Is It Too Late To Invest In Bitcoin?

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After being created in 2009, Bitcoin has rallied from under $0.01 per coin to a current all-time high of $20,000 per coin barely 10 years later.

This means that if an investor had just purchased $50 worth of Bitcoin back in 2010, his investment would have been worth over $100 Million at the Bitcoin all-time high in 2017.

Hence, after this meteoric rise, many people wonder if it is too late to buy Bitcoin now.

This guide aims to answer precisely that question by analyzing patterns and catalysts that could define the future price action of Bitcoin.

Note: Investing in Bitcoin is very risky, and you should not treat any of the content in this article as investment advice.

Previous Bitcoin bubbles

Bitcoin is known to move in explosive expansive cycles that are then followed by brutal corrections that erase up to 70% of the gains produced by the run. 

Historically, these cycles have been heavily correlated with the “Bitcoin Halving”, which is a monetary policy update that Bitcoin automatically makes once every 4 years. 

In these updates, Bitcoin’s yearly inflation is cut by 50% every time, enforcing the 21 Million coins supply cap of the currency.

This reduction in the amount of Bitcoin being produced every year has historically always driven up the price as there is now less supply for a constant (or increasing) demand for Bitcoin. 

2011 Bitcoin Bubble

In 2011, Bitcoin experienced its first major bubble. Bitcoin started the year at $0.30 per coin and hit an all-time high of $30 before the end of March.

After the mania started to fade, Bitcoin quickly crashed by over 90%, reaching a low of $2.30 per coin in the same year.

This first bubble was largely ignored by mainstream media and the world at large. The price increase was almost exclusively fueled by extremely tech-savvy early adopters.

Growth: From $0.30 to $30 (100x price increase)

2013 Bitcoin Bubble

In 2013, Bitcoin experienced its second bubble. This bubble started right after Bitcoin underwent its first “halving”, where Bitcoin’s inflation was algorithmically reduced by the protocol itself for the very first time.

Bitcoin started the year trading at $14, and after lots of ups and downs, reached a high of $1,240 per coin in November of that same year. 

This was the first Bitcoin bubble that got some attention on mainstream media and where regular retail investors and some tech-savvy hedge funds got involved as well.

However, shortly after breaking the $1,200 mark, the Chinese Government banned financial institutions from using Bitcoin and Mt. Gox (largest Bitcoin exchange at the time) closed operations around the same time.

As a result, Bitcoin crashed all the way down to $210, an 83% drawdown.

Growth: From $14 to $1240 (88x price increase)

2017 Bitcoin Bubble

Bitcoin’s most recent, and arguably “loudest” bubble happened in 2017. Bitcoin started 2017 trading at $970 per coin, to reach an all-time high of $19,500 in December of the same year.

This bubble was widely reported in mainstream media and it resulted in most people in developed countries hearing the term “Bitcoin” for the very first time. 

The massive media coverage together with news of regulated Bitcoin futures launching by the end of the year, which opens the doors to institutional investors, made an explosive mix.

However, right after the Bitcoin futures launched on December 18, the price started tanking as speculators “sold the news” of this event.

Although the price then subsequently crashed to a low of $3,200 per coin (84% drawdown), the previous rally caught the attention of major institutions. 

Throughout 2018, major financial institutions like JP Morgan, VanEck, and Ameritrade announced that they are working on offering Bitcoin to their clients.

Further, Facebook also announced that it is planning to launch its own cryptocurrency, which would expose close to 2 Billion people worldwide to the word “cryptocurrency”.

The 2017 bubble produced a lot of general awareness for Bitcoin, which sets the stage for another potential bubble in the near future.

Growth: From $970 to $19500 (20x price increase)

How high can Bitcoin go?

Now that we covered Bitcoin’s previous cycles, you may wonder: How high can the Bitcoin price go?

The honest answer is, nobody knows. 

What Bitcoin investors do is make an assumption of what Bitcoin can become in the world economy, and then calculate the Bitcoin price based on the estimated value captured by that market.

Let’s now explore some commonly discussed scenarios, and how high the Bitcoin price could go in each situation.

If Bitcoin substitutes Gold

Due to its scarcity and store of value properties, Bitcoin is referred to by many as “Digital Gold”. Further, some Bitcoin supporters go as far as claiming that Bitcoin is superior to Gold in 3 core aspects:

  • Bitcoin is extremely scarce as it is mathematically limited to 21 Million coins. With Gold, on the other hand, the total supply is uncertain as there is likely a lot of untapped Gold in the oceans and in space.
  • Bitcoin could transfer $100 million in value between two contents for less than $5 and in under 1 hour. A similar feat with Gold would cost millions of $ and take weeks. 
  • Bitcoin is extremely hard to confiscate as all a Bitcoin owner needs to do to hide his wealth is memorize a string of letters and numbers (private key). Gold, on the other hand, is a physical object that can be confiscated with ease.

At the time of writing, Gold has a market capitalization of approximately $7 Trillion

That means that if Bitcoin were to surpass gold as the leading store of value and obtain a similar market capitalization, that would result in a Bitcoin price of approximately $350,000 per coin.

If Bitcoin becomes a major currency

It is hard to accurately say how much a legacy currency like the USD or EUR is worth due to the elastic and intransparent nature of fiat currencies.

A commonly accepted measure is the M2 money supply, which includes physical cash, checking deposits, and easily convertible near money. 

Based on the M2 money supply, the US Dollar is worth $14 Trillion and the EUR is worth 11.7 Trillion € ($13.1 Trillion).

So, if Bitcoin were to become a major currency then that would put its market capitalization in the $10 Trillion region. At $10 Trillion in total market cap, each Bitcoin would be worth $550,000.

If Bitcoin substitutes offshore banking

It is estimated that over $15 Trillion are being hoarded in offshore bank accounts, out of reach of countries like the US and China, or countries in the EU.

Companies and high net worth individuals chose to store some of their wealth offshore to reduce the risk of all their funds potentially getting confiscated, or to make use of loopholes in the tax system.

One example is the company Apple, which has been hoarding over $225 Billion in cash overseas throughout the past years.

However, there are two main problems with offshore bank accounts:

  • The funds are in the hands of a third-party (bank) which is registered in a jurisdiction where the judicial system is not as reliable as in more developed countries.
  • In some situations, it is possible for Governments from other countries (like the USA), to confiscate those funds.

Bitcoin solves both problems by offering a solution to store wealth outside of a particular jurisdiction, without the need to rely on any third party. Further, unlike funds in offshore bank accounts, Bitcoins are extremely hard (if not impossible) to confiscate.

Hence, it is not unlikely that Bitcoin could become a vehicle (or the vehicle) to store value that companies or individuals want to keep offshore. 

If Bitcoin were to grow to a size where it accommodates the entire offshore banking industry (estimated to be worth over $15 Trillion), that would equate to a Bitcoin price of over $700,000 per coin.

If Bitcoin becomes the global store of value

Currently, investors diversify their wealth in various store of value vehicles, since there isn’t a single one that could be considered perfect. Hence

Some of the largest stores of value include Gold, Real Estate, and Bonds. Collectively, the global SoV market is worth over $320 Trillion.

Many Bitcoin supporters believe that Bitcoin is a superior store of value to any existing solution. 

On the contrary to Gold, Real Estate, or Bonds, Bitcoin can be easily transported, is highly liquid, and is non-confiscatable.

Assuming that Bitcoin captured a 30% of the global store of value market, that would put Bitcoin’s market capitalization at around $100 Trillion, which equates to a price of $5 Million per Bitcoin.

Current Bitcoin price catalysts

Now that we have explored some of the potential valuation ceilings that Bitcoin could reach, the next step is to outline a handful of key catalysts that could get Bitcoin there.

Currency wars and global unrest 

Increasing pressure from the US in the form of tariffs, uncertainty about global debt, and central banks being forced to lower interest rates to avoid a recession, has formed an explosive mix.

One major event that showed Bitcoins resilience to the uncertainty brewing in major fiat currencies was when the Chinese Yen lost it’s 7:1 peg to the US Dollar.

Right after the Chinese Yen broke the peg, a substantial Bitcoin rally followed.

As global uncertainty continues to build, more investors may see Bitcoin as a safe haven to allocate a portion of their net worth to.

Potential ETF approval

Currently, there is no way for large investors to purchase substantial amounts of Bitcoin through an exchange-traded product. 

This prevents many funds from getting exposure to Bitcoin since they are often not qualified (or allowed) to purchase actual Bitcoin themselves.

One powerful example of the impact an ETF can make is Gold.

The first Gold ETF was approved in 2001 and marked the beginning of a 6-year bull run that resulted in a 700%+ price appreciation.

impact on price gold etf

Many Bitcoin ETF proposals have been submitted to date. However, none have been approved yet and they were all rejected or postponed due to liquidity and manipulation concerns by the SEC.

That said, it is not unlikely that a Bitcoin ETF will eventually be approved. And if it does, it would offer an effective vehicle for funds and HNWI to get exposure to Bitcoin.

Increased awareness

While in the 2011 Bitcoin bubble barely anyone ever heard about the currency before, nowadays a big portion of the population is at least slightly familiar with the fact that “Bitcoin is an internet currency”.

This general awareness was accelerated even further by Facebook’s efforts to launch its own cryptocurrency (Libra) and by the global economic turmoil where mainstream media has often highlighted Bitcoin as a potential safe haven.

As more people hear and learn about Bitcoin, the chance increases that a portion of those individuals eventually decides to dip their toes into Bitcoin and purchase a small amount.

When extrapolating this phenomenon to millions or hundreds of millions of people, the impact on Bitcoin’s price can be significant. 

Increased merchant adoption

In its current form, Bitcoin is not ideal to be used as a medium of exchange just yet. 

According to Murad Mahmudov, from Adaptive Capital, a cryptocurrency must go through 2 stages before eventually becoming a great currency:

  1. Collectible
  2. Store of Value
  3. Medium of Exchange

Arguably, Bitcoin is currently somewhere between a collectible and a store of value.

That said, this has not stopped hundreds of merchants from starting to accept Bitcoin for purchases. Major companies like WholeFoods, AT&T, and Overstock already accept Bitcoin as payment.

Further, progress with scaling solutions like the “Lightning Network” continue making Bitcoin transactions faster and cheaper, to improve the currency’s viability for small payments.

Bearish argument for Bitcoin and risks

Bitcoin is an incredibly volatile and risky asset. The concept of digital currency is still largely unproven, and there are many ways in which Bitcoin could fail or be a poor investment.

Now that we have explored the potential of Bitcoin and how it could fit into the global financial system, it is also important to analyze the risks of investing in Bitcoin.

Relatively high market capitalization

At the time of writing, Bitcoin is trading at a $200 Billion market capitalization. 

Although this is significantly smaller than some of the assets that Bitcoin aims to take on, it is a substantial valuation when compared to other companies or assets.

In contrast, the market capitalization of McDonald’s is $170 Billion, the market capitalization of CitiGroup is $149 Billion, and the entire market capitalization of Silver is just $20 Billion.

Hence, Bitcoin investors need to be aware that when investing in Bitcoin today, the upside is significantly smaller than the one very early investors are enjoying.

Low merchant adoption

It’s true that Bitcoin’s current value proposition is to be a store of value until it’s market capitalization becomes larger and merchants can adopt it as a currency without having to worry about volatility.

That said, Bitcoin’s merchant adoption is still shockingly low for the fact that the platform has been around for over 10 years. 

When going to a random store, chances are almost zero that this particular store accepts payment in Bitcoin.

Potential competition from other currencies

Although Bitcoin was the first cryptocurrency to ever launch and is also by far the most adopted one to date, that does not mean that the network is perfect.

Some of the main concerns with Bitcoin are that most of the network is supervised by 3 large miners and that BTC coin holders don’t have a say in the network and are at the mercy of “core developers” and miners.

Currencies like Decred aim to solve these problems and could become a major competition to Bitcoin.

Nation-state attacks

Finally, if Bitcoin continues to grow and starts challenging major currencies (like the US Dollar), it is not far-fetched to think that nation-states may try to shut down the network to protect their interests.

This could be approached by 51 percent attacking the network, banning fiat to Bitcoin onramps, or trying to introduce bugs into the Bitcoin code. 

Although this risk is non-existent at the time of writing, it could become very real a few years down the road.

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