Written by: Matt Hougan, Chief Investment Officer of Bitwise

Translated by: Saoirse, Foresight News

A few days ago, a financial advisor asked me, "Matt, do you really think one Bitcoin can be worth 1 million dollars? That number is just insane."

I understand his thinking. 1 million dollars does sound ridiculous. It means Bitcoin would need to increase 14 times from its current price.

When I entered the crypto industry full-time in 2018, I would have just laughed at such statements. Back then, Bitcoin was around 4,000 dollars, and the target of 1 million dollars - even to me - seemed completely absurd.

But I don't think that way anymore. As I research this asset more deeply, I realize that I, like this financial advisor friend, made a very fundamental mistake in analyzing Bitcoin's potential.

In this week's memo, I want to explain this mistake and show how a set of rather conservative assumptions can lead to Bitcoin reaching 1 million dollars.

How to Estimate the Value of Bitcoin

I view Bitcoin as an emerging store of value asset. Its function is similar to gold - allowing people to hold wealth outside of traditional fiat currencies and banking systems, only existing in digital form. It is more volatile than gold and has a shorter history but is competing for the same market.

Within this framework, the basic logic for estimating its value is simple:

• Estimate the total size of the store of value market;
• Estimate the share Bitcoin can capture;
• Divide by 21 million (the maximum total supply of Bitcoin).

And you will arrive at its implied price.

Today, the store of value market is nearly 38 trillion dollars:

• Gold: 36 trillion dollars
• Bitcoin: 1.4 trillion dollars

By this metric, Bitcoin currently occupies less than 4% of the market share.

This is why many people find "Bitcoin at 1 million dollars" unrealistic, and it's also the reason I have not believed it for many years.

Based on today's market size, Bitcoin would need to capture over 50% of the store of value market to reach 1 million dollars, which is an extremely high barrier.

But the key point that many overlook is that the store of value market is not static. In fact, it has expanded significantly in the past 20 years. And with the rising concerns about the devaluation of fiat currencies, I believe this expansion will continue.

A Brief History of Gold

The first time I truly paid attention to gold was when the first gold ETF in the U.S. was launched in 2004. At that time, the entire gold market had a market value of about 2.5 trillion dollars - not much larger than today's Bitcoin market.

Over the years, it has grown to nearly 40 trillion dollars, with a compound annual growth rate of 13%. The reason behind this is the rising concerns about government debt, geopolitical risks, and loose monetary policies.

Market Value of Gold, 2004 to Present

Source: Bitwise Asset Management, data from the World Gold Council and Bloomberg.

The mistake people make when assessing Bitcoin's potential is ignoring this growth.

If this growth rate continues, in 10 years, the global "store of value market" could reach approximately 121 trillion dollars. At this size, Bitcoin would only need to capture 17% of the market to reach 1 million dollars.

Growing from 4% to 17% is still a massive increase, but looking back at Bitcoin's progress in recent years, this goal is completely attainable.

A few years ago, there were no Bitcoin ETFs in the U.S., institutional holders were few, and Bitcoin's volatility was so high that hardly anyone was willing to allocate more than 1%.

Now:

• Bitcoin ETFs have become the fastest-growing ETFs in history;
• From Harvard endowment funds to Abu Dhabi sovereign wealth funds, various institutions are holding it;
• Bitcoin's long-term volatility has decreased, and many professional investors are starting to consider a 5% allocation.

There is still a long way to go, but under these trends, capturing 1/6 of the store of value market in 10 years is not extreme; it feels more like a natural continuation of the prevailing trends.

Possible Risks

Of course, we must consider both sides of the issue comprehensively.

The global store of value market may not continue to grow like it did in the past 20 years. The last 20 years saw global financial crises, quantitative easing, and long-term low interest rates, and these conditions may not reoccur in the future, causing gold prices to potentially retreat.

Another risk is that Bitcoin may not be able to expand its market share.

But I believe these predictions may also be overly conservative: as concerns about government debt reach crisis levels, the store of value market may grow even faster in the future, and the share Bitcoin occupies in 10 years could be much higher than 17%.

In my view, the baseline scenario is:

• The store of value market continues to expand as it has in the past;
• Bitcoin continues to capture market share as it is now.

This would push Bitcoin's price to levels far above what it is today.

Notes

(1) Longtime readers may remember that I wrote on similar topics in 2023. Since then, my viewpoint has become clearer.

(2) It is worth mentioning: if silver, platinum, and palladium are also included, the store of value market would be larger, but for the sake of comparison, this article only compares gold and Bitcoin.