With bitcoin breaking out of its recent trading range as Chinese buyers once again flock to the currency as the Yuan slides (as we predicted over a year ago they would), even Wall Street analysts are starting to pay attention, and in a recent report by Needham's Spencer Bogart, the analyst has raised his price target on the digital currency from $655 to $848, due to "1) adoption trending faster than we forecasted in March, 2) improving fundamentals, and 3) upcoming protocol improvements that present attractive optionality for the price of Bitcoin. At the highest level, we continue to see value in Bitcoin as a "digital gold" and as a payment network that is enabling a global, open, permissionless financial system."
Wait, bitcoin has fundamentals? Why yes, and here is Needham's extensive breakdown for why bitcoin is set to rise substantially higher, but first, the Investment Thesis.
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Bitcoin is a decentralized, borderless, peer-to-peer, electronic cash system that is disintermediating and removing friction in the exchange of value by enabling fast, low-cost, global, peer-to-peer payments.
Similar to how the internet created a global open network for the exchange of information, so too is Bitcoin and its underlying “blockchain” technology enabling an open and global network for the exchange of value. For reasons addressed in this report, we see Bitcoin and its underlying technology as among the most significant innovations in payments and money in recent history.
Driven by market and secular changes such as the rise of ecommerce, globalization, and the ubiquity of enabling technology such as mobile phones, Bitcoin is beginning to disrupt trillion-dollar markets in payments and value exchange. While other digitally-native payments networks have incrementally improved the experience of digital value exchange, these solutions ultimately rely on the same preexisting and siloed infrastructure as the legacy financial system. So while these modern networks have made it easier to use that same aged financial infrastructure—particularly in a digital context—they have not created new infrastructure. Bitcoin, on the other hand, is new infrastructure for digital value exchange.
We see value in Bitcoin as a “digital gold” and as a payment network that is enabling a global, open, permissionless financial system. Bitcoin has a four-sided network effect that includes developers, transaction processors (“miners” securing the network), merchants, and consumers. All four of these major stakeholder segments are showing impressive growth but, most importantly, the strongest growth is in the stakeholder segments we see as most important to the first of two major growth stages.
While Bitcoin has at times been associated with illicit activities and portrayed as anti-government or anti-establishment, we believe these narratives entirely miss the essential point: Bitcoin is pro-human empowerment—it enables people to be fully in control of their money and transaction activity and is used extensively for legitimate purposes. Far from being static, Bitcoin is constantly growing and improving thanks to the vibrant global community of developers that is constantly making improvements and helping to add new features and functionality to money and value exchange.
We deduce that the price of Bitcoin benefits from two main sources of demand: its value as a “digital gold” and its utility as a payments channel. Based on Bitcoin’s extensive network effects, rapid growth, and roadmap for significant enabling network improvements, we estimate that both sources of demand will grow significantly over the next five years and ultimately drive the price of Bitcoin significantly higher.
We see the fastest adoption rates for Bitcoin as a payments channel in emerging markets with lower financial inclusion, fewer and lower quality payment alternatives, and because emerging market countries tend to have less stable currencies, more onerous capital controls, and more frequent economic, monetary, or financial crises. We also estimate that adoption of Bitcoin as a payment channel will be greater for cross-border transactions (vs. domestic) because relative to alternatives the advantages of leveraging Bitcoin as a low-cost, fast, and borderless payment channel are greater for cross-border transactions than for domestic transactions.
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And here are the "investment highlights"
Bitcoin Metrics & Fundamentals
In this section we examine some of the aspects of Bitcoin that are particularly relevant to portfolio managers and how these factors have evolved over time.
While Bitcoin is notoriously volatile—especially relative to the world’s major currencies—its volatility has declined significantly in recent years and is similar to several more well-known assets. Specifically, Bitcoin’s daily volatility is now comparable to small cap equities: For example, the average daily return volatility of stocks in the S&P Small Cap 600 is 2.6% vs. 3.3% for Bitcoin. Given the large opportunity ahead and the overall nascence of Bitcoin itself, the similar levels of volatility between Bitcoin and small-cap stocks are not altogether surprising, in our view.
When all the respective equity securities of the companies in the S&P Small Cap 600 are ranked by volatility, Bitcoin falls in the 85th percentile. In essence, Bitcoin’s daily volatility is similar to the high end of small-cap stocks.
As Bitcoin adoption, trading, and liquidity has grown over time, volatility has steadily declined. In particular, the annualized volatility of Bitcoin’s daily returns has nearly halved from mid-2014 to mid-2016, and daily price volatility is now similar to the volatility of oil. Interestingly, as Bitcoin’s volatility has declined over the past two years it has fallen below that of some of the most popular internet IPOs in the last few years. As Bitcoin liquidity continues to increase and volatility falls within a range that would be more tolerable for a greater number of investors, we think there will be a corresponding increase in interest among institutional investors.
Aside from its upside potential, one of the most appealing aspects of Bitcoin for institutional investors in our opinion is its low correlation to major asset classes. Earlier this year Ark Investment Management and Coinbase published a white paper presenting a compelling argument that digital currency ought to be considered its own asset class based on its investability, unique politicoeconomic features, lack of correlation to other asset classes, and unique risk-reward profile.
Regardless of whether investors consider Bitcoin the first of a new asset class or not, we certainly find Bitcoin’s lack of correlation to major asset classes to be among the most compelling features for portfolio managers. That said, we’ll be watching how this correlation profile evolves over the coming years—as Bitcoin's investor base evolves it’s possible that its correlation profile will shift as well.
In the tables below we highlight Bitcoin’s average 6-month rolling correlation over the past 18 months. In place of a longer period, we use a trailing 18-month window because Bitcoin’s price dynamics have changed significantly as its investor base has evolved in recent years—thus negating any benefits of using a longer measurement period. Bitcoin’s lack of correlation to any of the major asset classes or subgroups that we measured is readily apparent throughout the tables below.
We use a representative ETF for each major asset class and subgroup to assess correlation to Bitcoin’s returns.
In short, often the biggest factor in reducing portfolio variance is actually the combination of assets with different levels of volatility into the same portfolio (correlation effect taking a secondary role). As such, the impact of correlation in reducing portfolio variance is strongest in portfolios composed of assets exhibiting similar volatility.
In this sense, we can conclude that the potential for Bitcoin’s lack of correlation to reduce portfolio variance will be strongest in portfolios that are largely composed of assets exhibiting volatility similar to Bitcoin’s. One such group of assets would be a portfolio of small-cap equities—which, as we identified earlier, have a similar volatility profile to Bitcoin. We think this is particularly interesting considering that portfolio managers dealing mainly in small-cap equities (alongside commodities, currencies, and technology portfolio managers/analysts) are probably among the most predisposed to closely evaluating Bitcoin.
Bitcoin’s daily dollar volume roughly resembles that of a US MidCap security. We restrict our volume analysis to only include the top 5 BTC-USD exchanges because there is a tremendous amount of no-fee BTC-CNY volume on Chinese exchanges that is difficult to access outside of China.
Despite heavily restricting our analysis to the top 5 BTC-USD exchanges, we find that the median daily dollar volume over the past year was $28 million (vs. roughly $39 million for the average security in the S&P MidCap 400 vs. roughly $10 million for the average security in the S&P Small Cap 600). Total daily Bitcoin volume would be drastically higher if we included volume from all exchanges and across all currency pairs, but we think this would not be reflective of a typical investor’s experience.
Indeed, the picture presented here of Bitcoin liquidity might already be overstated given that this liquidity is spread across five exchanges and because we use summary statistics (averages) which likely obfuscate the decline in liquidity and corresponding increase in bid/ask spreads during large price moves.
Another factor to consider in regard to investors’ ability to enter and exit Bitcoin positions is that Bitcoin markets are open 24/7—which, for example, is particularly appealing should investors want to open a position in response to an unexpected macroeconomic event over the weekend.
As would be expected, as Bitcoin trading volume has increased over the past two years, bid-ask spreads have declined significantly. In the chart and table below we graph summary statistics of Bitcoin’s average spread over time and compare that to the securities in the S&P Small Cap 600.
In July, Bitcoin incurred its second “halving”—where the rate of supply of new Bitcoins falls in half every 210,000 blocks (approximately every 4 years). As a result, the “block reward” (newly created Bitcoin rewarded to miners for processing transactions and adding a block to the blockchain) fell from 25 Bitcoin to 12.5 Bitcoin per block.
This “halving” event is part of Bitcoin’s disinflationary process that will eventually cap total Bitcoin supply at 21 million. The stark contrast of Bitcoin’s historical and projected supply relative to the US Dollar and gold is readily observed in the charts below.
Daily USD on-chain transaction volume, as estimated by Blockchain.info, has grown at an impressive 224% CAGR since January 2013. Spikes in USD-equivalent transaction volume tend to occur when price rises significantly. In particular, we note that transaction volume in mid-2016 has grown more than threefold over a year ago.
Hash rate is a measure of the amount of computing power that is securing the Bitcoin blockchain. At current levels, Bitcoin is estimated to have many thousands of times more computing power than the world’s top-500 supercomputers combined. All else equal, a higher hash rate implies a higher cost to attempt a “double-spend” (fraud) on the Bitcoin blockchain so we are very encouraged by the strong, persistent growth in hashing power.
The price of Bitcoin, as measured by the CoinDesk Bitcoin Price Index (BPI), is up 46%—from $415 to $608—since we published our initiation report in March, and a couple recent events (Brexit, Bitfinex hack) have highlighted some interesting price action.
Bitcoin Thrives in Macro-Economic Uncertainty?
Of particular note was Bitcoin’s interesting (we think appealing) price action during and in the aftermath of the Brexit vote—likely the biggest macro event YTD. In short, most major asset classes declined significantly as Brexit results began to roll in on the evening of June 23 and over the days that followed. Very few assets appreciated during this “risk-off” period except for traditional “safe-haven” assets and Bitcoin.
While it is encouraging to see Bitcoin appreciate even while other assets declined, we note that the relevant data points here are extremely limited and we’re hesitant to project similar price action for future macro events. As we commented in a prior note to clients:
“While it is true that Bitcoin rallied alongside other traditional safe haven, ‘risk-off’ assets (Gold, US Treasury Bonds, Yen, USD), we're hesitant to dub it a safe-haven asset for a number of reasons. For one, calling it such obfuscates the fact that Bitcoin is a high-risk and volatile investment and, second, Bitcoin's correlation to other traditional safe-haven assets has fluctuated significantly.” –Needham in June 2016 Note to Clients
The other interesting recent price move was following the news of a ~120,000 Bitcoins ($60M+) heist from one of the world’s largest Bitcoin exchanges, Bitfinex. The exchange theft was the second largest in Bitcoin’s history after the 2014 Mt. Gox incident, but the resulting price move wasn’t nearly as severe. Part of the reason is likely that the Bitfinex hack was only a fraction of the value of the Mt. Gox theft ($66 million vs. $350 million at Mt. Gox) but the relative stability is also likely due to greater confidence in Bitcoin’s future—For instance, the Mt. Gox implosion appeared to be an existential threat to Bitcoin whereas the Bitfinex hack was largely shrugged off by the market. Regardless, for at least one serious test the invested capital in Bitcoin appeared relatively sticky.
Bitcoin Keeps Improving & the Outlook Is Compelling
Bitcoin has improved significantly since it was initially released nearly 8 years ago, and we think the outlook is bright. The latest major version (released August 23) contains 14 notable changes from 101 contributors around the world (decentralized much?), including a set that benefits scaling at the protocol level and eases the process for further scaling improvements (“segregated witness”). For those interested in the specifics of the latest release, we recommend the release notes which summarize the big changes.
We see a multitude of developments throughout the Bitcoin ecosystem that are poised to move from conceptual to real over the next 3-7 months—each of which could augment Bitcoin’s features and functionality and, consequently, increase demand for Bitcoin. While some of these developments might never come to fruition, might be delayed or may prove less valuable than anticipated, each of them individually could prove to be immensely important to Bitcoin’s future, and with multiple potentially highly impactful developments ahead we believe it’s an opportunity that investors would want to be in front of. We think the outlook is very bright indeed.
In particular, we will be watching for the rollout and impact of segregated witness, lightning networks, sidechains, privacy enhancements, and smart contracts.
As the number of transactions on the Bitcoin network has grown over time, the finite space available for transactions in each block on the blockchain is increasingly under pressure to the point where most blocks added to the blockchain are now at capacity. The consequence is upward pressure on transaction fees. Now, after many months of contentious debate, Bitcoin’s first real move toward increasing transaction capacity is likely to be deployed over the coming months.
Among other benefits, this particular set of improvements (known as “Segregated Witness”) effectively scales Bitcoin by ~1.75x, eases the process for further scaling improvements, and fixes a known “transaction malleability” bug. Segregated witness is part of the improvements included in that latest version release (0.13.0 on August 23rd) and, presuming there is sufficient adoption, will be activated with a later minor release (TBD).
Beyond segregated witness, advances such as lightning networks (discussed below) and other second layer solutions will likely help alleviate pressure from rising adoption and usage of Bitcoin going forward—with minimal negative effect on Bitcoin’s decentralization, which is widely perceived to be its most crucial feature.
Lightning networks/payment channels show significant promise for enabling high-volume, low-value transactions. A lightning network is a method for decentralized, off-chain transactions between untrusted parties. Relative to what is currently possible on the Bitcoin network, a lightning network allows for drastically higher throughput (potentially beyond Visa-level capacity) at faster speeds (near instantaneous), with greater privacy, and at significantly lower cost.
The enabling factor that allows for drastically higher throughput on a lightning network relative to the Bitcoin network itself is that it’s much easier to scale point-to-point transactions (as on a lightning network or payment channel) than those that need to be broadcast to the entire Bitcoin network. In essence, lightning networks keep transactions “off-chain” in a way where transacting parties can prove that they have funds locked up and can then trade smart contracts (cryptographically signed IOUs) back and forth that are tied to the locked-up collateral. At any point the transacting parties can bring their cryptographically signed IOUs to the final arbiter, the Bitcoin blockchain, to “cash out” with an actual on-chain Bitcoin transaction.
In this way, parties can confidently transact directly amongst each other without (1) constantly using the blockchain, (2) trusting one another, and (3) requiring a trusted intermediary. By not using the blockchain constantly, transacting parties circumvent much of the associated cost and throughput limitations. Although these transactions don’t constantly use the blockchain, they do rely on it to secure value and act as a final arbiter and thus the blockchain is absolutely critical to the functionality of lightning networks and other payments channels.
We note that one of the main downsides of lightning networks is that they require users to “lock up” an amount of funds on the Bitcoin blockchain equal to the maximum amount they wish to transact on the lightning network. For example, if a user locks up 2 BTC for a lightning network, that user can’t subsequently send a 3 BTC payment or “IOU”—so there is a capital cost associated with the idle funds that are necessary to leverage such networks. Still, considering the substantial benefits of lightning networks, we think this downside is minor (but not negligible).
Sidechains have been a concept for more than two years, but sidechain projects are finally inching their way toward more widespread deployment. The concept and potential value of sidechains is relatively straightforward: With sidechains, developers get the freedom to try new concepts, features and functionality in a production environment while still leveraging Bitcoin’s first-in-class network effects (its security in particular). Conceptually, sidechains bear some resemblance to “special economic zones” where a country has established different (relaxed) constraints in order to encourage a particular type of activity or industry while still maintaining a base layer of compatibility with the remainder of the country (the Bitcoin network in this case). The two primary consequences of this “best of both worlds” technology are an accelerated development cycle and new Bitcoin functionality.
In terms of an accelerated development cycle, sidechains would allow for real-world testing of otherwise conceptual ideas in a strictly opt-in environment—that is, every Bitcoin user needn’t be exposed to the consequences of an experimental sidechain. Concepts that are proven on a sidechain can either be incorporated into the main Bitcoin blockchain to benefit all users or can remain as opt-in sidechains that users leverage by choice. This is particularly important considering how difficult it is to achieve a high degree of network-wide consensus—for instance, if a feature can only be added with 95%+ of the network in agreement, very few features will ever be added. Sidechains may help alleviate much of this friction to innovation on the Bitcoin blockchain.
In terms of new functionality, sidechains may also enable blockchain applications for which Bitcoin was not originally designed—such as prediction markets—which ultimately increases the utility of (and demand for) Bitcoin.
Bitcoin is pseudonymous—so while real identities are not directly available on the Bitcoin blockchain, one can potentially deduce the identities of counterparties and link their pseudonymous address to other transactions to glean competitive information. Naturally, this is a no-go for companies that are considering using the Bitcoin blockchain within competitive industries. Aside from that, addresses with large amounts of value can be identified and thus potentially become targets for thieves.
The even greater risk associated with a lack of confidentiality/anonymity—and likely one of the biggest risks to Bitcoin in general—is the potential negative impact on fungibility. We believe that fungibility will ultimately be critical to Bitcoin retaining its value. If a particular Bitcoin is worth less because it has been “tainted” due to association with a nefarious address or transaction it could compromise the value of all Bitcoins. Of course, it’s only possible for a Bitcoin to be “tainted” if individual Bitcoin can be identified and linked to specific addresses and transactions. At least partially reassuring in this respect is that there are solutions available that help improve privacy (e.g. “tumbling” services like CoinJoin) and that this issue is front and center for many of the developers that contribute to improve Bitcoin and they already have a few techniques available that likely help mitigate risks to fungibility.
Methods to improve privacy, such as by concealing transaction amounts as in Blockstream’s “Elements” sidechain, are currently being developed and could potentially be used in a Bitcoin context in the not too distant future. In addition, second layer solutions such as lightning networks, sidechains, and privacy-specific layers (e.g. TumbleBit) also show early promise for improving the privacy of Bitcoin transactions.
The gold standard for privacy is the ability to be able to withhold as much information as possible (transaction amounts, addresses, etc) but to have the ability to selectively reveal transaction activity and information exclusively to intended parties. We’re optimistic that this will eventually be possible in Bitcoin.
The basic premise of smart contracts is to reduce mutual agreements between businesses, individuals, or machines to transparent software code that self-executes and self-enforces. On the surface, the functionality is relatively straightforward: A software protocol performs an action (releases funds, sends information, makes a purchase, etc) when certain conditions are met (a payment is received, the outcome of an event is determined, etc) all without dependence on any centralized intermediary.
Bitcoin has always had a base level of smart contracting functionality built in, but the lure of a “turing-complete” smart contracts blockchain has accelerated interest in alternative blockchain Ethereum to the tune of $1 billion (the current market capitalization of Ether—the native cryptocurrency of Ethereum). Some of this interest has recently been tempered by security issues with contracts built on Ethereum (as exemplified by the exploitation of the $150M DAO fund which enabled $50M+ to be siphoned from the fund against the intentions of most participants). Still, projects such as Rootstock are seeking to bring the same functionality to the most secure blockchain—the Bitcoin blockchain—via a two-way peg (2WP). This additional functionality could become an additional driver of Bitcoin demand and may see initial deployment before year-end.
Contextualizing the Bitcoin Opportunity
Market Opportunity, Assumptions & Valuation
With an equity security there are ways to calculate the intrinsic current value of the security based on potential future cash flows, but Bitcoin is different: the only future cash flow to consider is its terminal value upon sale. In this sense, we assess the value of Bitcoin by answering a series “what if” questions (e.g., “’what if Bitcoin represented a ____ % of the ______ market?” and then tracking progress toward those milestones and adjusting as necessary).
To contextualize the magnitude of the market opportunity for Bitcoin, we divide the market into two major sources of demand: Bitcoin’s value as a “digital gold” and its value as an alternative payment channel.
Based on evaluations of the movement of individual Bitcoin6,7 we estimate that roughly 75% of all Bitcoin is currently dormant or held as an investment in Bitcoin as a “digital gold”. Bitcoin’s appeal in this segment is largely attributable to its known finite supply and its value as a liquid speculative investment in a nascent technology. Given a current total Bitcoin market capitalization of $9.6 billion, we estimate that the portion of Bitcoin’s total market capitalization associated with its value as a “digital gold” is roughly $7 billion.
In comparing this market capitalization to the gold market, we differentiate the overall total gold market (which includes those owning and holding physical gold) from the portion of the gold market that is held in exchange-traded funds (ETFs). In actuality, owning and holding Bitcoin is probably closer to owning physical gold in that the owner is (or can be) completely and solely in control of the asset without any potentially competing claims. However, this overall physical gold market includes many segments that may not find appeal in Bitcoin in the short to medium term. For example, we think it is highly unlikely that segments of this market where gold has cultural value (i.e., in India, where gold may be passed down for generations) will adopt Bitcoin as a supplement or alternative.
Instead, we believe that the better comparable is the portion of the gold market held in ETFs—that is, we think that people who gain exposure to gold via ETFs are significantly more likely to add Bitcoin to their investment portfolio than the segment of the gold market that buys physical gold. We estimate there is $84 billion worth of gold held in ETFs around the world. In comparison, the portion of Bitcoin’s total market capitalization that we attribute to its value as a “digital gold” is $7 billion—roughly 8% of the size of the gold ETF market. We estimate that demand could push this figure to 27.5% of the gold ETF market by the end of 2020—which would represent $23 billion in market cap for Bitcoin as a “digital gold”. While this $27 billion is significant relative to the gold ETF market, it would represent less than 0.5% of the broader $7 trillion gold market.
We think that our estimate of 27.5% of the gold ETF market could ultimately prove conservative given that, in at least one respect, Bitcoin has an access advantage (it can be acquired without a bank or brokerage account) and because holding gold ETFs and Bitcoin are not at all mutually exclusive (we think that gold ETF investors would find value in Bitcoin for its diversification and upside potential). Further, we believe the investment appeal in Bitcoin as a “digital gold” extends well beyond its finite supply (analogous to a commodity investment) and also includes a sizable portion of the market that essentially owns Bitcoin as a liquid speculative investment in a nascent technology (analogous to a VC equity investment).
There could also be significant upside to our estimate if mainstream financial institutions were to further integrate Bitcoin into offered services—for example, if a Bitcoin ETF were approved to trade on one of the world’s major stock exchanges or if major banks or FX brokers began offering Bitcoin services (purchase, storage, payments, etc.)—but this is not currently priced into our estimates and assumptions.
The global payments market is immense: According to Boston Consulting Group’s “Global Payments 2015” report and corresponding interactive edition, the total value of global non-cash transactions topped $430 trillion in 2014 and is forecasted to top $619 trillion in 2020.
The total $619 trillion forecast can be divided into retail payments (those initiated by consumers) and wholesale payments (those initiated by businesses and governments). Of the two, the total value of wholesale payments is significantly larger than the total value of retail payments (2020 forecast of $552 trillion vs. $68 trillion). While it’s certainly possible that Bitcoin finds traction in the wholesale payments market (for example, Align Commerce targets underserved SMB businesses and uses the Bitcoin payment rail), for conservatism we’re currently limiting our adoption projections to the retail market given some reluctance among financial institutions and governments in particular to consider public blockchains like Bitcoin. While recently there have been significant shifts among some financial institutions toward Bitcoin (e.g. Bitcoin integration at USAA via Coinbase), we think it’s too early to price this scenario into our assumptions. For these reasons and because the pain point is stronger in the retail market where fees (especially as a percentage of transaction value) are significantly greater, we limit our adoption projections to the retail market for now.
We further subdivide the retail payments market to arrive at Bitcoin’s addressable market opportunity as a payments channel. The first distinction we make within the retail payments market is between emerging markets and developed markets. We believe that adoption will be significantly greater in emerging markets (albeit still a small portion overall) than in developed markets given that financial inclusion is significantly lower in emerging markets, the viable alternatives are fewer (and of lower quality), and emerging market countries tend to have less stable currencies, more onerous capital controls, and more frequent economic, monetary, or financial crises.
We also subdivide both the developed retail payments market and the emerging retail payments market into the portion of transactions that are domestic versus cross-border. We assume greater adoption for cross-border transactions given that, relative to alternatives, the advantages of leveraging Bitcoin as a low-cost, fast, and borderless payment channel are greater for crossborder transactions than for domestic transactions.
Taken together, we assume the greatest rate of adoption for retail cross-border transactions initiated in emerging markets (2% of $2 trillion market), followed by cross-border transactions initiated in developed markets (1% of $1 trillion market), followed by domestic emerging market transactions (0.4% of $24 trillion market), followed by domestic developed market transactions (0.1% of $40 trillion market).
The pace of Bitcoin adoption has exceeded our expectations (as outlined in our estimates published in March) and we are adjusting our forecast accordingly. At the end of August 2016, estimated TTM transaction volume was roughly 30% higher than we projected in March, and as a result of this fasterthan- expected growth we are raising our 2020 market share estimates by a more conservative 10%.
Updating Our Estimates (Raising Bitcoin Price Projection)
In providing our estimates, our goal is to help put Bitcoin’s usage, price, and market capitalization in the context of its respective market segments. Bitcoin only has value to the extent that people use it for payments or hold it as a digital gold, and so we try to provide perspective and context on the room for growth in these markets. While we’re encouraged by Bitcoin’s rapid progress and the major room that we see for growth, it’s important that investors are aware that Bitcoin has limited intrinsic value— especially compared to equity in a dividend-producing company—and price could go to $0.
When we consider Bitcoin’s major growth opportunity coupled with its diversification benefits, we find the Bitcoin opportunity to be highly compelling, but we also recognize that it is a highly speculative investment with significant downside opportunity.
Supported by the compelling forward opportunity, we are raising our Bitcoin price projection from $655 to $848 based on faster than expected growth in the adoption of Bitcoin as a digital gold and as an alternative payments channel.
Hard fork: If there were a significant number of users and transaction processors (“miners”) on the network that elected to choose an alternative version of the Bitcoin software, the Bitcoin network could fork and potentially result in two different blockchains. This could have a significant adverse effect on the price, perception, and usage of Bitcoin.
“Cyber” Attacks: There are numerous ways that users or attackers could try to manipulate, diminish or otherwise attack the Bitcoin network, including but not limited to “51% attack”, “selfish mining”, Sybil attack, and Denial of Service (DoS) attacks. While the risk of these attacks and others is real, the Bitcoin network has overall been able to sustain and avert substantial attacks over its 7+ year history, and thousands of upgrades have made it better able to withstand potential attacks.
Alternative Blockchains / Alternative Digital Currencies: As Bitcoin has gained popularity over recent years, there have been hundreds of alternative crypto coins (“alt coins”) created that have attempted to serve a different use case or to improve upon Bitcoin’s real or perceived deficiencies. It is possible that one of these “alt coins” could out-compete Bitcoin. However, blockchains and especially digital currencies tend to exhibit strong network effects and no other blockchain or digital currency has come close to matching Bitcoin in terms of total market capitalization.
Regulation: While regulatory agencies, particularly in the United States, have taken a relatively cautious approach to Bitcoin regulation, governments and regulators certainly have the ability to ban, outlaw or otherwise make it excessively onerous to access Bitcoin.