I am a huge fan of Bitcoin, both as a creation of the human mind as well as its financial services. In 2017 I released a (free) guide to the economics of Bitcoin (along with co-author Silas Barta) in order to facilitate conversations between the old guard finance/econ community with the younger cypherpunk/techno crowd. Finally, when a family member recently asked me for personal financial advice, I wholeheartedly recommended gaining exposure to Bitcoin (as well as precious metals) as an inflation hedge.
I’m starting with the above disclaimers to reassure the Bitcoin community that I come in peace. My modest point in the present article is to review some back of the envelope calculations, by which I conclude that Bitcoin may still have an amazing price appreciation ahead of it, but that it almost certainly won’t be able to match its prior performance. To be clear, the point of my article isn’t to turn people bearish on Bitcoin—far from it!—but rather to provide some guardrails in one’s optimism about the first cryptocurrency.
From 2014 – 2024, Bitcoin went from about $50 to $67,000, a jaw-dropping 133,900% increase, which works out to a compound annual growth rate of about 105% per year. (Yes that’s right, since 2014 on average Bitcoin more than doubled every year, for ten years in a row.)
Now it’s true, there’s a sense in which Bitcoin is just getting warmed up. Its biggest proponents think Bitcoin is destined to become the fundamental currency on planet Earth. And so the HODLers continue to stack sats, waiting for the rest of humanity to catch up.
What I’m going to now argue, is that even if this vision comes true—and even if it happens as soon as the year 2050, which I think is being generous—Bitcoin can’t possibly repeat its record-shattering performance.
Or at least, the only way Bitcoin could match its prior performance, is in a world where AI enhancements mean that all types of assets—including not just cryptocurrencies but also real estate, precious metals, and above all, human labor—see extraordinary growth.
So to understand what it is that I’m about to argue, it’s trying to show what would happen in today’s world, if Bitcoin suddenly became the global money. And then, when we get an estimate of what that would mean, we spread out the growth over 25 years because such global adoption obviously can’t happen overnight.
Bitcoin is in a weird spot at the moment, where its biggest fans refuse to let go of it, because they envision a future in which Bitcoin serves as the ultimate means of settlement. (Because of transaction costs, Bitcoin may be more analogous to gold bars in vaults, with other claim layers built on top of it, facilitating the purchase of a cup of coffee, etc. I am ignoring all of those complications here, which is even more generous to the growth potential of Bitcoin.)
If and when Bitcoin lives up to the dream and serves as the primary money on planet Earth, where it has achieved near-universal adoption, then it can’t (at that point) continue to enjoy rapid price appreciation (measured in other fiat currencies, or in its purchasing power vis-à-vis a basket of goods).
What we would see in practice is that Bitcoin enjoys speculative gains along the way, as more people begin holding it, but once it has achieved global penetration, the gains would taper off, allowing people to stop HODLing and begin using Bitcoin as a means of payment.
So with that framework, let’s get a ballpark estimate of what those speculative gains could look like, along the way.
Suppose in today’s global economy, Bitcoin displaced all of the monetary aggregate M3. This includes not just paper currency, but also commercial bank accounts, as well as less liquid assets such as money market mutual funds. Right now, global M3 is estimated at some $80 trillion. So if Bitcoin (at today’s price structure) were to become the undisputed go-to money for humanity, it could plausibly have a market cap of $80 trillion.
Yet let’s be even more generous. Right now, because government-issued fiat currencies are so undependable (see my interview of Lyn Alden about her book Broken Money), people try to minimize the proportion of their overall net worth held in the form of actual money. But Bitcoin is a much better money than the government-issued abominations. Let’s therefore assume that if (in today’s world) Bitcoin were the global money, people would hold double their current allocation in the form of money. (Note: If Bitcoin maxis want to challenge my computations in this article, I think this is my weakest link. If you want to argue that people would hold more than double their current allocation to actual money—which is not the same as “going to cash” mind you, because even Treasuries have a nominal yield while actual currency doesn’t—then you can juice my final number.)
Hence, we get a ceiling (in today’s terms) of Bitcoin’s market cap of $160 trillion.
To say that Bitcoin has an upper bound of $160 trillion sounds like there’s lots of room to grow, and in an absolute sense, of course there is. However, it’s not going to yield future performance comparable to Bitcoin’s past decade.
One adjustment we have to consider is that there will be future bitcoins to be mined. Right now, there are some 19.9 million that have been mined, about 95% of the upper cap of 21 million. So of the currently existing bitcoins, let’s say that the upper bound on their market value is only $152 trillion.
Since the current market cap of Bitcoin is some $1.31 trillion, that means Bitcoin (in our upper bound scenario) can “only” rise 115x, or 11,500%. If that happens between now and 2050, as incredible as that growth is, it “only” works out to 21% per year.
Note, this figure abstracts away from standard CPI inflation; it is showing the “real” growth of Bitcoin. It also abstracts away from background real economic growth that arguably feeds into all assets. What the figure isolates is how much growth one could hope from Bitcoin, purely from its global adoption. On that metric, I don’t see how we could get more than 21% per year, on average. To be sure, some years might see massive appreciation, but that would be counterbalanced by other years of underperformance. I am talking here about long-run average growth, similar to the 105% annual figure I calculated for the past ten years.
Since its birth, Bitcoin has been the best-performing asset (in terms of annualized price appreciation) in human history. However, even though there is plenty of room for future growth, my back-of-the-envelope calculations indicate that Bitcoin investors should be more tempered in their expectations. Bitcoin could still be the best-performing asset of the next decade, but it almost certainly won’t be able to beat “Bitcoin from 2014 – 2024.”
Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together Whole Life insurance policies and digital blockchain-based issuance.
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