Is $10M Bitcoin Crazy?

For the uninitiated, Bitcoin’s price action can appear completely random and, when on a major upswing, quite confusing. And yet, there are Bitcoin bulls out here calling for $10M bitcoin (the smartest among them providing no or very broad timelines on such a prediction).

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But how could a digital currency ever reach such a valuation? Why would investors exit or defer on other assets to go into Bitcoin?

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The short answer is counterparty risk; that is, the risk that something could go wrong beyond one’s control because of an additional party involved in the investment. Let’s consider a few alternative investment options and how this risk might give investors pause and lead them to Bitcoin instead.

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Real estate is the largest asset class in the world, and in more recent times has come to be used as a store of value, rather than exclusively a place to live or work. People and firms around the world buy real estate for the tax advantages, cash flow, and the nominal appreciation of the asset.

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However, there is significant counterparty risk at play, the most prevalent stemming from the jurisdiction in which the property exists.

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At the most extreme end of the risk spectrum are totalitarian governments and eminent domain laws that equip or allow full confiscation of real estate. This may seem like an unlikely threat, but it would have the most dire consequence for an investment - total loss (hopefully if done through “legal” means, you get the fair market value for the property, but that might not have been in your calculations when factoring in capital, time, and energy into the deal).

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More likely jurisdictional challenges include property tax hikes, deteriorating safety of neighborhoods, and any new local ordinances that can easily come into play. For these reasons and others, such as maintenance, fluctuating insurance rates, and more, real estate seems increasingly risky to many.

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The stock market (equities) similarly has its challenges. While its proven as a (relatively) long-term means of beating inflation and therefore preserving purchasing power, you are still invested in companies that can struggle or fail based on supply chains, mismanagement, regulation, and recessionary pressures, among other variables.

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Apple, for example, as of recently seems poised to partner with Google for AI services rather than enter the game (at least more meaningfully) itself. This could work great… or it could have enormous consequences if the victors over the next couple of decades are AI and AI-adjacent businesses. A heavy investment in Apple could be your next winning lottery ticket, or it could be years and years of measly returns. And AI adoption is just one factor that would affect this, never mind geopolitical tensions in China (where their manufacturing is done), potential disruptions to personal computing industry, a shifting competitive landscape, etc.

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And Apple is just one example. Nvidia has reached as high as 7% of the S&P 500, meaning a traditional 60/40 portfolio might have 4%+ exposure to just this one company’s success or failure. A major drawdown in one stock price could be a huge hit to a typical investor. Stocks are the guarantee they sometimes seem.

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And finally, we have government bonds - the “risk free” asset. But here again, we have a counterparty: the government. We’ll address the US specifically here.

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The United States is inching closer to the event horizon - the point of no return - as it relates to our debt crisis. Interest expense alone on our $34T of debt is now over $1 trillion - more than our military budget and nearly 25% of tax receipts. This is an unproductive cost and growing more each day. There are only four ways to get out of this hole:

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1. Austerity, which is political suicide and highly unlikely

2. Higher taxes, which are also politically unpopular and might not do the trick anyway (tax revenues fluctuate widely from year to year)

3. Hard default, whereby bondholders are just told “sorry” and lose everything, and all confidence in the US dollar is also erased

4. Money printing, whereby bondholders are paid what they are owed nominally but are wrecked in real terms from the ensuing tsunami of inflation that would follow

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Option #4 seems most likely by nearly any realistic measure. With bonds, you have to trust the government to be fiscally responsible - seems pretty unlikely, no?

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Bitcoin, by contrast, has no counterparty risk. You don’t have to wonder how a government or corporation will perform, if they will remain fair, or put any other trust in a third party. You can just buy the asset, store it in a $100-200 hardware wallet and let it sit.

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As more people begin to recognize the perils of the three top, classic asset classes, doesn’t it stand to reason that many will move value into Bitcoin?

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Why pay ongoing taxes and maintenance on a property with this alternative?

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Why hope you’re picking the right stocks, or that a single stock won’t materially hurt an index fund?

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Why pray that the government doesn’t default or, more likely, print money to cover its debt?

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As this realization sets in, we might expect massive inflows into Bitcoin. And remember, these might not be mere retail investors allocating 1% or 2% here or there. There a massive pension funds trying to cover major deficits, corporations that are currently lighting money on fire in the form of cash balance sheets, and sovereign nations that will one day demand incorruptible, sound money (versus central bank Monopoly money) in exchange for real world resources (e.g., oil, natural gas, other commodities).

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To imagine that several trillion dollars might eventually move into Bitcoin is not only likely, but entirely pragmatic once properly understood in the broader context of alternatives.

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Whether the number we end at, approach, or pass right through is $10M is somewhat besides the point: the point is that over a long enough time horizon, all roads seem headed toward a Bitcoin future.

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