In this article, I forecast Bitcoin's potential price scenarios using fundamental analysis. We'll be exploring the following questions as it relates to the valuation of Bitcoin from a price perspective.

What is Bitcoin's value proposition and how does it realistically play out in Bitcoin's price given the current state of the macro-economy?

This may seem complicated, and to some degree it is, but it's also important to remember that bitcoin's price, like any asset's price, is a simple function of supply and demand. If the demand for Bitcoin increases faster than its supply, the price will increase.

Bitcoin Fundamental Analysis

Fundamental analysis seeks to assess the value of an asset based on variables outside of it's price history. In the case of Bitcoin, relevant variables would be Bitcoin's usefulness, adoption, security, and the world's macro-economic state, all of which we'll discuss below.

Bitcoin's Value Proposition

Store of value - A store of value is an asset, commodity, or currency that maintains it's value over time rather than depreciating. Bitcoin is frequently compared to gold in this regard as gold has historically been the world's primary store of value. Precious metals such as gold have been used by economies through history as a store of value because they are relatively easy to transfer, scarce (limited supply), and easy to exchange between different denominations (via gold coins).

Bitcoin works as a store of value because there is a limited supply, which creates scarcity. After all 21 million Bitcoin have been mined, which is estimated to be sometime in the year 2140, no one will be able to mine any more. Unlike fiat currency, which can be printed and mismanaged by governments, Bitcoin's monetary policy is consistent and immutable as it's written in code that remains unchanged.

In times of economic turmoil, people turn to stores of value because they can be depended upon to retain some reasonable amount of value in the long-term. They act as a hedge against the

Examples of stores of value include precious metals, real estate, and fine art. What makes Bitcoin the ultimate store of value is it's ability to be a better store of value than any other asset. Other stores of value have major issues that Bitcoin solves.

For one, Bitcoin is very liquid. Finding a buyer for a piece of real estate or fine art can take a long time, whereas Bitcoin can be liquidated very easily.

Bitcoin is also easily transferable. It's quite difficult and expensive to transfer real estate, art, or physical gold. Bitcoin can be sent to anyone who has a Bitcoin address regardless of their location with very low fees in a matter of minutes.

Bitcoin is fungible. Fungibility simply means that all Bitcoin are the exact same and carry identical value. This differs from art or real estate in that each piece of real estate or art is unique. One reason gold is such a great store of value is its fungibility. Assuming the same karat, 1 oz of gold is equal in value to any other ounce of gold.

Bitcoin is indestructible. Bitcoin cannot be destroyed or damaged like real estate, art, or physical cash.

Bitcoin is also resistant to censorship in that anyone with internet access can connect to the Bitcoin network. Many governments have tried to enforce regulations on Bitcoin and other cryptocurrencies which has proved to be very difficult given their decentralized nature.

In this section of analysis we've established that Bitcoin has a real and strong value proposition as a store of value.

Bitcoin Security

Bitcoin's security and decentralization what makes it such an attractive store of value. There is no third party governance, custodian, or regulation that users have to trust. Storing and transferring traditional fiat money requires placing trust in third parties (PayPal, Square, Western Union, banks, etc.), whereas Bitcoin's blockchain network is decentralized and trustless.

While it is possible for hackers to steal a user's Bitcoin if they gain access to the user's private keys (private keys are essentially the password to your Bitcoin wallet), hacking the Bitcoin network itself is not realistic, or financially practical.

Hacking the Bitcoin network would require owning over 51% of the mining capacity (distributed consensus system) which would allow that user, or group, to alter transactions for their benefit.  

This would require an absurd amount of capital to achieve and even if someone were able to own 51% of the Bitcoin's mining power, it would be more profitable to use this power to continue mining Bitcoin honestly, rather than alter transactions that would instantly devalue the currency.

Bitcoin Adoption

Bitcoin has established itself as the face of cryptocurrency, consistently making financial news headlines in part due to it's historically large swings in price, high valuation, and revolutionary implications.

At the time of writing this (October 26, 2020) the state of Bitcoin adoption is stronger than ever with a price of over $13k, a market cap of over $242B, and a cryptocurrency market dominance of 62%. To further demonstrate how far Bitcoin has come:

• Over 800,000 Bitcoin addresses contain over 1 BTC  (source).
• 34% of Bitcoin engagement occurs on mobile devices (source).
• 62% of bitcoin has been held without moving wallets for over 1 year (source).
• Fidelity now recommends considering a 5% investment portfolio allocation to Bitcoin.
• PayPal has integrated Bitcoin into their user base of 346 million customer allowing them to buy, send, and sell Bitcoin.
• Cashapp, owned by Square, has facilitated Bitcoin investing through their mobile app, and has recently allocated 1% of their total assets to Bitcoin.
• Microstrategy, a software company, has made headlines by purchasing $425 million worth of Bitcoin.

While it's clear that institutional money is pouring into Bitcoin at record rates, Bitcoin has not yet seen government investment, though multiple governments have auctioned off Bitcoin seized in criminal investigations.

Bitcoin has also garnered attention from several governments, including China, who have gone as far as to impose strict regulations or bans on cryptocurrency. These attempts to regulate Bitcoin have only served to demonstrate one of Bitcoin's most powerful features:

By design, Bitcoin is virtually unbannable. If you can't keep people from accessing the internet, you can't keep people from accessing the Bitcoin network. Because Bitcoin is decentralized, it can be accessed and used by anyone, anywhere as long they can connect to the network via an internet connection.

While Bitcoin has frequently been an object of notoriety in the news, there is still a lot of room to grow in terms of adoption. Surveys estimate that only between 6% and 11% of Americans own Bitcoin. Assuming Bitcoin reaches a 90%+ adoption rate, this would mean we are currently very early on in the adoption curve and now is an excellent time to invest.

A 90%+ adoption rate seems more and more likely with payment services like Paypal and Cashapp now offering Bitcoin. An astounding 89% of Americans use PayPal and 20% use Venmo (owned by Paypal).

Macro-economic Analysis

Macro-economic analysis doesn't need to be overly-complicated to provide valuable insight. It's helpful to list out the facts that relate to the current state of the macro-economy, then make logical predictions as to where individuals, institutions, and governments will put their money.

• Covid-19 has forced lock-downs that have stymied economies worldwide.
• These lock-downs have caused financial turmoil among many individuals, businesses, and governments.
• Despite economic turbulence, many equities, especially in the tech and finance sectors have bounced back and are at, or near, all time highs. Many economists consider equities to be in a bubble right now.
• Other industries, such as the airline and hospitality industries, are on the verge of collapse and desperately seeking government bailouts (which will require governments to print a lot of money).
• The real estate market is also at an all time high and considered by many economists to be in a bubble.
• In order to offset the negative effects of the US and many other countries are having to compensate with their monetary (lowering interest rates) and fiscal (printing more money) policies.
• Real yields on bonds are worse than ever with many of them being negative.
• There is economic uncertainty surrounding the possibility of a second wave of covid, as well as risk of a recession as a result.

Based on these current circumstances we can ask the question:

Where does it make sense for individuals, businesses, and governments to store their money?

For individuals and businesses there is a fairly straight forward answer: Gold and/or Bitcoin appear to be the best options at the moment for investing spare cash reserves. Why gold and Bitcoin? We already discussed how gold and Bitcoin are great stores of value, especially during uncertain economic times (which we are most certainly in). Looking further, however, we can see that other investments just don't make sense at the moment.

Equities are in a bubble, sitting at their all time highs, and have far more room to fall than they do to grow, especially when you consider the potential drop in consumer consumption if we fall into a recession.

Real estate, which is traditionally another good store of value is also in a bubble, and as mentioned earlier has low liquidity and a high entry cost.

Bonds may be seen by some as somewhat of a safety net, but the returns are so low that they are unlikely to outpace inflation, in which case you'd have been almost just as well off just holding onto your cash.

Speaking of holding onto your cash, the US inflation rate thus far in 2020 is quite low, at under 1%, but projections are predicting an inflation rate well over 2% in 2021, which could go much higher if the Federal Reserve continues to print money at such an alarming rate. So just sitting on your cash is not a good idea either.

So if equities, real estate, bonds, and cash all look like bad investments, what's left? You guessed it. Gold and Bitcoin. Gold is probably the safer, lower variance route as its a well-established store of value in times of economic uncertainty. Bitcoin on the other hand, is the higher risk, higher reward investment, though the risk has certainly diminished with each new wave of institutional investment and adoption we've seen in 2020.

While many economists believe Bitcoin's underlying blockchain technology is quite likely to make it's way into governments and central banking systems, this will likely be in the form of pegged stablecoin currencies rather than cryptocurrencies that are subject to price fluctuations.

It is reasonable to predict, however, that countries with hyperinflation and other currency issues could consider adopting a Bitcoin standard. After all, countries such a Greece, Nigeria, and Venezuela, which all have very weak national currencies, already have very high rates of cryptocurrency adoption among their citizens.

Price Forecast

Bitcoin's current market cap is roughly $250 billion dollars, which makes it roughly 1/3 the size of of Facebook ($758B), 1/4 the size of Google ($1.03T) ( 1/6 the size of Amazon ($1.58T). That is an entire cryptocurrency, the world's largest cryptocurrency, sitting at a market cap lower than individual tech companies.

Let that sink in for a moment.

Earlier in this article we discussed how Bitcoin is a better store of value than gold do to its security, decentralization, fast transactions, and scalability. Gold's current market cap is around $9T. If Bitcoin were to surpass Gold's market cap of $9 trillion, the price of Bitcoin would rise to roughly 36x it's current price, or $468,000 per Bitcoin.

To some, this may seem like an ambitious projection, but I don't think it is if we assume a proper time frame. Obviously it's highly unlikely that Bitcoin will crest $400k in the next year or two. What could realistically happen however, is that Bitcoin could solidify itself in a 2021 recession as a store of value, and subsequently peak at ~$100k before correcting down to a more sustainable level in the short-term.

This kind of price action would prime Bitcoin for the next recession which could happen 4-12 years later, in which case Bitcoin could realistically hit the $400k mark.

Stock-to-Flow Model

The last thing I'll leave you with the the Bitcoin stock-to-flow model. Traditionally used for precious metals such as gold, silver, and platinum the stock-to-flow model estimates prices based on the current supply of a commodity against the inflow of the commodity (amount mined).

Adapted for Bitcoin, this model has been very accurate for the last 8 years. Every 4 years the mining rewards for Bitcoin are halved, which drastically reduces the inflow of new Bitcoin and creates more scarcity. Historically, this has manifested large price increases shortly after.

The last Bitcoin reward halving occurred in May of 2020, which suggests that the price of Bitcoin should increase significantly sometime in 2021, which conveniently overlaps with the potential recession mentioned earlier.

Conclusion: Bitcoin Forecast

Obviously it is impossible to perfectly predict the future prices of an asset along with the corresponding time frames for hitting those prices. We can however zoom out and use the fundamental analysis above to construct rational estimates for Bitcoin's price long-term.

Based on Bitcoin's value proposition and the state of the macro-economy, it's reasonable to expect Bitcoin may crest it's old all time high of just under $20k by within the first half of 2021.

If this happens, Bitcoin will garner large-scale media attention and there is potential for another period of wild speculation and an influx of retail investor money. From mid 2021 onward, the Bitcoin stock-to-flow model should be an accurate predictor that can be used for general price guidance.

According to the stock-to-flow model, achieving an all time high of ~$100k by mid 2022 should be possible. Beyond 2022, there is extreme potential assuming a $100k level has been breached. The most apt comparison to speculate Bitcoin's potential price is to look at gold's market cap. As mentioned, if Bitcoin matched gold's current market cap of $9 trillion, Bitcoin's price would be ~$468,000. Additionally, the Bitcoin stock-to-flow model predicts a Bitcoin price of ~$1,000,000 sometime around 2026.

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