It has been more than a decade since Satoshi Nakamoto mined the genesis Bitcoin block. Over the years BTC has experienced many boom and bust cycles. The narrative surrounding the digital currency evolved as well, from uncensorable digital money and a peer-to-peer payment network to an inflation hedge and a store of value. Bitcoin's early critics have been coming round. After years of negative comments, Nouriel Roubini finally admitted that BTC could be a partial store of value. Even JP Morgan recently turned bullish, recognising Bitcoin's "potential long-term upside".
In fact, most commentators and analysts expect BTC to go nowhere but up. Let's briefly recap the most commonly cited bullish drivers, before looking at some Bitcoin price expectations and potential pitfalls.
Macro backdrop
In some sense, Bitcoin's timing couldn't have been better. Created, in part, as a response to unlimited corporate bailouts during the global financial crisis, BTC is beautifully designed to counter continuous money printing by global central banks.
In response to Covid-19, many governments introduced a plethora of fiscal measures to support their economies, leading to massive deficits. Central banks have been tasked with financing these deficits by printing exorbitant amounts of money. Global monetary stimulus measures and near-zero interest rates are further contributing to the deterioration of the scarcity of fiat currencies.
In comparison, assets such as silver, gold and yes, Bitcoin, are inherently scarce. Bitcoin's supply, for example, is growing around 2.5 per cent a year. Its monetary policy can be described as quantitative tightening due to the halving of block rewards every four years.
Scarcity + network effects
As mentioned above, BTC is a scarce asset. Only 21 million coins will ever be created. As the original cryptocurrency, it also has a wide moat and enjoys powerful network effects. The network effect is crucial for adoption but also for the security of the blockchain. Despite many innovations in the crypto space, the Bitcoin blockchain remains the most secure, precisely because of the substantial network of devices worldwide verifying its accuracy.
The scarcity of BTC and the security of its network are fundamental pillars of the Bitcoin bull case.
Institutional money flows
We will cover this subject in-depth later in this article. However, to sum up, Bitcoin remains a small asset class as illustrated by the chart below. Liquidity is still insufficient for many institutional investors to meaningfully participate in the market. Global central banks, for example, hold more than $2.6trn in gold reserves and would struggle to allocate any significant capital to BTC.
Over the coming years, as infrastructure and liquidity improve, institutional capital inflows are likely to be a significant bullish driver for the price of BTC.
Deep dive: institutional money and corporate treasury demand
Institutional money deserves a somewhat deeper analysis. The price impact of institutional capital flows on Bitcoin price over the next 5 years would be substantial, and there is sufficient evidence to support the institutional money thesis.
First, let's define institutional money. For our purposes, institutional money includes hedge funds, pension funds, family offices, high net worth individuals and corporate treasury departments alike.
From the corporate treasury perspective, holding BTC might prove to be less risky than not having Bitcoin exposure at all. MicroStrategy's purchase of $425m in Bitcoin and Square's $50m Bitcoin investment are just two examples. According to Messari, a crypto analytics firm, 0.5 per cent of all BTC currently in circulation is held by treasury departments of publicly traded companies.
Corporate treasurers have a tough job of managing a company's liquidity, capital structure and financial risks. During the Covid-19 pandemic, S&P 500 companies stockpiled record amounts of cash on their balance sheets, reaching a record of $1.8trn. Hoarding cash, however, is detrimental to shareholder value. Despite the uncertain economic environment, cash has underperformed the S&P 500 in 2020, and the purchasing power of the USD has declined by 1 per cent so far this year.
What about hedge funds, pension funds and other professional investors? Are they likely to increase their exposure to BTC in the upcoming years?
To some degree, that's already happening. The Grayscale Bitcoin Trust saw a record inflow of $215m for the week ending October 27 and now has $7.6bn in assets under management. At this pace, the trust will own up to 5 per cent of Bitcoin's circulating supply by the end of 2021.
Prominent Wall Street investors are also increasingly bullish on BTC. Bill Miller, mutual fund legend and chief investment officer of Miller Value Partners, has recently summed up his bullish thesis for BTC, simply saying that "Bitcoin's supply is growing around 2.5 per cent a year and the demand is growing faster than that".
Another Wall Street legend, Stan Druckenmiller, expects that inflation could spike to between 5-10 per cent and is using Bitcoin as a hedge in this scenario.
From an investment management perspective, there's a strong case for holding BTC in a diversified portfolio. Analysis by Messari shows that BTC offers the highest risk-adjusted returns, the lowest correlation to most markets (including in economic downturns). If that's not enough, the chart below speaks for itself.
BTC halving: a short-term catalyst
Bitcoin's halving cycles tend to act as short- to medium-term price catalysts as reduced supply helps to push prices higher. The most recent halving happened in May of this year and, so far, BTC is following the price trends from the previous cycles. Historically, most gains occur in 12-18 months following a halving. As the BTC network grows and the asset classes mature, however, each halving cycle has less impact on the price.
The stock-to-flow model could be used to analyse the potential impact of the most recent halving event on the price. PlanB, a Dutch institutional investor, published his stock-to-flow price model and multiple visualisations highlighting the effect of halvings on the price.
We can also look at BTC's price action relative to another scarce asset, gold. Here's a chart by Charles Vollum showing Bitcoin’s price in grams of gold. This analysis suggests a 10x increase in the price of BTC over the coming years if it follows historical ranges. However, Vollum's research also indicates that each halving cycle is less explosive than the previous one.
Bitcoin price prediction 2025: adding zeros
Now it's time to look at Bitcoin predictions 2025. Most analysts and investors are bullish on BTC and long-term price targets, as unreliable as they may be, often go into seven digits.
Analysis from Bloomberg Intelligence, for example, sets Bitcoin forecast 2025 at $100,000 as most measures of demand and adoption support an upward trajectory for BTC.
Bloomberg also cites the digital gold narrative and potential inflow of institutional capital as factors driving prices higher. They expect a Bitcoin ETF to eventually be launched in the US, making it easier for institutional investors to allocate money to the asset. They believe that "something significant needs to go wrong to reverse Bitcoin adoption and price appreciation".
Jason Williams, a partner at a digital asset investment fund Morgan Creek Digital, expects BTC to "hit $1-3 million in the next five years," powered by the scarcity narrative and increasing allocation from corporate treasuries. Plan B's stock-to-flow valuation model that we explored earlier also suggests that $1m BTC is possible in the long term.
A fly in the ointment: the bear case for BTC
It's often challenging to find a credible bear case for BTC. While some investors still cling to the notion that BTC has no value, that is hardly an investment thesis.
One of the main concerns for BTC, as well as other cryptocurrencies, is the potential of adverse regulatory developments. For instance, any ban on crypto payments or fiat-to-crypto gateways by the US or any other government could be detrimental to most Bitcoin price projections.
Another concern is that BTC is essentially a piece of software. Potential bugs in the code, for example, a coincidental inflation mechanism, could be damaging to the scarcity narrative.
While these and other concerns are undoubtedly valid, most investors and analysts still expect BTC price 2025 to be materially higher.
As always, investors should consider their risk tolerance and do some homework before investing in any cryptocurrency. If you are not ready to make long-term investment commitments, but still want to try to profit from the growing volatility, you can do so by trading BTC through contracts for difference (CFDs) at Capital.com.
Trading CFDs offers the opportunity to try to benefit from both bullish and bearish price action. You can either hold a long position, speculating that the BTC price will rise, or a short position, speculating that the price will fall.
Thanks for reading