If you are interested in investing, you won’t have failed to notice Bitcoin’s resurgence in 2024. The world’s biggest cryptocurrency by market cap regained its all-time high (approximately £50K/$69k/AUD93K) in the early spring, prompting many to predict a new bull run would begin, dwarfing what we have seen before.
Others are not so sure, believing that it is simply too late to join the train. You can see sense in both arguments, and we will look at both in due course. Each argument takes an opposing view of what Bitcoin is, and that leads to subjective takes on where it is headed.
A more sober, objective analysis can help with investment decisions. So, let’s start at the beginning.
What is Bitcoin? We won’t bore you with all the technical details, but it’s enough here to say that it is a digital currency based on an immutable ledger, its blockchain. The more pertinent question is, what is Bitcoin’s purpose?
There are two main trains of thought on this: Bitcoin is digital money, i.e., a replacement for fiat currency, or Bitcoin is a digital asset that acts as a store of value.
Bitcoin is no longer a currency
Once the dream of early adopters, Bitcoin was pitched to become a digital currency that would replace fiat money. Even today, you’ll see some shops and cafes advertising that they accept Bitcoin.
However, as Bitcoin’s value rises, the second concept mentioned above becomes more prevalent. You wouldn’t pay for a pizza with Bitcoin for the same reason you wouldn’t pay for a pizza with gold or Apple shares. You hold those assets because you believe they will rise in value over time.
So, why a store of value? What does this mean? Well, Bitcoin’s creation was largely based on the concept of it being “hard” money. There can only ever be 21 million Bitcoin, whereas central banks can print dollars, euros and pounds out of thin air. Bitcoin’s mysterious creator, Satoshi Nakamoto, saw fiat currency as something that was constantly being debased owing to money printing, so he, she or they created Bitcoin as a finite alternative.
Therefore, investors in Bitcoin are entering a market knowing that supply is ultimately finite. At the moment, around 19.5 million Bitcoins have been mined (investors don’t really need to know the mechanics of this), leaving around 1.5 million. Bitcoin’s protocol ensures that the rate at which new Bitcoins can be mined slows over time through a process known as the halving, thus fewer Bitcoins enter the market over time.
Bitcoin’s market cap exceeds £1 trillion
So, let’s talk a bit about market cap, which is an important consideration when investing in any cryptocurrency. At the time of writing, one Bitcoin costs around £55.4K, and as we said, around 19.5 million have been mined.
We can thus see that Bitcoin has a market cap of around £1.1 trillion. Thus, if you entered a Bitcoin trade today and wanted a return of ten times your investment, the price per Bitcoin would have to reach £554K, and the market cap would be £11 Trillion.
For perspective, that figure is about three times the combined annual GDP of the UK and Australia. That may sound like a lot, but it’s also somewhere around the total market cap of gold, which feels a lot more achievable.
The question for investors, then, is how Bitcoin goes from being a £1 trillion asset to a £10 trillion asset or £100 trillion asset? This is the point where experts fall out over the maths involved.
As we said, achieving a similar market cap to gold is achievable, especially with the advent of hedge funds like BlackRock launching ETFs, as well as the more favourable regulatory climate.
Some would also say that demand for Bitcoin in pension funds will create long-term buying pressure. Yet, some forecasters claim that we will see millions of pounds being exchanged for one Bitcoin in the future.
That would arguably require nation-states – big nation-states – to start buying Bitcoin. While some, like El Salvador, have already started buying, its purchases are measured in millions; we are talking about trillions.
Joan Gamell / Unsplash
None of this is meant to sound like a promotion of Bitcoin, and it is certainly not meant to be financial advice. The truth is that Bitcoin is only as valuable as the belief in its value. It is, essentially, some lines of code. As it turns out, at least for now, investors see value in those lines of code, but it could all change. It has before.
Bitcoin may be deflationary
Yet, Bitcoin enjoys a first-mover advantage, perhaps more so than any other asset in history. And there are other aspects to its allure.
For instance, we may regard it as a deflationary asset. We mentioned earlier that 21 million is the maximum amount of Bitcoin that can ever be mined, but it is important to stress that 21 million Bitcoins will likely never be available to sell. Why? Because Bitcoin can be lost, some estimate that around six million Bitcoins have already been lost.
By lost, we mean they are in irretrievable wallets, where people have lost their passwords or seen the hardware wallets destroyed. Future Bitcoins may be lost by transactional mistakes, such as sending Bitcoin to a dead wallet, for example.
The concept of Bitcoin becoming so scarce that prices become obscenely high tantalises many of its strongest proponents. They dream of supply shocks, where demand truly outweighs supply. Yet, this remains speculative.
The truth is we are going into the great unknown with Bitcoin. Predictions of £1 are just as valid as £1 million per BTC. This will hold no fear for Bitcoin traders, who can latch upon the volatility of the asset. For the rest of us, it’s a matter of judging just how far this juggernaut can go.
The value of Bitcoin can go down as well as up. Never invest more than you can afford to lose.
