Recently the media went nuts over another sudden Bitcoin price drop – this time, from a peak of $64,000 to “just” $55,000.
But considering where Bitcoin came from, this is like criticizing 1984 Arnold Schwartzenegger for losing a pound of muscle mass.
And perhaps most pertinently, where is the price of Bitcoin going? Is it going to skyrocket to $1,000,000, or plummet back down to the “mere” four digits?
Let’s discuss why Bitcoin is worth so much.
Bitcoin isn’t valued like traditional assets…at all
To understand the valuation of an investable asset like Bitcoin, it helps to compare it to something more traditional. If anything, the direct comparison will serve to illustrate why Bitcoin’s price valuation over time is less predictable than a pig on LSD.
Now, if you sit down with a good financial analyst and give her enough time and coffee, she can generally explain why traditional assets are valued what they’re valued. Why are shares of GOOGL worth so much today? Why has the value of my condo risen so much?
Here’s what she’d have to say:
How stocks are valued
The calculation of a specific share price is extremely complex, diving into a plethora of factors, algorithms, and formulae like P/E ratios, market cap, dividend discount models (DDMs), and more.
What’s easier to grasp are the factors that go into these formulae and affect share prices on a daily basis. These often include company performance, supply and demand, dividend announcements, management performance, the global economy, the local economy, market players and competition, patent approval, speculation, government regulation, activity from fellow investors, and public perception.
And many, many more. Now, although the list of factors driving share prices is long, diverse, and complex on its own, many of the factors are measurable and predictable.
By being able to somewhat predict the future performance of a stock, investors are able to design what are known as asymmetric risk profiles – meaning they can stack the cards in their favor. Ever wonder why despite the volatility of the stock market, your retirement account tends to consistently provide 7% returns each year? That’s because some smart person (or AI) has invested your money using an asymmetric risk profile – rather than win or lose big, they win a little bit every single time.
How real estate is valued
Some folks prefer investing in real estate over the stock market because the list of factors driving real estate prices is a bit smaller and easier to understand.
Those factors may include supply and demand, interest rates, inventory, demographics, generational preferences, the overall economy, the availability of government assistance.
The list gets a bit more complex for commercial real estate versus residential, but by and large, the value of a house shares a lot in common with the value of a share price. They’re both:
- Based on real-world factors.
- Measurable and justifiable on paper.
- And therefore, predictable to a certain extent.
Now that you understand a bit better how traditional assets are valued, let’s look at something a little less traditional.
… and how Bitcoin is valued
David Hunter, CFA is the Director of Research and Investments for CPC Advisors and Raymond James Financial Services. Naturally, with a title such as his, he’s poured countless hours into researching Bitcoin over the years, understanding its viability, volatility, and overall potential as an investment asset.
When I asked him how Bitcoin was valued, this was his response (paraphrasing):
He had more to say, but that was the gist of it.
“Bitcoin is 100% speculation,” he said. Whereas traditional investments are based on real world, measurable, and predictable factors like market cap and economic performance, Bitcoin is significantly more “transient.”
Bitcoin’s valuation isn’t affected by earnings reports, P/E ratios, mergers and acquisitions, shifting demographics, confidence in leadership, or government regulation (yet).
Therefore, this is the list of factors driving the value of a single bitcoin:
The value of a bitcoin is entirely based upon the availability and interest of future buyers. That’s why wealth advisors aren’t big fans of Bitcoin: supply and demand alone are extremely hard to measure and model after. If you can’t justify the current price of a bitcoin, you can’t predict its future performance. And if you can’t predict future performance, you can’t fit Bitcoin into an asymmetric risk profile.
That all being said, just because the factors driving Bitcoin’s price upwards are transient and hard to predict, that doesn’t mean they don’t exist. Let’s look at Bitcoin’s insane history and how it exploded in value.
Why is one single bitcoin worth so much?
If we’re talking purely factors driving Bitcoin’s price upwards, it’s demand.
Bitcoin’s mainstream understanding and acceptance, especially by institutional investors and foreign retail traders, are fresh and exciting milestones for sure – but they’re only representative of more demand. New demand from new sources, yes, but garden-variety demand nonetheless.
According to David, “Bitcoin is like Beanie Babies; the only way you can profit from BTC is by having someone in the future pay more than you paid for your BTC. That’s not true of stock – you’ll get dividends and there’s a basis of value there – shared ownership of a profitable company.”
Bitcoin hasn’t adopted any stock-like valuation factors since 2011. There’s no truly new factor driving up the price of Bitcoin that wasn’t present ten years ago – there’s no skilled management team, no new patent, no P/E ratio, no income statements, no balance sheets… just more demand.
In short, Bitcoin is worth so much because everyone wants a piece of it.
Bitcoin is valuable for the same reason Paris Hilton is famous: it just…is.
Where is the value of Bitcoin going?
Now that I’ve covered where Bitcoin has been, where is the value going? Is it going to the moon, or will it crash land?
For an objective, expert opinion, I’ll once again lean on David Hunter, CFA. After years of research, here’s what he had to say about Bitcoin’s valuation in 2025 and 2030:
“Should BTC be $10 or $400,000? That’s a big spread to have no idea what the true market value is.”
Basically, as long as demand exists for Bitcoin, the price will remain high. If demand falters or even evaporates, the price will drop (again).
That’s why many investors, analysts, wealth advisors, or really anyone who’s built an asymmetric risk portfolio for themselves or for a client is nervous around crypto: it’s based purely on demand, and demand is fickle.
When you look at factors driving share prices or home values, there’s a lot there that a skilled investor can use to build an asymmetric risk portfolio. In short, there’s plenty of predictability.
For example, it’s a safe bet that the value of a Blue Chip like GOOGL will provide consistent returns over ten years. Not only has GOOGL consistently grown in value, unlike Bitcoin it has the data to show why it’s grown in value and why it’ll continue to grow in value.
Similarly, it’s a safe bet that purchasing a condo in an emerging zip code with low taxes will make you money in the short term, whether you choose to rent, flip, or both.
But despite its overall rise in value, Bitcoin is not a safe bet.
Demand on its own is not a stable enough factor upon which to build an asymmetric risk portfolio. Without other factors involved, there’s no guarantee or even near-guarantee that Bitcoin will keep going up.
To predict the future value of Bitcoin is to predict its future demand. Looking to later this year and into 2025 and beyond, here are three possible scenarios:
Why it could surpass $100,000 or even $1 million
When it comes to cryptocurrency investing, another word for “demand” is “trust.” Morgan Stanley allowing crypto holdings in investor portfolios was a big sign of trust – although I’m sure it came with great trepidation, like letting a dog on a leather couch.
Bitcoin’s amazing performance during the pandemic also highlighted how one of its greatest “falterings” can be an asset. Bitcoin isn’t based on reality, so it isn’t affected by reality. As markets dropped and companies shuttered, Bitcoin continued its skyward rally as if propelled by COVID-19 molecules themselves. Therefore, investors big and small seeking a cash stimulus during COVID-19 turned to crypto, and crypto answered the call.
As the dust settles, more and more stories like this will emerge of how Bitcoin saved businesses and unlike traditional markets and global governments, didn’t let anyone down during the pandemic. Demand will rise in 2021, so will Bitcoin’s value, and the cycle will continue to six and seven figures.
Why it could totally crash to below <$10,000 (again)
Then again, if Bitcoin’s past behavior is any indicator whatsoever, we’re in another buyer bubble craze.
According to a study by The Harris Poll American, roughly 7% of Americans receiving stimulus payments invested some or all of it into cryptocurrencies, mostly Bitcoin and Ethereum. The last several times there was a buying frenzy on an even lesser scale, the bubble burst within months, tumbling around 80%. Given recent valuations of around $60,000, that could put Bitcoin at $12,000 or lower.
Another factor that could torpedo BTC’s price is the impending IRS crackdown on crypto trading. The IRS officially designated cryptocurrency to be a capital asset (and thus taxable) all the way back in 2014. However, fewer than one in 10,000 crypto traders ends up reporting crypto gains on their taxes. The IRS sent out highly threatening letters to crypto tax dodgers in 2019 and 2020, and blockchain technology allows them to track exactly who owes what down to the penny.
If the mere threat of a crackdown in S Korea was enough to drop Bitcoin’s price by 12% in 2018, an actual crackdown in the U.S. will surely have an impact as well.
Plus, it’s worth mentioning that institutional acceptance of crypto isn’t universal.
Let’s not forget, too, that entire countries share a “no crypto” policy; China shut down all crypto exchanges in 2017 and India criminalized all crypto trading. The latter move is especially damning, given India’s push for digital currency as a replacement for paper.
Bitcoin history – major milestones that (eventually) drove the price skyward
Honestly though, “exploded” isn’t the right word to describe Bitcoin’s rise in value. The world’s first crypto has gone from $0.0008 to $64,000 in 11 years – that’s an increase of 80,000,000.
That’s simply insane, so let’s take a look at how it got there.
2008-2010: Bitcoin launches with no predetermined value
Did you know that Bitcoin was born on Halloween?
On October 31st, 2008, a Japanese cryptographer known only by the pseudonym Satoshi Nakamoto posted a white paper online titled Bitcoin: A Peer-to-Peer Electronic Cash System.
Soon after, a blockchain was launched to support the first Bitcoin transactions, and on May 22, 2010, the first Bitcoin transaction occurred: 10,000 bitcoins for $25 worth of Papa John’s.
This warm, cheesy launch gave proof of concept to the idea of Bitcoin: that Internet users could safely exchange value without the need for a third-party or intermediary, like a bank or Paypal. Therefore, when Bitcoin hit the exchanges in 2010, its value quickly multiplied to a few cents each.
Bitcoin wasn’t conceived as an investment, but rather, “Internet bucks” to ease transactions. Casino chips, if you will. Casino chips don’t rise in value – they merely represent real-world dollars in a more convenient form that’s easier to pass around the poker table.
But crucially, unlike a casino chip, the value of a single bitcoin was never predetermined. There were no $5, $10, and $20 color-coded bitcoins. Once proof of concept was established and blockchain tech was in place to facilitate transactions, the mysterious Nakamoto was hands-off. Early Bitcoin adopters had to figure out the value of a single bitcoin themselves.
Therefore, demand alone drove the value of a bitcoin upwards; a trend that would continue into the next decade.
2011-2015: popularity and “sponsorships” drive demand
By February of 2011, the value of a bitcoin had passed the $1 threshold and continued to climb. Word-of-mouth drew in new buyers, and increased demand artificially drove the price up.
However, 2011 was also the first time Bitcoin saw a massive plunge. In June it hit $31, only to plummet back to single digits before year’s end.
Investors speculate that cryptocurrencies suffer massive price drops when big investors sell off their holdings. This not only floods the market, it reduces buyer confidence, potentially leading to larger selloffs.
Big selloffs can lower the value of stocks and real-estate also, but they’re especially devastating to cryptocurrencies because keep in mind, demand is the only factor propping up their valuations.
Anyhow, those who held the line were rewarded as the value of Bitcoin reached $1,000 by the end of 2013. The four-figure threshold was a huge win, since it spawned headlines, creating demand out of thin air and inflating the price even higher.
Further driving demand in the early 2010s was Coinbase. Coinbase wasn’t content merely facilitating trade – they went out of their way to educate and convince big companies like Dell, Expedia, Time, Stripe, and Paypal to begin accepting crypto in some tangible way.
These corporate “sponsorships” were massively validating to the crypto community, driving demand and price.
2016-2018: the bubble pops
The rising acceptance of Bitcoin led to a “crypto craze” in 2017. New cryptocurrencies were introduced via ICOs or “initial coin offerings,” leading to endless forum debates about which ones would win out and topple Bitcoin. Bitcoin itself became the Jennifer Lawrence of Silicon Valley: the up-and-comer everyone was talking about.
The craze seemed to reach a head around November 2017, when everyone and their uncle was talking about Bitcoin over turkey and stuffing.
Unfortunately, by the time everyone bought in, the price of Bitcoin fell down a flight of stairs. Between Turkey Day and Christmas, it had lost 45% of its value and continued declining all throughout all of 2018. The stumbling crypto would finally bottom out in January of 2019 at $3,441, or below 20% of its November 2017 value of nearly $20,000.
So what led to Bitcoin’s second major bubble pop? If the value of Bitcoin is primarily based on demand, what caused demand to fall?
Well, rumors that South Korea would ban crypto alone caused the price to plummet 12%. The hacking of Coincheck certainly didn’t help either. On January 26th Japan’s largest crypto exchange, Coincheck, was hacked and lost $530 million USD in customer’s crypto. The Great Crypto Heist is still the biggest theft of all time, and not only did it torpedo Coincheck, but it also reminded new investors that their crypto holdings weren’t FDIC insured.
But even before the S Korea rumors and the Coincheck fiasco, Bitcoin had lost nearly half its value by Christmas. Some say it’s because the buying craze of late 2017 caused investors to ask themselves why they were holding crypto, and many came up short.
“It feels like a bubble,” hedge fund manager Mark Dow told Fast Company in 2018, “[and] the less we understand the object of the bubble, the greater the scope for greed and FOMO to fill in the blanks.”
Dow “simply could not come up with a good reason for the crypto’s insane performance” and therefore chose to short it, doubling his profits.
Mark Dow certainly shorted at the right time, because there wouldn’t be many opportunities moving forward to bet against Bitcoin.
2019-2021: to the moon (and why)
From mid-2019 until late 2020, the value of a bitcoin fluctuated between $7,000 and $12,000 on a near-daily basis. This would be considered volatile by any other asset’s standard, but by Bitcoin’s standard, it was as steady as a surgeon’s wrist.
Then, COVID-19 happened.
Starting in October 2020, just before its 10th birthday, Bitcoin started skyrocketing in price. By December it reached $20k, then $40k in January, until finally peaking at nearly $65k in April.
What happened, and why hasn’t Bitcoin seen a meteoric rise quite like this before?
Theories abound, but Cointelegraph has the best overall take:
- Institutional investors are finally onboard. Many companies have turned a hail mary Bitcoin investment into tens of millions almost overnight. Risky or not, those kinds of returns are impossible to ignore. C-Suite executives that support Bitcoin can no longer be written off as radicals or mere “evangelists” any longer: their beliefs are validated in part by Morgan Stanley, which now allows its wealthier clients access to Bitcoin in their portfolios.
- It’s gone mainstream. Put simply, Google searches for “Bitcoin” reached an all-time high in 2020, indicating heightened crypto literacy and logically, increased demand.
- Emerging markets are getting in on the action. According to Cointelegraph, Luno, a crypto exchange for foreign markets, has seen purchase volumes triple among retail investors in Nigeria, South Africa, Malaysia, and Indonesia.
There’s an old joke I read on Reddit once, years back. A young girl asks her dad, a crypto trader, for some money:
“Dad, can I borrow $10?”
“$9.47? What do you need to borrow $10.16 for?”
Since 2010, Bitcoin’s value has skyrocketed mainly because demand has skyrocketed. Originally valued at just $0.0008, the price of a bitcoin has been sucked into an unstoppable vortex:
Awareness > Demand > Increased Value
Nothing has really changed in the last eight months – the vortex has merely sped up. Secondary factors like emerging markets and Fortune 500 acceptance have played a role, but they always equate to one thing: more demand, and the vortex continues.
And like a piece of plywood in a twister, the value of Bitcoin could keep rising or it could hit the ground. If nothing else, it’ll be exciting to watch.