If you are following the potential bitcoin price targets, you know that many analysts expect bitcoin to completely consume or eat portions of gold, money supply (M2), global fiat debt, stocks (shares) and real estate.
Once you understand the implications of bitcoin with no counterparty risk and no risk of dilution, you should recognize that bitcoin will fully inhale all the wealth stored in gold, M2 and global debt, but that part of the wealth stored in stocks (shares) will be relocated to bitcoin?
It is a very complicated idea to ponder.
Two weeks ago, we published our ideas on how the valuation of a fictional company, Wyoming Red Ribeyes, would change after hyperbitcoinization. Now, let’s dive in a little deeper and perform a scenario analysis that shows how much the assessment of a typical S&P 500 company would change based on two relatively unknown predictor variables:
- The BTC inflation rate: how do we expect a relative CPI (price of goods) index to evolve over time?
- The risk premium for BTC shares: What is the expected percentage return (called BTC) that will motivate investors to invest their BTC in publicly traded shares?
BTC inflation rate
It is realistic to expect BTC average consumer price index (CPI) inflation to fall somewhere between negative 0% and 10%. The current system tries to produce about 2 percent of CPI inflation annually. Since Bitcoin’s monetary standard operates under a fixed supply, bitcoin savers will be rewarded with all future productivity improvements through increasingly lower prices.
It is generally reasonable to expect a CPI of approximately 5% negative, which indicates that economic growth under the Bitcoin standard will be faster and more sustainable.
BTC Equity Risk Premium
A stock risk premium is the excess return that stock investment is expected to provide in relation to a real risk-free return from simply HODLing bitcoin (or potentially profitable on the Lightning Network’s leasing channels).
This is difficult to predict as it will ultimately boil down to bitcoin HODLers. They will be the ones to determine the stock risk premiums they are willing to accept for their bitcoin.
Based on the current bitcoin-denominated loan rates (6 percent on BlockFi), we would probably expect the equity risk premium to be above that, since this is the rate for reasonably secure debt, therefore, “equity risk premium shares”. It may be realistic for an S&P 500 company to have an equity risk premium between 0% and 30%.
Although this depends on how the market weighs specific business risks, it is generally reasonable to expect about 10 percent, which indicates that investors will not be willing to part with HODLed BTC unless they expect a 10 percent return for monitor the risk of investing in publicly traded shares.
What is the percentage of the value reserve (SoV) in the shares?
Below is a data table that displays what percentage of the wealth stored in exchange-traded stock valuations is simply looking for a generic SoV (i.e. bitcoin). Note that this data table is using Wyoming Red Ribeyes’ discounted cash flow (DCF) models as a typical fictional company on the S&P 500.
The two predictor variables, BTC inflation and BTC stock risk premium, are the only two variables that change in the DCF models.
Looking at our 5% estimates of negative BTC CPI inflation and 10% BTC stock risk premium, the estimated percentage of SoV currently stored in public S&P 500 shares is 77%. This indicates that 77 percent of the real wealth stored in the S&P 500 could be reallocated to bitcoin.
This estimate varies depending on the two predictor variables. For example, at the bottom end (0% equity risk premium and 0% inflation), bitcoin will capture only 46% of the wealth stored in publicly traded stocks. However, at the upper end (capital risk premium of 30 percent and negative inflation of 10 percent), bitcoin will capture 90 percent of the real wealth stored in the S&P 500.
Updated price targets
Starting from the basic assumption that Bitcoin devours the wealth stored in gold, M2 and global debt, we start with $ 17.1 million per BTC.
If we use our analysis to determine that bitcoin will consume 77 percent of global shares, this pushes BTC’s total 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 SoV out of properties (50 percent of total properties), which leads to a total BTC market capitalization of $ 568.4 trillion, indicating a price of $ 27 million by BTC.
In comparison to our previous price target, incorporating shares (50%) and real estate (50%), it increased by only $ 1 million (from $ 26 million to $ 27 million). However, $ 1 million BTC looks pretty good now.
Future research
We also want to dive into real estate valuations, as we simply use a 50% baseline to determine the wealth stored in the property that will be absorbed by bitcoin. This can be greater or less. In addition, we could try to price in the future the productivity gains that bitcoin will bring, as well as the high propensity to keep an asset without counterparty risk and without risk of dilution.
The global wealth figures originated from Visual Capitalist and the ”Mimesis Bitcoin Investment Research Report.”
This is a guest post from Mimesis Capital. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.