TLDR. Buying Bitcoin as a Store of Value is anti-fragile scenario planning aka tail risk insurance against something really bad happening in the Legacy Finance Economy. If a tiny % of global wealth makes that bet with a tiny % of their investable assets and one of the really bad scenarios happens, BTC = USD1 million is a feasible scenario. That scenario is not desirable even for those with Bitcoin if you also have a lot of Legacy Finance assets.
This update to The Blockchain Economy digital book covers:
- Run the numbers on Bitcoin and Gold.
- That $1m BTC price implies a cup of coffee costing $ thousands.
- Now assume BTC is around $10,000. Are you too late?
- There are four scenarios to play with.
- This scenario planning is driving the Bitcoin price.
- It is OK, nothing bad will ever happen in the Legacy Finance Economy.
- I own Bitcoin but don’t want it to be worth $1 million
- Context & References.
Run the numbers on Bitcoin and Gold
First run the numbers on 21m Bitcoin
(Even though it is more like 17m after accounting for lost Bitcoin)
- 21m * $1,000 (long gone except in short dreams) is $21 billion.
- 21m * $10,000 (credible soon) is $210 billion.
- 21m * $100,000 (wild forecast #1) is $2,100billion (aka $2.1 trillion).
- 21m * $1m (wild forecast #2) is $21,000 billion (aka $21 trillion).
That is a lot of money. Now run the numbers on Gold Market Cap
The Gold Market Cap is the $ per ounce market price * total Gold
The $ per ounce market price is the easy part of the Gold Market Cap calc. As of time of putting key to pixel, the price is $1,338.50
This is where it gets a bit fuzzy. Gold does not have a mathematically precise hard upper limit like Bitcoin, but we can get to an “accurate enough” estimate. There are about 5.5 billion ounces of gold in the world. That makes Gold market cap at current prices about $7.4 trillion.
That means to get to to $21 trillion in Bitcoin market cap (ie BTC = $1m USD) is a major stretch in normal scenarios.
This is where the second part of the headline comes into play – ”but not desirable even for those with Bitcoin”
That $1m BTC price implies a cup of coffee costing $ thousands.
If USD hyperinflation kicks in, both Gold and Bitcoin price will rocket. You can already see this in countries with hyperinflation where even if you had bought Bitcoin at the peak price in last bull run of $20,000 you would have outperformed any asset priced in your hyperinflated Fiat currency.
It may seem inconceivable that USD will suffer hyperinflation but hyperinflation is always inconceivable until it happens. One of the jobs of wealth managers is protecting against long tail risk and hyperinflation is a classic long tail risk. That is why some legacy finance assets are moving into Bitcoin.
Now assume BTC is around $10,000. Are you too late?
No asset moves up in a straight line. Bitcoin is more volatile than other assets in part because there are no Central Banks doing “plunge protection” by printing currency and buying financial assets in Quantitative Easing (QE) schemes.
So you will need to be comfortable with occasional down moves of more than 20%.
For those investing from big asset pools, putting a small % into Bitcoin is sensible. For example, assume a Family Office with $1 billion to invest, putting 1% into Bitcoin. That is $10m. Assume buying in at BTC = $10,000 to keep the numbers simple. Now run that through four scenarios.
There are four scenarios to play with
Wealth Managers and Family Offices look at both Bitcoin & Gold as a hedge against central bank money printing. There is no certainty in investing, only scenario planning and tail risk insurance.
- Scenario 1. Legacy Finance assets behave normally and Bitcoin becomes a small part of the Gold market which remains about where it is today. In that scenario, 99% of $1 billion grows by 3% and Bitcoin moves sideways. All is fine in that Family Office.
- Scenario 2. Legacy Finance assets behave normally and Bitcoin turns out to be less valuable than tulips. The Family Office loses $10m on Bitcoin but the rest of the portfolio (99%) performs normally. The 3% on $990 million is $29.7m, but there is a $10m loss on Bitcoin.
- Scenario 3. Legacy Finance assets suffer a catastrophic decline (say 80%) and Bitcoin goes to the moon. This is where $10m goes up 100x and is worth $1 billion and the $1billion in Legacy Finance assets loses $800m (80%). I use 80% as example because some of the portfolio will already be in assets such as land that do not go to zero. Tail risk insurance mission accomplished.
- Scenario 4. Legacy Finance assets suffer a catastrophic decline and Bitcoin goes to zero. In that awful scenario, shelter, food & physical safety become critical and financial assets become only a distant memory and it is the gold part of your tail risk insurance that you rely upon.
This scenario planning is driving the Bitcoin price.
First, 4 things that do NOT drive the Bitcoin price:
- News: positive news made no difference in the bear market and now negative news is just ignored. Bull markets climb a wall of worry, bear markets worry about good news.
- Technical Analysis: all the TA pundits are forced to say “this should not be happening”. We are left with a simplistic version of TA looking at big round numbers “we crossed 8k so 9k is next” or “we dropped below $8k so $7k is next”.
- Retail Muppets and FOMO: retail investors don’t have enough capital, so big savvy institutional traders could easily drive price down with a few well timed shorts.
- Crypto Whales: they already own so much crypto at low cost, why risk Fiat cash when prices are rising fast?
It is the Legacy Whales doing scenario planning which drives the Bitcoin price. Big money is making an anti fragile bet at the tail end of the Everything Bubble, leaving overpriced IPOs etc
Traders understand this and repeat the mantra to “not fight the tape”, understanding that real inflows will make shorting dangerous.
It is OK, nothing bad will ever happen in the Legacy Finance Economy.
That was of course an ironic section heading. 10 years after the Lehman crisis we solved a debt problem by piling on a lot more debt. Doc to patient “Your heart attack was from alcohol and junk food. Here is a bottle of whiskey and a double cheeseburger”. Deutsche Bank (DB) is one scenario flashpoint.
DB is one of many bad scenarios. There are also many good scenarios. The point of scenario planning is not to predict which scenario will happen – that is impossible. The point of scenario planning is to position portfolios for as many scenarios as possible – including unlikely ones (referred to as long tail risk). That scenario planning is a major factor in the current Bitcoin bull market.
We all hope that DB will turn their ship around. We all hope that central banks have figured out how to engineer a soft landing and a return to normal money. Even if you own Bitcoin, the bad scenarios are bad. However, as the old saying goes – hope is not a strategy.
I own Bitcoin but don’t want it to be worth $1 million
My hope for the future is that the Blockchain Economy will reduce inequality by making a more level playing field. My hope is that Bitcoin is worth a bit more than it is today (but a lot less than $1 million) and that price is supported by real use cases as a Medium Of Exchange. Yes, hope is not a strategy.
Context & References
Why bitcoin is surprisingly valuable and stable as a chair with only one leg – for now
What has changed a decade after the financial crisis?
Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.
I own some Bitcoin, but I am not receiving compensation for this post.
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