Bitcoin’s Potential Value
Bitcoin’s rise in market value from zero at birth over a decade ago to roughly $150 billion as of this writing is remarkable. Yet this valuation is a tiny fraction of its future potential. So now we must ask two questions: (1) How big is the total addressable market, and (2) What share of this market will Bitcoin likely take? I see five major market opportunities for Bitcoin:¹⁴²
1. Digital Gold
Today, the total value of the gold market is roughly $8 trillion. While a portion of this total value arises from industrial (non-monetary) value, as we discussed in Chapter 3, it appears that the majority of the total value of gold is its moneyness (monetary premium). If we assume an industrial value for gold of $2 trillion, then we are left with a monetary value of $6 trillion.
As we saw in Chapter 8, Bitcoin scores significantly higher than gold overall on the 14 Characteristics of Good Money, especially in being more identifiable, transferable, divisible, fungible, censorship-resistant, and unseizable. We should therefore expect Bitcoin to capture a large portion of gold’s monetary value over time. A third of this value over the next 10 years seems reasonable. That results in $2 trillion of “gold” value for Bitcoin.
2. Fiat-Beater
As our Chapter 8 scoring demonstrated, Bitcoin is currently on track to becoming better money than the U.S. dollar. Since the dollar is better than any of the world’s other fiat currencies, Bitcoin is on its way to becoming better money than the world’s fiat currencies in total. Just global coins and bank notes in circulation amount to over $7 trillion.¹⁴³ Total money inclusive of demand deposits at banks is over $35 trillion. Total money including time deposits (CDs) exceeds $90 trillion.
In a future in which Bitcoin is prominent, there is likely to be significantly less fractional reserve banking since the market will impose tighter discipline on banks and prevent them from running their balance sheets at 10x leverage. Therefore, the $90 trillion number just mentioned is not relevant. However, some significant fraction of the $7 trillion figure and even the $35 trillion figure is feasible. 20% of $10 trillion seems reasonable, leading to a “fiat” value for Bitcoin of $2 trillion within a decade.
3. Offshore Assets
Nobody knows how much money is held in offshore bank accounts, but reasonable estimates seem to fall into the $10–$30 trillion range.¹⁴⁴ We haven’t “scored” offshore assets in this book like we did the dollar, gold, and Bitcoin. However, suffice to say that buying some bitcoins is easier and cheaper than opening a foreign bank account. Today, opening a foreign bank account might still be done anonymously. Buying Bitcoin anonymously today is difficult, but smart software developers are attempting to build anonymity into “second layer” systems atop the Bitcoin network, and some may succeed.
Regardless, for many people holding an offshore asset is not about privacy as much as it’s about avoiding unjust seizure. Bitcoin is probably the most unseizable form of money ever created, which means it will surely take some share from the offshore asset market. Assuming conservatively the lower end of the estimated range of offshore assets, $10 trillion, it seems reasonable that Bitcoin could capture 20% of the market within 10 years, leading to an “offshore” value for Bitcoin of $2 trillion.
4. De-Monetizing Other Assets
As we saw in Chapter 2, all goods are at least “a little bit money.” However, capital goods in particular are held in part to immunize their owners against the inexorable inflation (value loss) of fiat currencies. Having an inflation-proof asset like Bitcoin reduces the need to hold other “store of value” assets, including real estate or even stocks, partly as hedges against inflation. The classic example is vacant homes in cities, such as London, where long-term empty homes are estimated at over £10 billion ($12 billion).¹⁴⁵
Once the world wakes up to this fact, some portion of the monetary value of these assets will likely be absorbed by Bitcoin. Global real estate alone is worth more than $200 trillion,¹⁴⁶ and stock markets are worth at least $70 trillion. If the moneyness (monetary premium) embedded in these assets accounts for 10% of their value, and Bitcoin captures a few percentage points, that would lead to a “de-monetization” value of Bitcoin of perhaps $1 trillion.
5. New Applications
As discussed in the prior chapter, ABRA is employing the Bitcoin network to secure a wide range of global assets, as well as facilitate international remittance payments. Microsoft is building a decentralized identity (DID) system to try to solve the problem of identity management and theft on the Internet. The Lightning Network and other scaling solutions could enable micropayments that were impossible with the legacy financial system. There likely will be other applications we haven’t even imagined that will rely on Bitcoin, and the development and adoption of these systems will increase demand for Bitcoin. Estimating such incremental demand is impossible, so I will estimate a level of $1 trillion to the “new applications” value of Bitcoin.
Adding up the “gold,” “fiat,” “offshore,” “de-monetization” and “new applications” values of Bitcoin results in a total value of Bitcoin of $8 trillion within the next decade. This is roughly 53x Bitcoin’s current value of $150 billion. If these assumptions about the value are reasonable (and I believe they are actually conservative), then we can infer what the market is telling us about the probability of Bitcoin achieving this outcome. It is $150 billion divided by $8 trillion dollars, which equals 1.9%. This isn’t quite right since it doesn’t factor in the time to realize the potential, but we’ll come back to that issue shortly. I believe the probability of achieving this $8 trillion outcome is far higher than 1.9%. I see the probability as greater than 30%.
I approximate my view of the rough “probability distribution” of outcomes for Bitcoin within the next decade as follows: one-third probability that it fails and goes to zero, one-third probability that it becomes a very niche asset and therefore doesn’t gain significant value from its current level, and one-third probability of success, approximated as the 53x outcome described earlier. This distribution of possible outcomes makes an investment in Bitcoin (1) as likely to lose value as gain value, yet (2) the most asymmetrically positive investment opportunity I’ve ever seen. The “expected value” of this bet is 1/3 x 0 + 1/3 x 1 + 1/3 * 53 = 18x my investment over 10 years. That’s an expected annualized return of 33%, or approximate doubling of value every 2.5 years.
I don’t expect to see another investment opportunity as attractive as this ever again in my lifetime. How could it go wrong? Lots of ways. Let’s examine them in the following chapters.