Bitcoin reaching $1 million per coin often sounds absurd to investors, but billionaire asset manager chief investment officer (CIO) Matt Hougan says the skepticism often stems from a fundamental misunderstanding about how the asset should be valued.
In a memo released on Tuesday, the CIO of Bitwise Asset Management said that many analysts rely on “static figures” when thinking about bitcoin’s long-term price potential. According to Hougan, that approach ignores the fact that the market bitcoin competes with – the global retail market – has been expanding at a rapid pace for decades.
Hougan wrote that many people hear $1 million and immediately spend it, noting that the price would represent about a 14-fold increase from current levels.
“$1 million sounds ridiculous—even to me,” Hougan wrote. “I don’t see it that way anymore.”
Hougan framed BTC as an emerging commodity of value very competitive with gold. In that context, estimating the potential value of bitcoin becomes a matter of calculating the total market size of the store of value, estimating bitcoin’s share of that market, and dividing the result by the fixed supply of 21 million coins.
According to Hougan’s estimates, the global market for the store of value today stands at just under $38 trillion, which includes mostly gold and BTC.
Gold accounts for $36 trillion of that figure, while bitcoin represents about $1.4 trillion, or just under 4% of the market.
Viewed through that lens alone, $1 million BTC would seem impossible. At today’s market size, a cryptocurrency would need to capture more than half the market cap to reach that price level.
Hougan: The market will change, Bitcoin will follow
Hougan’s argument is based on the assumption that the market itself will not remain static. He points to the boom in the gold market over the past two decades as evidence that the value chain can grow exponentially in times of macroeconomic uncertainty.
The market value of gold was estimated at $2.5 trillion in 2004, when the first US gold exchange-traded fund was launched.
Since then, the metal’s value has risen to nearly $40 trillion, an increase attributed to factors such as rising government debt, political tensions and loose monetary policy.
If the retail price market continues to grow at the same pace, Hougan estimates it could reach about $121 trillion within a decade. Under that scenario, bitcoin would need to capture about 17% of the market to reach a value of $1 million per coin.
The global market for the “store of value” will be ~$121 trillion in 10 years,” writes Hougan, “Bitcoin only needs to take 17% of the market to become a $1 million coin.”
While that would still represent a significant increase in his current stake, Hougan says a switch is not impossible given bitcoin’s progress in recent years.
Institutional adoption has been rapid, especially after the introduction of US bitcoin exchange-traded funds. Major asset managers, endowments, and private equity funds have begun allocating money to the asset class, while professional investors have expanded typical portfolio allocations from around 1% to levels close to 5%.
Still, Hougan acknowledged that the projections depend on significant assumptions. The store of value market may not grow at the same rate as in the past two decades, and bitcoin may fail to achieve the expected share.
Still, Hougan said investors should focus less on the size of today’s markets and focus on how the broader financial landscape may play out. The biggest mistake, he says, is using a fixed denominator to value a competitive asset in a market that continues to grow.
“As I see it, the basic case – That the store-value market will continue to grow as it is, and bitcoin will continue to gain market share as it did,” wrote Hougan, “leading to many, much higher prices than we have today.
At the time of writing, Bitcoin is trading close to $70,000.
