and pseudonymous nature pose a significant threat to government controls and sovereignty of their monetary systems.
c) Technological challenges:
One of the biggest technological challenges facing Bitcoin is scalability. A currency that can only process 7 transactions per second is going to have serious network congestion issues when we have thousands or millions people using it. Transaction fees will skyrocket and delays will make it unattractive for investors or payment purposes. Despite the launch of Lightning Network to address these challenges, the adoption rate has been slow.
Besides scalability, another technological challenge facing bitcoin is security. Although the bitcoin network is secure, the industry is plagued by high-profile hacks and security breaches which have led to the loss of millions of dollars worth of cryptocurrencies. The security on the application layer of the network remains poor and such an environment does not give investors the confidence in bitcoin.
d) Bitcoin vs Gold:
As an asset class, bitcoin has long been compared to gold and touted as “digital gold” by many due to its scarcity and classification by CFTC as a commodity. At the time of writing, bitcoin’s market capitalization is around US$500 billion compared to gold’s market capitalization of US$12 trillion (see Figure 3).
When the bitcoin price hits US$1 million, its market capitalization will be US$19 trillion (assuming 19 million bitcoin in circulation). This will exceed the total value of gold that has been mined for centuries! Are we assuming that every investor will diversify their US dollars into bitcoin instead of gold when there is hyperinflation as a hedge? Not impossible but highly improbable!
Bitcoin to US$1million – bed of roses with thorns!
Let’s imagine the scenario that bitcoin reaches US$1 million in June. According to Balaji, the world would have spiralled into the abyss of hyperinflation and the US dollar monetary system would have collapsed. It is also likely that global economies will capitulate into depression and political and social disorder will reign. If the US dollar is already a worthless currency due to hyperinflation, I can see why bitcoin will be valued at US$1 million when this happens because it will not be worth as much as the US$1 million we have today.
