What is the Future Price of Bitcoin?

What is the future price of bitcoin? We've seen price swings from $100 to above $1000 and then back to the $400 range. Still we have no interesting services with bitcoin, despite some merchants accepting it, so it is clear that most of the bitcoin price today is mostly due to speculation and day trading.

We know by definition that only 21 million bitcoins will ever be available. Some of those are already unavailable due to lost private keys. Today there are about 12 million bitcoins and around 2020 there'll be approximately 18 million. Not all of these bitcoins will be in circulation as many will hoard them for savings.

We'll now go through a couple of different scenarios for what the market capitalization could be. Let's start with the highest bid first, and then work towards the lower ones.

Scenario 1: Bitcoin takes over the entire world. In this scenario there'll be no fiat currencies left and the dollar is also gone, but the prices I put forward are the equivalent buying power. There are different definitions of money (M0, M1, M2 and M3, see http://en.wikipedia.org/wiki/Money_supply), but any chosen definition will have some problems. We know there are about $1000 trillion in derivatives (http://culturechange.org/cms/index.php?option=com_content&task=view&id=329&Itemid=1). Derivatives represent anything that derives value (hence the name), which includes stocks, bonds, assets and more. So suppose 21 million units are to represent $1000 trillion, then we'll get a value of approximately $47 million per bitcoin. If sky has a limit, then that's the limit.

Scenario 2: Bitcoin takes over the entire world, but the derivatives market has a lot of "air" in it so it cannot be used as the market capitalization reference. We know that there's about $223 trillion in assets ( http://www.zerohedge.com/news/2013-06-02/its-1-world-who-owns-what-223-trillion-global-wealth). We probably need more money than assets, because we'd also like to exchange things that are strictly not assets, but it will give us a nice starting point for determining the value of a bitcoin: $223 trillion divided by 21 million gives a value of approximately $10 million dollar per bitcoin. As we need more money than pure assets, so the answer is somewhere between $10 million and $47 million.

Scenario 3: Let's assume Bitcoin takes over from ¼ to ½ of the world (excluding for example China and Russia). Then a single BTC would be worth around $2.5 - $5 million.

Scenario 4: Bitcoin becomes the world reserve currency. Because bitcoin is apolitical it serves as a perfect medium of exchange between countries. China is really disappointed in letting the US dollar being the world currency reserve and has repeatedly pushed for IMF's Special Drawing Rights (SDR) which is an international basket of different currencies with drawing rights where each country has a designated quota (adjusted every 5th year). Unfortunately for China, the current super power of the world has no intent in letting the US dollar to be replaced. If China understands that bitcoin is their best option, then perhaps they'll change their stance, although I understand that they are scared to death of losing capital control. The current reserves in USD around the world can be found in this list: http://en.wikipedia.org/wiki/List_of_countries_by_foreign-exchange_reserves and if you sum all the numbers you'll get $13,305,705 million or $13 trillion. Let's use the standard measure that 1/3rd of the coins are in circulation (world GDP is $70 trillion and the asset base is $223, so it's about right), which gives a base 2/3rd = $13 trillion, this gives approximately $20 trillion to be distributed over 21 million BTC = $1 million.

Scenario 5: Bitcoin becomes the dominant player of all e-commerce. The market capitalization of all e-commerce is around $1 trillion (http://www.emarketer.com/Article/Ecommerce-Sales-Topped-1-Trillion-First-Time-2012/1009649). Again, we use the measure that a 1/3rd of all coins are in circulation, so this gives $1 trillion / $7 million = $142,857.

ScenarioBTC Price
1 $47,000,000
2 $10,000,000
3 $2,500,000-$5,000,000
4 $1,000,000
5 $142,857

If we get to scenario 5, then there's only a question of time before we move up the ladder to scenario 4, then to scenario 3, etc. so eventually we'll get a bitcoin being worth around $10 million (in equivalent buying power).

What are the threats for this not to happen?

We already know (http://www.datavetaren.se/?p=why_banks_cannot_replicate_the_blockchain) that private institutions or governments will not be able to challenge bitcoin with their own crypto currencies. The only thing that remains is if some alt coin proves to be superior over bitcoin. The technically best crypto currency so far would be Ethereum, but it is not given that the technically superior technology wins (because of the network effect). A classic example is the battle between VHS and Betamax (video cassette tape format war: http://en.wikipedia.org/wiki/Videotape_format_war).

In my opinion Ethereum is very cool technology, but I doubt it could overthrow Bitcoin for the role of money. I think Bitcoin is already too complicated for just representing money. I have no problem in buying Ethereum coins for some interesting programming contract that is not representable in bitcoin, but bitcoin will remain the world reserve digital currency. There's no need to have an extremely complicated digital contract programming language to handle unit of accounts.

Other alt coins, Litecoins, have shorter clearing times (instead of Bitcoin's 10 minutes), but this is definitely VHS vs Betamax here, because 10 minutes vs 2.5 minutes is nothing to care about. Most money in this world is based on 30-60 days clearing time (i.e. VISA or Mastercard), so 10 minutes are orders of magnitudes better already. Whether you go for 10 minutes or 2.5 minutes is not important enough. Most people have some reasonable reserve, they don't live on air for 10 minutes so they can immediately consume once the coins get confirmed. If there's some esoteric application where 2.5 minutes clearing time is important, then fine, Litecoin will fill that space, but it won't be the world reserve digital currency.

My conclusion is that bitcoin is already too big to fail. The first mover advantage makes it the facto world reserve digital currency. Fiat currencies are crap in comparison so it is only a question of time until it reaches a market cap with an equivalent of $10 million per BTC. If you own a whole BTC (which is something you possibly can afford today), then sooner or later you're a rich man or woman. Dress yourself accordingly, because this elevator will exit the Milky Way.