Bitcoin (BTC 2.36%) is an extremely polarizing asset. There are strong supporters who believe it can go to the moon. There are also thunderous critics who think the cryptocurrency is worthless. Nonetheless, it has been a winning investment in the past.
As of the morning of Dec. 11, Bitcoin's price siat at roughly $90,000 -- down from the peak of more than $126,000 it touched in early October. I predict that it will triple to $270,000 in five years. Here are two of the most important catalysts that can drive the price to that level by the end of this decade.
Image source: Getty Images.
Bitcoin benefits from rising U.S. debt and money supply
Perhaps the most notable macroeconomic trends in recent history have been the increases in debt levels and the money supply. These features have characterized the U.S. financial situation, and there are no signs that the growth on these fronts is ever going to let up. The Federal Reserve just announced another 25-basis-point cut to its benchmark interest rate. And it revealed that it would resume quantitative easing (QE), buying as much as $40 billion worth of Treasury bills every month. This pumps liquidity into the system with U.S. dollars that are created out of thin air.
This sounds crazy, but it's a policy that has been used for quite some time. Back during the financial crisis of 2007-2009, Ben Bernanke, who was the Fed chairman at the time, made heavy use of QE to help get the U.S. economy back on a solid footing. This act was meant to be a temporary intervention. That hasn't been the case.
When the COVID-19 pandemic struck, however, QE was supercharged, and trillions of dollars were pumped into the system to prevent what otherwise threatened to be an economic disaster. Ideally, QE should be used to help support the economy during recessionary periods. Now, it's being used at a time when the economy is still growing, and the market has come to expect the central bank to always intervene in an accommodative way.
During the past 20 years, the amount of U.S. federal debt went from about $8 trillion to more than $38 trillion. And the M2 money supply has increased by 238% during that same period.
It's interesting that Bitcoin was launched in January 2009, in the waning days of the financial crisis. Its price has skyrocketed over time as more investors have bought into the value proposition of owning an asset that isn't controlled by anyone, that hasn't been hacked, and that has a fixed supply cap.
You could easily argue that Bitcoin is the best way for investors to bet on the premise that the U.S. government will never be able to pay down its towering debt burden. Additionally, there's no reason to believe that the debt is not going to keep increasing. The Congressional Budget Office forecasts that by 2055, the amount of federal debt held by the public will balloon to a jaw-dropping 155% of gross domestic product (GDP), up from 100% in 2020. This ever-expanding money supply will lead to ongoing currency debasement.
CRYPTO: BTC
Key Data Points
Bitcoin is being integrated into traditional financial services
Another notable tailwind to pay attention to is how Bitcoin is being embraced by financial institutions that control large pools of capital. Spot Bitcoin exchange-traded funds were among the most successful product launches in Wall Street history. Mainstream banks are suggesting that their wealth management clients allocate a small percentage of their portfolios to Bitcoin. We've seen a proliferation of Bitcoin treasury companies that buy and hold Bitcoin on their balance sheets. And there are upstarts that provide Bitcoin-backed lending products.
Five years from now, it's likely that Bitcoin will be even more integrated into the traditional financial services industry. That should lead to more innovation, resulting in creative solutions for businesses to find ways to serve their customers by leveraging the crypto. All of this supports the premise that there will be more demand for the digital asset.
A $270,000 price target might be conservative
For Bitcoin's price to triple in five years would require a compound annual growth rate of about 25%. That would be an impressive run that would probably outperform the stock market. But it would also be well short of the crypto's trailing five-year compound annualized return of 37%.
Investors should temper their expectations, as it's unlikely that Bitcoin's future returns will match those of the past past. However, there's also a chance that my $270,000 price target for it in 2030 could prove to be too conservative.
