Bitcoin (BTC -4.46%) is one of the fastest-appreciating assets in the history of the world.
The original cryptocurrency was invented by the anonymous Satoshi Nakamoto in 2009, and reached a market value of $1 trillion by 2021, though it has since fallen below that mark.
The question of how much Bitcoin, as an asset class, should be worth has long been debated among its backers, and is front and center to Bitcoin's purpose, which most bulls tend to see as a form of digital gold.
Like gold, a precious metal whose volume is restricted by its rarity, the supply of Bitcoin is capped at 21 million units, though all Bitcoins won't have been mined until around 2140 because of the mathematical halving of Bitcoin rewards for miners.
Because of the argument that Bitcoin is a form of digital gold, many believe that Bitcoin's total value should approximate that of all the gold in the world, which is around $12 trillion today. With Bitcoin's market cap at $770 billion currently, reaching the total value of the world's gold would give Bitcoin holders a return of more than 1,600%, but one billionaire investor thinks Bitcoin should be worth way more than that.
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Move over gold
At the Bitcoin 2022 Conference in Miami earlier last week, Peter Thiel, the billionaire co-founder of Paypal and early investor in Facebook, argued in the conference's keynote address that the global equity market, not gold, is the best analog for Bitcoin's market cap potential.
Thiel said, "The real competitor for Bitcoin is not Ethereum (CRYPTO: ETH) -- that's a payment system. It's not even gold. It's something like the S&P 500. It's the stock market as a whole." He continued, "The benchmark for Bitcoin is not gold but equities, and the question is why can't there be parity between Bitcoin and equities. Why shouldn't we be talking about something more like 100 to 1?" The 100-to-1 was a reference in his slide to global equities being worth $115 trillion, while Bitcoin is worth a little less than $1 trillion.
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Is Thiel right about Bitcoin?
Thiel has been a key player in the way money functions in the global economy since 1999 when he co-founded Paypal, so it's worth listening to his thoughts on Bitcoin, the cryptocurrency that some expect to be the next iteration of money. But it's important to understand that the argument that Thiel is making for Bitcoin reaching $115 trillion isn't based on its intrinsic value. It's an argument that Bitcoin should be an equally valid asset class for institutional investors, and therefore it should receive an equal level of investment. Thiel underscored this later in his address when he attacked business titans including Warren Buffett, JPMorgan Chase CEO Jamie Dimon, and Blackrock CEO Larry Fink, saying, "If you have these large institutional investors, they need to be allocating some of their money to Bitcoin when they manage state pension funds in the U.S., or they get trillions of dollars in assets. When they choose not to allocate to Bitcoin, that is a deeply political choice. We need to push back on them."
As Thiel sees it, Bitcoin isn't yet worth $115 trillion because money managers aren't investing enough in it, and he calls that a political choice because the well-known libertarian sees Bitcoin as a crusade against fiat currencies, or government control.
But there's something backwards about the argument. Global equities, meaning all the publicly traded companies in the world combined, are worth $115 trillion because those equities represent businesses, like Apple or Buffett's Berkshire Hathaway, that generate trillions in annual profits. They're not worth $115 trillion because institutional investors have trillions of dollars they need to put somewhere, and they've arbitrarily chosen equities.
Thiel also ignores the fact that Bitcoin isn't a productive asset in the way that equities are. Its valuation, like gold or even an NFT, is an article of faith. A Bitcoin is only worth around $40,000 today because a group of people, many of whom are speculators, have decided that it is. There's little practical value to it.
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What it means for Bitcoin
Bitcoin's founder is anonymous, and there's no CEO to pitch the cryptocurrency. In that void, Thiel's keynote address takes on added significance as he's one of the highest-profile backers of the cryptocurrency. But the speech was equally notable for what it lacked as for what Thiel discussed.
He never once addressed Bitcoin's utility as a medium of exchange. In fact, he ceded that quality to Ethereum, arguing that Bitcoin was the "gold" of crypto, representing a store of value, while Ethereum was the "Visa" of crypto, used to make financial transactions.
Most of Thiel's speech was spent trashing Bitcoin detractors and making the case for the $115 trillion valuation. Thiel played to the masses by pumping the currency and offering the astronomical $115 trillion price target. Like others before it, the speech revealed that Bitcoin may be better understood as a cult rather than an asset class. In other words, it's an article of faith -- and one that can make you rich if you persuade enough people to buy it -- rather than an object of real value. His primary argument for Bitcoin was more political than economic. A well-known libertarian, he sees Bitcoin as a way to escape government control and skirt the deflationary nature of fiat currency and taxes.
That political point is a well-worn argument for Bitcoin by now, and it's true that Bitcoin has been used in countries like Venezuela that have been embroiled in civil unrest and hyperinflation. But that's much different from Bitcoin substituting for stable currencies like the dollar.
It's also notable that Bitcoin tends to trade as a risky asset rather than a store of value, notably plunging when the war in Ukraine broke out. When investors "flee to safety," they flee from Bitcoin.
Where Bitcoin's price goes from here is anybody's guess, but the tailwinds that supported its rise in 2020-2021 like pandemic lockdowns and the increase in money supply are now fading.
Thiel seems to believe that the next significant rally in Bitcoin will require buy-in from institutional investors, but there are two major obstacles to that happening anytime soon. The crypto is too volatile for most money managers to invest in, and Bitcoin has yet to prove why it should be worth $1 trillion, let alone $115 trillion.
