If you have met potential bitcoin price targets, you know that many analysts expect bitcoin to completely consume portions of gold, money supply (M2), global fiat-denominated debt, equities (stocks) and real estate.
Once you understand the implications of bitcoin having no counterparty risk and no dilution risk, you need to realize that bitcoin will fully inhale all the wealth stored in gold, M2 and world debt, but what part of the wealth that is in stocks (shares) stored, will be allocated again in bitcoin?
This is a very complicated idea to think about.
Two weeks ago, we published our thoughts on how the valuation of a fictitious company, Wyoming Red Ribeyes, would change post-hyperbitcoinization. Now let’s dive a little further and perform a scenario analysis that shows how much the valuation of a typical S&P 500 company will change based on two relatively unknown forecast variables:
- The BTC Inflation Rate: How can we expect a relative CPI (price of goods) index to trend over time?
- The premium of the BTC equity risk: What expected percentage return (BTC denominated) will motivate investors to trade their BTC in equities?
BTC Inflation Rate
It is realistic to expect that the average BTC consumer price index (CPI) will fall somewhere between 0 percent and negative 10 percent. The current system seeks to deliver about 2 percent CPI inflation annually. As the Bitcoin monetary standard works under fixed stock, bitcoin savers will be rewarded with all future productivity improvements through lower and lower prices.
Overall, it is reasonable to expect a CPI of around negative 5 percent, indicating that economic growth below a Bitcoin standard will be faster and more sustainable.
BTC Shares Risk Premium
An equity risk premium is the excess return that is expected to result in a risk-free real return from simply HODLing bitcoin (or a potential return on Lightning Network rental channels) through investment in shares.
This is hard to predict because it will eventually come down to the bitcoin HODLers. These are the ones who determine the stock risk premium they are willing to accept for their bitcoin.
Based on current bitcoin lending rates (6 percent at BlockFi), we would probably expect the equity risk premium to be above it, as it is the rate for reasonably secure debt, hence an equity risk premium. ‘It can be realistic for an S&P 500 business to have an equity risk premium between 0 and 30 percent.
Although it depends on how the market weighs specific business risks, it is generally reasonable to expect about 10 percent, indicating that investors will not be willing to divorce HODLed BTC unless they expect a 10 percent return. will accompany the risk of investment. traded in a stock exchange.
What percentage value (soV) is in shares?
Below is a data table that indicates what percentage of wealth valued in equities is simply looking for a generic SoV (i.e. bitcoin). Note that this data table uses the discounted cash flow (DCF) models of Wyoming Red Ribeyes as a typical fictitious S&P 500 company.
The two forecast variables, BTC inflation and BTC equity risk premium, are the only two variables that change in the DCF models.
If we look at our estimates of negative 5 percent BTC CPI inflation and 10 percent BTC equity risk premium, the estimated SoV percentage currently stored in public S&P 500 stocks is 77 percent. This indicates that 77 percent of the actual wealth stored in the S&P 500 can be re-allocated to bitcoin.
This estimate varies according to the two forecast variables. On the low side (0 percent equities risk premium and 0 percent inflation), for example, bitcoin will capture only 46 percent of the wealth traded in equities. At the highest point (bitcoin premium with 30% and negative inflation of 10%), however, bitcoin will capture 90% of the real wealth stored in the S&P 500.
Updated price targets
Starting with the assumption that Bitcoin eats up the wealth stored in gold, M2 and world debt, we start with $ 17.1 million per BTC.
If we use our analysis to determine that bitcoin will occupy 77 percent of world equities, it pushes the total BTC market capitalization to $ 427.9 trillion, indicating a price of $ 20.4 million per BTC. From there, we can conservatively add that bitcoin will take the SoV out of real estate (50 percent of total real estate), pushing us to a total BTC market capitalization of $ 568.4 trillion, which is a price of $ 27 million per BTC.
Compared to our previous price target, which includes both equities (50 percent) and real estate (50 percent), it increased by only $ 1 million (from $ 26 million to $ 27 million). However, $ 1 million BTC currently sounds very good.
Future research
We also want to dive into real estate valuations, as we have simply used a 50 percent baseline to determine the wealth in real estate absorbed by bitcoin. It can be higher or lower. In addition, in the future we may try to praise the productivity gains that bitcoin will bring, as well as the high propensity to hold a counterparty risk-free and dilution-risk-free asset.
The global wealth figures arose from Visual capital and the “Mimesis Bitcoin Investment Research Report.”
This is a guest post by Mimesis Capital. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.