Cryptocurrencies are currently in a bear market, but there are plenty of reasons for long term optimism. Short term volatility is great if you’re speculating or looking for arbitrage, but what really matters to HODLers and serious investors is the long-term trend in the value of popular cryptocurrencies like Bitcoin and Ethereum.
Bitcoin went from less than $1,000 a coin to nearly $20,000 a coin, or approximately a 2000% increase in about 1 year. So what would cause the price of Bitcoin to increase to even greater astronomical levels in the future? There are plenty of reasons to see how this could happen in the future. Despite the bear market conditions, digital assets are here to stay, and I strongly believe the value of digital assets will soar over the long-term.
The basic economics should be considered first. The fact that Bitcoin is limited to 21 million coins means that, over time, it is going to be much harder to mine, and there is going to be a limit on the total supply of Bitcoin. The halving will occur in two years, which will slow the rate of introduction of new Bitcoin into the ecosystem as the total supply marches ever closer to 21 million.
Institutional investors and major financial institutions are starting to enter the market, and these entities are trading in Bitcoin futures and other derivatives products via the CME and CBOE. Liquidity spikes could push the price of Bitcoin even higher. As new legitimate businesses spring up that enable cryptocurrencies to be used for a more diverse array of financial transactions, adoption will inevitably increase in the long run. This limited supply, coupled with an expected increase in demand, requires that the price naturally increase.
On the retail side, less than 2% of people own any Bitcoin, yet 32% of young people say they prefer Bitcoin over stocks. If those people actually purchased some Bitcoin, that would equate to 10x adoption.
There are about 15 million millionaires in the US. Eventually, their financial advisors are going to advise their clients to buy some Bitcoin or other cryptocurrencies in order to gain some exposure to the market. This is also going to drive demand.
Fiat currencies have failed in many because humans can’t help but print more money. There has never been a time where a deflationary alternative built on code and mathematics is needed. Bitcoin has a compelling use-case as a store of value, particularly in countries experiencing hyperinflation such as Iran, Turkey, and Venezuela. Bitcoin also has a compelling use case in remittances, and greater adoption by financial institutions will help provide these services at more competitive rates.
So can Bitcoin reach $100,000 a coin?
It all comes down to adoption by retail investors and financial institutions. There are plenty of sources of demand for this scarce resource, and both groups have shown their willingness to use and hold digital currencies.
Bitcoin is trading around $6,500 a coin today, meaning it needs to increase 1400% to reach $100,000. What’s unique about Bitcoin is that it is the dominant instrument in a growing universe. Coins are only issued when transactions are mined, and the continuous creation of new coins equates to greater adoption of Bitcoin. Even if the number of users holds constant for some time, a short-term price drop will inevitably attract more buyers, resulting in a longer term price increase as adoption continues increasing.
This doesn’t mean fiat currencies will go the way of the dinosaur. Cryptocurrencies will at the very least live in harmony with fiat currencies as they solve multiple problems like infinite minting, privacy, human error in a centralised government backed currency, forgery, double spending, transaction fees, contract law issues, and many others.
The value of Bitcoin has followed the same trend as major social networks. In other words, greater engagement equates to greater value. Metcalfe’s law has been reflected in the value of companies like Facebook, Google, and Alibaba. This principle states that the value of a network is proportional to the square of the number of connected users in the system. 94% of the change in value of Bitcoin in the past 4 years can be explained by this equation.
Coinbase, which is currently the largest Bitcoin exchange, can be used as a useful indicator of adoption. This exchange alone adds around 30 to 50 thousand customers per day. Each of these customers will drive further long term demand and help grow the value of the network. Extrapolating long-term, based on an average adoption rate of 40 thousand users daily, the price Bitcoin will reach $100,000 by February 2023 if the value follows Metcalfe’s Law.