Monday, January 8, 2018

How high can Bitcoin go? $ 95K or maybe even $380K?

I am staying home because of a cold. Bitcoin has stirred my curiosity. Let’s speculate how high the value of a Bitcoin might go. We must know a bit about the currency system to know what are reasonable assumptions.  To start, lets express everything in today’s world reserve currency, i.e. in U.S. dollars.  No currency has an inherent value, except maybe gold which has currently an all-in mining cost of around US $900. Bitcoin valuation is like fiat currency an expression of the confidence that its owners will honor their IOUs.  Same for fiat currencies, whose value is an expression of confidence in that their governments will honor their IOUs.  Thus, both fiat currency and Bitcoin have a minimum value of zero.

The function of any currency is to provide a means of exchange for goods and services provided as well as a way to express the monetized value of assets (such as stocks or real estate). The coins and/or bills of a currency in circulation in a particular economy represents only a fraction of the value of that economy.  For example, U.S. annual GDP is around 18 trillion today and it represents around 20% of the global economy and thus we could say that global GDP is around 5 times 18 or 80 trillion U.S. dollars.

Some internet research shows that there is approximately 1 trillion U.S. dollars in circulation and 4.5 trillion dollars’ worth of all fiat currency. These are 2011 numbers and growth of currency in circulation (i.e. printing press activity of all governments) is 7% per year. Yes, that is a lot more than reported inflation and it is a lot more than typical GDP growth. Using an average real GDP growth of 3% that would mean 4% inflation created by the printing presses. That is a lot higher than the current typical rise in consumer price indexes in many countries. Thus, today’s global currency in circulation based on 7% annual growth is 8 trillion dollars or 10% of world GDP.

Gold is often considered the baseline currency of this world now for close to 5000 years. Using an estimate of world global gold volume is usually done based on the famous Olympic Swimming pool size or 2500m3 which at 93,000 kg/m3 represents 48 million 250 thousand kg or 1.5 trillion troy ounces. At $1300 per 1 oz gold that represents 20.2 trillion U.S. dollars or 20% of the world’s GDP.  Government debt worldwide is according to the CIA’s global statistical data 0.6 times world GDP or around $50 trillion.  Governments don’t save only its citizens do. If the world saves 20% per year of GDP then worldwide, government debt seems to be repayable in less than 3 years (60% debt versus annual global savings of 20%).  However, Canada’s government debt equals GDP; that of the U.S. governments is 77%, while Japan’s is 220% of its GDP and the EU’s government debts amount to 87%.  Compared that to consumer debt where a mortgage is often several times a person’s annual income. 
Although these government debt levels seem manageable, combined with other government obligations, the typical global budget deficit is 3% of GDP. So how do we pay that government debt back?  When was the last time governments were in surplus?  Also, remember that with interest rates on the rise, these deficits are likely to balloon even further.  Just a few years ago, the European Union members were having trouble making interest payments (Italy has government debt of 133% of GDP; Spain has 99% debt and Greece has 180%).
At current debt levels, many governments have difficulty repaying their debt and just wait until interest rates rise even further. But I digress. Back to currency in circulation. Worldwide currency in circulation is 8 trillion, gold available in this world (including jewelry, etc.) is 20 trillion, thus currently at a $250 billion circulation Bitcoin does not represent a significant amount of currency. For Bitcoin to replace all fiat currencies, I would estimate that it would have to at least a circulation value $8 trillion or $380,000 per Bitcoin. To even represent a significant currency, Bitcoin should have at least a circulation value of one to 2 trillion dollars, the latter would represent $95,000 per Bitcoin.
You can not compare a Bitcoin valuation with that of shares of a company. Yes, the Bitcoin price graph looks like a bubble, but for this cryptocurrency to develop into a true currency, its valuation has still to rise many times. Now, you tell me if that is reasonable; I can see the potential pricing goal but for that to happen we need a major financial crisis and loss of confidence in one or more of our fiat currencies. Also, if that were to happen, gold bugs expect that precious metal to reach between $5000 and $10,000 per oz which would place all gold in circulation at $77 trillion to $155 trillion. That would exceed world GDP nearly twice, especially if growth would collapse.  I guess time will tell, but for now a double in Bitcoin value over the coming year or years seems conservative if this cryptocurrency trend continues.

1 comment:

  1. Any opinion on the Canadian cannabis stocks ? They seem to be only going up & up. Bought a few positions in late 2016 and now getting a little nervous with the profits. I think similar to Bitcoin, in bubble territory now. No real way to value these stocks. At least the cannabis stocks on based on a real product.