What Would it Take for Billion-Dollar Bitcoin?

A few days ago, Fidelity Investment’s global head of Macro Jurrien Timmer made a splash by seeming to predict that Bitcoin would hit $100 million by 2035. This would imply 72% annual returns on bitcoin for the next 14 years. Which beats bank accounts by roughly 72%.

A few days later a number of crypto news outlets took it another step, crediting Timmer with predicting $1 billion Bitcoin by 2038. To be fair, both projections were simply extrapolating the chart Timmer used in his client presentation, rather than his putting it in words. But it’s a great moment to ask what exactly it would take for Bitcoin to hit these kinds of numbers.

What goes into a Bitcoin price?

The price of bitcoin in dollars has two parts: what’s a bitcoin worth, and what’s a dollar worth. So we’ll take it step by step.

First, what’s the demand — the “total addressable market” for money. After all, most value isn’t parked in money at all, it’s parked in things like houses, cars, and investments. You probably own lots of things that aren’t money — chairs, for example, or a phone. Because humans have many goals in life, while money has a very specific purpose: enabling low-cost transactions in the future.

So what’s that worth?

Today, people worldwide hold about $92.5 trillion in money. Roughly $80 trillion is parked in government fiat, then another $12.5 trillion is parked in alternative monies — $11.5 trillion in gold and $1 trillion in Bitcoin. Note I’m ignoring alt-coins, since they’re not used as significant stores of value, more like casino chips.

So that comes to $92.5 trillion in pure money demand — 86% in fiat, 13% in gold, and 1% in Bitcoin. Put into words, people gave up $92.5 trillion in real stuff in order to store their savings in something that will somewhat protect the value and that will be cheap and easy to trade in future.

Note that global wealth is much higher: perhaps $400 trillion. But most is invested in real estate or businesses, since you can live in a house and investments pay returns. So only about 25% of human wealth is stored in money, summing to about $12,000 per human.

Estimating future money demand

Now, we’re talking at least 14 years in the future. Without getting sci-fi quite yet, I’ll assume that in 2035 or 2038 people still live in houses and still invest in businesses. So I’ll use that same split — 75% in stuff and investments, and 25% for money.

By the way, you could argue that hyper-bitcoinization increases money-holding since money no longer melts away in value and borrowing isn’t subsidized by central banks. But you could also argue that a hard-money world sees more real investment since time horizons are longer — more invested means less value parked in money. Anyway, for the moment, I’ll assume that same 25% of wealth in money.

Next, there will probably be more people in the future, and the world will probably be richer — both being the century-long trend. Both factors increase the amount of money people want to own. So, for simplicity, I’ll assume the next 14 years of real money demand look like the past 14 years.

There are 2.2 times more US dollars than 14 years ago (adjusted for price inflation), and 2.4 times more than 17 years ago. So today’s $92.5 trillion in money demand might grow organically to about $200 trillion in today’s terms by 2035, and about $220 trillion in 2038.

By the way, I’m using the US dollar as proxy for the whole world, partly because it’s easier to measure. But also on the logic that the US dollar held steady against other currencies these past 14 or 17 years, so they probably all grew about the same. Keep in mind even US dollar money supply is only a guess, even by the federal reserve.

How to get to $100 million?

Now, you’ll notice a problem: if 2035 money demand is $200 trillion and there are 20 million bitcoins, that’s a maximum of only $10 million per bitcoin. Not $100 million and certainly not a billion.

Indeed, $100 million per bitcoin implies a total bitcoin value of $2,000 trillion, while $1 billion bitcoin means an eye-watering $20,000 trillion value for all bitcoins. So how could Bitcoin alone, a type of money, be worth between 10 and 100 times more than all money in the world?

Simple: the dollar has to collapse. It’s the only way any of these scenarios can work.

The dollar’s price could collapse because they print too much — the classic assumption. Or it could collapse simply because nobody wants to use it any more.

Historically, it’s usually a combination — as fiat loses value, people move their wealth into other things. Mises called this the “ flight into real values.” Historically, that meant gold, houses, cars — anything that’s not being debased. In the future it could mean Bitcoin instead.

So how much would the dollar have to collapse to get to $100 million or $1 billion bitcoin?

It depends how many people are using bitcoin. To illustrate, if fiat continues to hold an 86% share of money demand in 2035, then a $2,000 trillion valuation of all bitcoins would imply a total money supply of at least $14,000 trillion. Seventy times greater than that $200 trillion money demand. In other words, a dollar would be worth roughly 70 times less than it is today — $350 for a cup of coffee, $20 million for a typical house.

Ironically, things get much worse for the dollar if nobody uses Bitcoin. For example, if only 1% of 2035 money demand is Bitcoin and that little 1% is worth $2,000 trillion, then it implies total money supply is $200,000 trillion (!) Which would imply a dollar collapse of 1,000-fold. $5,000 cups of coffee, $300 million houses. The Indonesian Rupiah, basically.

And, just to set up the kindest scenario for fiat, if 95% of people in 2035 are using Bitcoin, then that $2,000 trillion in bitcoin implies only a slightly larger total money supply — $2,100 trillion. In which case it works with just a 10-fold debasement of the dollar. So $50 cups of coffee, $3 million houses.

The key takeaway is that any scenario with hundred-million or billion-dollar Bitcoin utterly hinges on the dollar crashing. Meaning those bitcoins won’t buy a hundred Lamborghinis or small countries.

So what will they buy? Well, going much over a million per bitcoin implies government money failed spectacularly. In which case bitcoin probably has a very large share of money demand. Considering how superior bitcoin is to gold, I’d guess almost 100% of money demand is bitcoin in these scenarios.

In which case just divide that $200 trillion real money demand by 20 million bitcoins and you get something like $10 million per bitcoin in 2035. Of course, you could make lots of tweaks for things like lost coins, velocity, and so on, which might double that. But, as a ballpark figure, something like $10 or $20 million in real terms is the ceiling — anything beyond that is simply an indirect way of saying fiat will collapse.

Conclusion

Final point, the reason Timmer mentioned $100 million or $1 billion in the first place is the striking accuracy of the Stock to Flow (S2F) model built by pseudonymous institutional investor Plan B. The model itself was inspired by Saifedean Ammous’ scarcity discussion in “ The Bitcoin Standard “ and simply correlates price with how many bitcoins are created vs how many exist.

Plan B doesn’t claim any “why” to S2F — it’s just a statistical history. Still, the model has been “remarkably accurate” up to today — to the point that Fidelity’s head of global macro is using it in client presentations.

So it’s comforting to know that if, indeed, Stock to Flow keeps going another 5 or 6 years — if Bitcoin’s price continues to be dominated by its scarcity — then it implies that fiat doesn’t even have a decade left before passing the baton to Bitcoin.

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Originally published at https://cryptoeconomy.substack.com on September 5, 2021.