Cathie Wood and her team at Ark Invest think cryptocurrency presents a paradigm shift in the world's monetary system. Crypto is accessible, global, and private, three factors that make it a great way to store and transfer money.
But Wood also believes the cryptocurrency market will be governed by power laws. In other words, only a few cryptocurrencies will become popular enough to see their potential value come to fruition.
If there's one cryptocurrency that's likely to benefit from power law dynamics, it's Bitcoin (BTC 1.41%). It's already the world's largest cryptocurrency, accounting for over 57% of the entire market. But Wood suggests Bitcoin's dominance could grow even larger, fueled by price appreciation of about 6,350% to reach $3.8 million per Bitcoin.
Here's why.
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The big investors have yet to start buying
Wood's astronomical bull case for Bitcoin is predicated on the idea that institutional adoption remains in its infancy. Big asset managers practically have $0 invested in the cryptocurrency, but that could change over the next few years.
The driving force behind that change is the introduction of spot Bitcoin ETFs, which the SEC approved at the start of this year. Wood believes the introduction and strong adoption of those ETFs could add an extra $2.3 million per Bitcoin to Ark Invest's bull case from 2023, which was $1.5 million. That's driven by a 5% portfolio allocation among institutional investors.
There's still a long way to go to get there. Ark says there's a global investable asset base of $250 trillion. 13F filings with the SEC from institutional investors in the U.S. show just $11 billion invested in the major spot Bitcoin ETFs. A 5% allocation would be $12.5 trillion, more than a 1,000x increase. Granted, 13F filings don't account for any direct Bitcoin holdings among institutions.
A 5% allocation toward Bitcoin won't happen overnight. It will take years for that to happen, if it ever happens at all. Institutional investors currently allocate about 4% of their total investable assets toward gold, primarily using ETFs to do so.
For Bitcoin to reach Wood's outlook, it might have to replace gold's role in portfolios entirely. Perhaps that's doable. Many call Bitcoin digital gold. But Wood may be overly optimistic.
CRYPTO: BTC
Key Data Points
How high can Bitcoin go?
While institutional adoption remains a big catalyst for the growth of Bitcoin, Wood's $3.8 million per coin price target seems beyond reasonable. Still, the price of Bitcoin is largely dictated by supply and demand. With a relatively fixed supply, an influx of investors should produce strong price appreciation over time.
While Bitcoin ETFs saw strong adoption out of the gate, inflows have slowed considerably over the last few months. That correlates with the price of the cryptocurrency, which has stagnated since reaching an all-time high of $73,750 in March. The cryptocurrency currently trades around $60,000 per coin.
But a big institutional buyer could be a driving force in the next leg up for the crypto, and it could set off a cascade of institutional investment. Broad adoption of cryptocurrency from the entire investment world will take decades, however.
I think Wood is right in that power laws will play a role here, and Bitcoin will be the big beneficiary of more investors looking at cryptocurrency to diversify their portfolio. As such, it could play a role in your portfolio, and it may be worth a small allocation. Whether that's 5% or 1% or 10% is up to you. But it's reasonable to expect the price of Bitcoin to continue climbing higher as more investors add it to their portfolios. The path upward, though, is likely to be quite volatile.
