Most articles on Bitcoin tend to argue either in favor of a significant appreciation of the cryptocurrency or for it to fade into irrelevance. My thesis for Bitcoin is that it is an asymmetric bet on its adoption as a global reserve asset. The expected value of this bet, according to my assumptions and calculations, is for Bitcoin to trade within a $40,000 to $100,000 range.
Despite this view, I rate Bitcoin as a "Strong Buy" because it is an asymmetric bet that I, personally, like, and I am willing to take. In other words, I believe in the bullish case of this asymmetric bet. Bitcoin is the single largest holding in my portfolio, but it comes with significant opportunity risk.
Thesis: Bitcoin is an asymmetric bet with an expected value between $40,000 to $100,000 per Bitcoin. But I am still very bullish.
Bitcoin is an asymmetric bet. The cryptocurrency has all the characteristics it needs to become a superior global reserve asset: durability, divisibility, fungibility, portability, verifiability and, most importantly in my view, scarcity.
The real question is whether the world's institutions, such as central banks, governments, pension funds and large investment funds will actually adopt it as a global reserve asset.
In this article, I will detail the bull and bear case for Bitcoin within three scenarios of probability. The expected value of these scenarios, from a statistical standpoint, is for Bitcoin to trade between $40,000 to $100,000 per Bitcoin. More details on this are available in the article.
Beyond the statistical exercise, my bear case is for Bitcoin to get stuck in a tug-of-war between bulls and bears and keep trading at close to current price levels indefinitely. My bull case is for Bitcoin to at least match the market capitalization of gold, maturing as a global reserve asset. I like Bitcoin as an asymmetric bet and that's why I am recommending a Strong Buy.
Assumptions behind the asymmetric bet
Bitcoin might become a global reserve asset, or fall into irrelevance - these are the two possible outcomes from an asymmetric bet on Bitcoin. In the next two sections, I will outline what those two outcomes look like in my opinion, in terms of price per Bitcoin expressed in US dollars. Then, I will run the math and go over the statistically expected value of my asymmetric bet on Bitcoin.
Selecting the bottom for my bearish case: Bitcoin Realized Price
The most straightforward bottom to select for a Bitcoin bear case would be zero. After all, Bitcoin is not a cash-flow generating asset and therefore no intrinsic value can be calculated based on future cash flows.
However, I don't think Bitcoin going to zero is a realistic outcome. Even in a bearish scenario, people I believe will keep trading BTC in the short- and mid-term to try to make money. There will also be people that will keep believing in Bitcoin and hold it longer term, no matter what. In a nutshell, I think that even in a bearish case Bitcoin will remain a sort of (somewhat regulated) 'online casino'. People will keep investing in the hope of gaining from trades that take advantage of the high volatility of the asset.
What I am considering to establish my bottom is Bitcoin Realized Price. This is the value of all bitcoins at the price they were last transacted on the blockchain, divided by the number of all bitcoins in circulation. This number is a gauge of what on average people paid for their Bitcoins.
The reason why I am selecting this metric is because of human behavior. I believe that people are less willing to sell below their unrealized price, as this would imply selling at a loss. This indicator is commonly used in Technical Analysis to establish Bitcoin's bottom.
For my bearish case, I am using 2 figures related to Bitcoin Realized Price:
Short-Term (155 days) Realized Bitcoin Price, at $62,000 at the time of writing.
Total Realized Bitcoin Price, at $29,500 at the time of writing.
The average between these two figures is $45,000. I am rounding up this figure to $50,000 for my bear case.
Selecting the top for my bullish case: Bitcoin to match gold
Selecting a target BTC price in USD for my bullish case is an easier exercise and I won't use technical analysis indicators for this purpose.
If Bitcoin matures as a global reserve asset, I believe it will at least match the market capitalization of gold, the current prime global reserve asset. Gold currently has a market cap of around $15 Trillion, while Bitcoin is at roughly $1.3 Trillion. Bitcoin matching gold's market capitalization would put the price of one Bitcoin at $650,000. This is the figure I am using for my bullish case.
In reality, I believe that Bitcoin could go way beyond that amount if it matures into a reserve asset. The reason is that in a bullish case, I see Bitcoin replacing not only gold, but also fiat currencies in the measure they are used as reserves.
To clarify - I do not believe most people will ever buy groceries using Bitcoin and I do not see Bitcoin replacing fiat currency for daily use on a mass scale. I do see however how, in a bullish case, central banks might decide to hold Bitcoin instead of US dollars, Euros, British Pounds or Swiss Francs. For simplicity, however, I am using Bitcoin matching gold in market capitalization as my bull case scenario.
The expected payoff of my asymmetric bet is between $40,000 and $100,000 per BTC
I have defined my targets for the asymmetric bet as $650,000 per BTC for the Bullish case, and $50,000 per BTC for the Bearish case. I am now going to provide 3 different scenarios related to the probability the bull and bear cases pay off:
Scenario A assigns a 5% chance that Bitcoin reaches my bull target level.
Scenario B assigns a 20% chance that Bitcoin reaches my bull target level.
Scenario C assigns a 25% chance that Bitcoin reaches my bull target level.
To calculate the expected payoff of this bet in the three different scenarios, I multiply the probability of each of the three scenarios by the target price of the two cases. As outlined in the above table and in the thesis summary, this gives an expected payoff between $40,000 to $100,000 per Bitcoin.
How this asymmetric bet might play out in the real world
My calculations so far are a theoretical exercise. An "expected payoff" can be used to assess whether an investment is interesting at current prices. With Bitcoin currently sitting at around $67,000 per Bitcoin, entering Bitcoin seems a good deal in two out of the three scenarios.
Different probability scenarios will change the expected value of this bet. Readers can assign their own probabilities and decide by their own whether Bitcoin at these levels represents an interesting investment.
In reality, my asymmetric bet on Bitcoin will result in either of two outcomes. Bitcoin might go up and mature into a global reserve currency. Or it might fall into irrelevance and trade close to current levels indefinitely.
The bull case: Bitcoin as a reserve asset, not a currency
I believe Bitcoin is not a viable alternative to replace currencies for daily use. The basic principles of macroeconomics teach that deflation is worse than inflation. That's because when consumers expect their currency to appreciate in value, they tend to refrain from consumption. Therefore, a deflationary currency would not be good because it would drastically decrease consumer demand, which is a key component of GDP. This would result in a deep and prolonged economic crisis.
In other terms, it is reasonable to assume, based on basic macroeconomics theory, that few would be willing to spend their Bitcoin to buy groceries, if they expect the value of said Bitcoin to rise significantly in the future.
That's why my bull case sees Bitcoin as a global reserve asset, not as a replacement for everyday currency. A global reserve asset does not need to be inflationary - on the contrary, it needs to be deflationary or at least experience low inflation. Bitcoin is excellent in that it has a predetermined supply, rendering it very scarce. It is also highly transparent, with transactions verifiable on the blockchain. Other characteristics of Bitcoin that make it a great reserve asset on paper include how easy and cheap it is to transfer, and its divisibility and fungibility.
Of course, that's not enough. For Bitcoin to mature into a global reserve asset, it needs to be adopted by an increasing amount of institutional and retail investors.
I believe Bitcoin has already shown significant progress in terms of institutional adoption. The last four years have seen Bitcoin being adopted by an increasing number of investors. El Salvador adopted it as a currency, several Bitcoin ETFs were launched under the SEC's rule, and even a pension fund has recently decided to expose itself to Bitcoin.
The next steps for my bull case to run its course would include governments and central banks. The rate of Bitcoin adoption for a possible bull case is pure speculation, and I prefer to refrain from giving an exact target in terms of when I expect this bet to run its course.
I will limit myself to listing some recent events which, I believe, are indicating a further, increased adoption of Bitcoin by institutional investors. These include Argentina reportedly in talks with El Salvador's regulators to discuss Bitcoin as legal tender, a rumor that Qatar's sovereign fund might buy Bitcoin and the impressive growth of BlackRock's Bitcoin ETF.
The bear case: Bitcoin stuck in a tug-of-war between bulls and bears
The way that I see a bear case play out, is for Bitcoin to be stuck between bulls and bears in an indefinite tug-of-war. I believe people will keep trading Bitcoin even if it weren't to mature into a global reserve asset. My belief is rooted in the functionality that Bitcoin offers today. These include:
International money transfers between sanctioned countries or generally to avoid government oversight.
Active trading by people that want to profit from Bitcoin's high volatility.
Illicit transactions.
Demand driven by the small countries that adopted Bitcoin as a currency so far.
I define my bear case as an 'online casino' scenario, in that Bitcoin will be used to try to make money or for borderline-illicit transactions by its users.
Risks to my thesis
The first risk to my thesis concerns my target price for Bitcoin. I have assumed Bitcoin, in a bull case, will at least match gold's market capitalization. In reality, Bitcoin might never mature to those levels, even in a bull case. In a "mild bull" case, Bitcoin might simply become one of the alternatives to gold and reserve currencies, without ever taking over from them in full. In that scenario, Bitcoin might be stuck at significantly below my $650,000 per BTC target price.
The second risk to my thesis concerns the probability I assigned to my three scenarios. My assumptions might be off - someone could argue that there is less than a 1% chance that institutions adopt what is still seen as a highly volatile, high risk asset. Assigning a 1% probability that Bitcoin matures into a global reserve asset would provide a very different expected value for my asymmetric bet.
There is also a risk related to opportunity cost. If my bear case were to materialize, investors could lose money when compared to having invested in other assets. For example, Bitcoin has overperformed equity markets so far, but that might change in the future.
Finally, there is a risk linked to high volatility. Bitcoin is historically a highly volatile asset, and I do not see this changing for the foreseeable future. Any investor entering Bitcoin at these levels should be aware of and able to handle high volatility.
Overall, my bet on Bitcoin has a high risk - high reward investment profile. When I invest in single stocks or single positions, I try to identify possible asymmetric bets. But asymmetric bets are very risky by definition, since they tend to either pay disproportionate returns or heavily underperform the market.
Conclusion
My bear case for Bitcoin sees the cryptocurrency trading at around $50,000 per Bitcoin. My bull case for Bitcoin sees it growing up to $650,000 per Bitcoin. The expected payoff of this asymmetric bet is, in my opinion, between $40,000 to $100,000 per Bitcoin. With the current price at roughly $67,000 per Bitcoin at the time of writing, I see this as a good entry point for investors interested in the cryptocurrency.
Ultimately though, investing in Bitcoin still comes with a high risk that the asymmetric bet does not pay off. Therefore, my final recommendation is for investors to enter this bet only if they understand Bitcoin and are overall bullish on the chance it pays off. My recommendation of a STRONG BUY is rooted in that personal belief.
Geneva Investor
Investor based in Geneva, Switzerland. Follow me on Twitter @GenevaInvestor for daily macro & investing nuggets. I write about macroeconomics, global trends, and what I believe are asymmetric investment opportunities in the market. I have a Master's degree in Business Management. I am currently bullish on PLTR, US equities, MSTR, AMZN and Bitcoin. Friend "Rex Investing" is also a contributor to Seeking Alpha. All opinions and analysis are exclusively my own.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MSTR, BTC-USD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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