Wall Street analysts don't always get things right, but some have such a strong track record of success that it's worth paying attention when they make a prediction. Tom Lee is the co-founder and head of research at Fundstrat, a Wall Street advisory firm focusing on stocks and financial assets.
In 2013, Lee predicted the Dow Jones Industrial Average would hit 20,000 within four years. Lo and behold, it crossed that level in early 2017. Lee also had the most bullish S&P 500 target on Wall Street in 2023, despite many analysts fearing a recession and falling stock prices. He estimated the index would end the year at 4,750, and it closed at 4,769.
Lee has maintained a bullish view on the world's largest cryptocurrency, Bitcoin (BTC +1.24%), for years. But he just came out with a fresh prediction: that the token could soar by 1,120% within the next five years.
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Bitcoin is still recovering from a steep loss in 2022
The cryptocurrency industry is still recovering from a brutal crash that sent Bitcoin from an all-time high of $69,000 in 2021 to just $16,256 near the end of 2022.
The industry fell into turmoil during 2022 thanks to a string of high-profile collapses. Centralized crypto exchange FTX was shut down when its founder, Sam Bankman-Fried, was caught committing fraud, leaving clients and investors $8 billion out of pocket. Shortly before that, stablecoin TerraUSD lost its peg, which wiped out $60 billion worth of value.
Investors were quickly losing confidence in cryptocurrencies, especially because they had gained almost no traction as a payment mechanism in the real world. Even today, a mere 9,393 merchants around the world accept Bitcoin in exchange for goods and services.
Centralized exchanges continued to face legal trouble in 2023, with the head of crypto exchange Binance forced to step down for his role in breaching anti-money laundering rules. He is currently awaiting trial.
Ironically, those high-profile takedowns have given investors more confidence in the cryptocurrency industry. Aggressive regulatory actions are deterring bad actors, as well as legitimizing the industry. Combined with a risk-on sentiment for financial assets like stocks in 2023, Bitcoin has recovered a good deal of lost ground.
The token jumped more than 150% in 2023, and it currently trades at about $39,000, though that's still far from its all-time high of $69,000.
Bitcoin exchange-traded funds are a new source of demand
The U.S. Securities and Exchange Commission (SEC) approved 11 Bitcoin exchange-traded funds (ETFs) in earlier this month, which adds a new way for investors to buy the token -- and it's a big reason Tom Lee is so bullish.
An ETF is managed by professionals, and it's designed to hold underlying assets (like stocks, bonds, or in this case, Bitcoin) and package them into one security for investors to buy or sell. Before the approval of a Bitcoin ETF, it was difficult for financial advisors and institutions to own the token because of its risk profile. Volatility aside, the purchaser had to carefully secure their Bitcoin in a digital wallet or in cold storage (like a USB, locked in a safe). There was no insurance or bailout if the tokens were stolen.
Now, a financial advisor can simply buy an ETF for their clients without worrying about storing Bitcoin. That responsibility falls upon the manager of the fund; BlackRock, Ark Investment Management, and Fidelity are just some of the high-profile Wall Street asset managers with an approved Bitcoin ETF.
Of course, it comes with a cost. An ETF will incur an annual fee ranging from 0.2% to 1.5% of the total value of the Bitcoin it owns, which can crimp the returns over the long term.
However, for Bitcoin, the ETF could spark anywhere from $50 billion to $100 billion in fresh demand within the first year, according to Standard Chartered. That could push the price of Bitcoin higher as asset managers buy up tokens for their ETFs.
CRYPTO: BTC
Key Data Points
Tom Lee thinks Bitcoin could soar to $500,000 in five years
Bitcoin is a finite resource, much like gold. Its source code limits its maximum supply to 21 million tokens, the last of which is expected to be mined in the year 2140. Theoretically, so long as demand exists, its price should gradually rise.
Tom Lee thinks ETF demand could push Bitcoin to $150,000 per token this year. But he predicts it could soar to $500,000 per token within five years, which would represent a gain of more than 1,120%.
Is that realistic? Bitcoin has a total market capitalization of $770 billion right now, so a gain of 1,120% would drive that number to almost $9 trillion. For context, Apple is the largest company in the world, with a value of just $3 trillion. It sells tangible goods and services that produce substantial revenue and earnings, and those form the basis of the company's value. Bitcoin, on the other hand, produces nothing tangible, which makes it very hard to truly value.
The total value of all gold reserves is estimated at $13.6 trillion, and that might be a better comparison to the potential of Bitcoin. Still, gold can be physically owned, which is a useful trait in the event of an economic or social crisis.
Bitcoin could very well hit Lee's $500,000 target by 2029, but investors should always tread with caution when it comes to speculative assets like cryptocurrency.
