Several respected financial-industry experts have made projections about the future value of bitcoin (BTC/USD), and they have literally ranged from $0 to $1,000,000.
While there's no way of knowing what will happen with bitcoin over the next few years, it can certainly be fun to speculate. With that in mind, while I don't want to commit to a specific price prediction, here are three different scenarios that I could see playing out for bitcoin over the next couple of years, and why I'll probably be wrong about all three.
Prediction 1: $500,000 if bitcoin becomes a widely used currency
Well, $501,493 to be exact. This figure is based on seeing bitcoin surge in popularity to the point where it makes up 10% of the global money supply, an aggressive but realistically attainable percentage if everything goes right for bitcoin.
To achieve this ultra-optimistic valuation, here's what I believe would need to happen. Bitcoin would need to become widely used as a currency -- not just as a speculative instrument, or even as a store of value. And there's a lot standing in the way before that could happen.
For example, bitcoin would need to become far more user-friendly for people who aren't tech-savvy. In other words, it would need to become as easy as swiping a debit card at a payment terminal, or its road to widespread adoption will be very difficult. In addition, bitcoin's value will need to stabilize, which admittedly is contradictory to a prediction of a $500,000 value.
Perhaps most importantly, the traffic capacity of the blockchain network will need to be greatly improved. Today, the entire bitcoin network is capable of processing only about three transactions per second, less than 1% of what it would need to process if it were being used constantly in payment transactions all over the world.
Could it happen? Sure. Is it likely? Not by 2020.
Prediction 2: $113,433 If bitcoin becomes a widely used store of value
Someone recently told me that I was thinking of bitcoin all wrong when describing it as a currency. Instead of a payment mechanism, bitcoin's real use is as a store of wealth, like gold, this individual claimed.
That certainly makes some sense. After all, a finite number of bitcoins will ever be created, and it's possible to make bitcoin holdings just as secure as physical gold, if not more so.
As of this writing, the market value of all the gold that's ever been mined is roughly $7.6 trillion. And to be clear, I don't think bitcoin will ever come close to replacing gold as the world's preferred non-currency value storage mechanism.
However, let's say bitcoin achieves one-fourth of the popularity as gold as a wealth storage vehicle. That would translate to a value of about $1.9 trillion for all bitcoins in existence, which is about $113,433 per coin.
Prediction 3: $100 (or less) if bitcoin fails to overcome its challenges
Since bitcoin is not yet a widely accepted form of payment, nor so many people use it as a store of wealth, it's fair to assume that this is a speculative rally and that some level of future success is priced into bitcoin at this point.
Therefore, if enough time passes and bitcoin's progress toward mainstream acceptance is slow or non-existent, speculators could begin to head for the exists. In addition, there are several negative catalysts that could lead to a bitcoin crash. Just to name a few:
- A major bitcoin hack occurs, similar to the infamous Mt. Gox exchange's breach a few years ago.
- Selling pressure in bitcoin futures puts sustained, downward pressure on bitcoin.
- The problem of the network's capacity remains unsolved, and bitcoin transaction times get even worse. (They're taking several hours now.)
Why these will probably be wrong
In a nutshell, the first two predictions are different variations of ideal scenarios, and the third one is if bitcoin crashes. In reality, the price of bitcoin is governed by lots of factors, the combination of which is impossible to accurately predict, and the reality of what will happen is probably somewhere in between. In other words, I don't think a complete meltdown is particularly likely, but I don't think an ideal scenario that leads to a six-figure price tag is any more likely -- especially by 2020.
And this is probably the biggest takeaway for prospective bitcoin investors. Buying any asset that could conceivably be worth either $100 or $500,000 within a couple of years is speculation, not investing. Keep this in mind, and don't buy bitcoin with any money you can't afford to lose.