Opinion | Will 1 BTC reach 1 million US dollars in 2025?

Editor's Note: The original title is "Viewpoint | Is it realistic for Bitcoin to reach $1 million per coin?"

Bitcoin supporters have been talking about how the price of one bitcoin could reach $1 million. Before, it was just speculation. Now, some big names in the cryptocurrency world think it’s a done deal.

Central banks are implementing massive quantitative easing programs due to the coronavirus pandemic, prompting predictions that Bitcoin will reach $1 million by 2025. Experts believe that Bitcoin's stock-to-flow (S2F) ratio is approaching that of gold, meaning that Bitcoin's market capitalization has the potential to grow significantly. In addition, Grayscale's Bitcoin and Ethereum Trusts have seen large inflows, indicating strong bullish sentiment among institutional investors towards cryptocurrencies.

Massive global quantitative easing has reignited predictions of a $1 million Bitcoin. Is that price realistic amid the coronavirus pandemic?

Some predict that the price of Bitcoin will reach $1 million by 2025

Global Macro Investor has just released a report outlining the future direction of global financial markets.

In the next 3 to 5 years, the price of gold is likely to increase by 3 to 5 times. Bitcoin may reach $1 million per coin in the same period.

Some believe that Bitcoin’s market cap will grow from $200 billion to a $10 trillion asset class, while gold (including paper gold) will grow from $15 trillion to $60 trillion over the same period.

Currently, the total supply of Bitcoins in circulation is just over 18 million, and a market cap of $10 trillion means that each Bitcoin would be worth just over $550,000.

One billionaire sees upside potential for Bitcoin

Chamath Palihapitiya, CEO of Social Capital and former Facebook executive, also believes that the price of Bitcoin could reach seven figures. According to Forbes in early April, Palihapitiya told Anthony Pompliano of Morgan Creek Digital that he believes that the price of Bitcoin will either return to zero or reach millions of coins under the stimulus of the new coronavirus epidemic.

Palihapitiya believes that the global economy may be heading towards a period of rapid depreciation of fiat currencies, and in this context, "Bitcoin will become a safe-haven asset."

The former Facebook executive said the process could take 10 years.

Right now, there's maybe a 5% or 10% chance that Bitcoin is valuable. There's a good chance that by 2030, we won't be able to solve our economic problems through inflation. Essentially, the only way to curb inflation is to have some form of gold standard, but that's almost impossible for governments and central banks to do. They'll never agree on a financial instrument, they'll never agree on an exchange rate. But people might choose to use Bitcoin for transactions.

What are the fundamentals of Bitcoin?

Despite the controversy, stock-to-flow models suggest that after the upcoming halving (which is about two weeks away at press time), Bitcoin’s scarcity will approach that of gold.

The S2F model is a value metric used to measure scarcity. It is the ratio of an asset's current supply divided by its new supply (annual growth). For example, silver has an S2F ratio of 22.

PlanB is the first investor to use the S2F model to calculate the scarcity of Bitcoin, in order to assess the long-term value of Bitcoin. Currently, the S2F ratio of Bitcoin is 27, which has exceeded the value of silver. The S2F ratio of gold is 62.

Taking gold as an example, an S2F ratio of 62 means that at the current mining rate, it will take 62 years for the supply of gold to double, making gold extremely scarce. Using this scarcity model, you can try to predict the price of a commodity in the future.

After the halving in May 2020, Bitcoin’s S2F ratio will double to 52, and its scarcity will be closer to gold. According to the model, the expected price of Bitcoin after the halving will reach $55,000 per coin.

If gold and Bitcoin are hedge assets of similar value, then according to the S2F model, in theory, the two assets may have similar scarcity. Therefore, if the market value of Bitcoin soars to the level of gold, then each Bitcoin will be worth more than $500,000. If paper gold is also included in the market value of gold, the price of each Bitcoin will reach a maximum of $800,000.

Additionally, one view put forward by analyst Philip Swift is that the price of each Bitcoin is approaching $100,000 because Bitcoin’s price trend is in the same direction as the S2F ratio.

Bitcoin price and S2F trend chart, courtesy of Philip Swift

PlanB also recently updated the S2F model chart, predicting that the price of each Bitcoin will reach $288,000 from 2020 to the fourth halving of Bitcoin.

PlanB's latest S2F model diagram

Bitcoin demand is strong

Based on the current supply of Bitcoin, the price of Bitcoin is already close to $8,000. The supply growth will be halved after mid-May. Therefore, until the full impact of the reduction in new coin output begins to appear, the rise in Bitcoin prices is actually demand-driven.

Grayscale's 2019 investor research found that about 36% of U.S. investors are interested in investing in Bitcoin. 83% of respondents said that Bitcoin's "growth potential" is one of the reasons they are interested in Bitcoin. In addition, Bitcoin's scarcity also resonates strongly with investors.

Grayscale’s quarterly report also shows that institutional investors are increasingly interested in Bitcoin. In the first quarter of 2020, institutional investors saw the strongest level of demand for Bitcoin ever, with inflows into the fund exceeding $500 million.

Of this, 79% of the inflows came from hedge funds and other institutional investors. About $400 million flowed into the company's Bitcoin Trust product and $100 million flowed into the Ethereum Trust product.

Inflows into cryptocurrency trust funds in the first quarter of 2020

Grayscale's quarterly report reflects investor demand for Bitcoin, as the fund is a significant holder of digital assets. As of the end of the first quarter of this year, the company held 1.7% of the total circulating supply of Bitcoin. This also means that the company's holdings of cryptocurrencies account for 1.2% of the total market value of crypto assets.

Grasysacle Bitcoin Trust's percentage of Bitcoin's circulating supply

Inflows into the company’s Bitcoin products doubled every quarter last year. While the chart below shows a stagnation in inflows from Q2, Q3, and Q4 of 2019, this was actually the result of Graysale ceasing to accept new funds.

The asset manager periodically stops accepting new inflows when a fund is oversubscribed, so the lack of inflows is not a reflection of a lack of demand for its products, but rather a result of an artificial cap on assets under management.

Over the past year, the funds flowing into Bitcoin through Grayscale have doubled every quarter, from about $100 million in the second quarter of 2019, to $200 million in the third quarter of 2019, to $400 million in the fourth quarter of 2019, and $800 million at the end of March 2020. This shows that institutional demand for Bitcoin continues to rise.

Inflows into Grayscale over the past year

Grayscale data shows that institutional investors are bullish on the rise in the price of the currency. As data provided by Visual Capitalist shows, the notional value of global derivatives is between $630 trillion and $1.2 trillion. If only a small portion of these funds shift from derivatives to digital assets, the price of Bitcoin could see a significant surge. Institutional investors shifting from other asset classes to digital assets will drive the price of the currency to $1 million per coin.

By the time of Bitcoin's fourth halving, four years from now, there will be 19,687,500 Bitcoins in circulation. Its S2F ratio will double again and far exceed that of gold. If Bitcoin has become a safe-haven asset by then, then the price of Bitcoin will surely go to the moon.

While $1 million Bitcoin may seem far-fetched in 2020, back in 2016, it was also difficult to imagine Bitcoin reaching today’s prices.

Of course, we need to be cautious about all price prediction models, because even the slightest error in the prediction model can greatly affect the final result.

Will we see a bitcoin reach $1 million by 2025? No one really knows. However, the above analysis shows that it is entirely possible.

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