If you have tracked potential bitcoin price targets, you know that many analysts expect bitcoin to consume or eat entirely in parts of gold, money supply (M2), global fiat debt, stocks (stocks), and real estate.
Once you understand the implications that bitcoin has no counterparty risk and no dilution risk, you should recognize that bitcoin will completely inhale all of the wealth stored in gold, M2 and global debt, but what portion of the wealth stored in stocks (stocks) will be reassigned to bitcoin?
It’s a very complicated idea to think about.
Two weeks ago, we published our thoughts on how the valuation of a fictional company, Wyoming Red Ribeyes, would change post-hyperbitcoinization. Now we’re going to dive a little further and run a scenario analysis showing how much a typical S&P 500 company’s valuation would change based on two relatively unknown predictor variables:
- BTC inflation rate: how do we expect a relative CPI (price of goods) index to develop over time?
- The Risk Premium for BTC Shares: What Expected Percentage Return (expressed in BTC) will motivate investors to invest their BTC in publicly traded stocks?
BTC inflation rate
It is realistic to expect average BTC consumer price index (CPI) inflation to fall anywhere from 0 percent to minus 10 percent. The current system aims to produce about 2 percent CPI inflation annually. Since Bitcoin’s monetary standard operates under a fixed supply, bitcoin savers will be rewarded with all future productivity improvements through lower and lower prices.
Overall, it is reasonable to expect a CPI of about 5 percent negative, indicating that economic growth will be faster and more sustainable under a Bitcoin standard.
BTC equity risk premium
A risk premium on stocks is the extra return that investing in stocks is expected to yield over a risk-free real return from simply HODLing bitcoin (or possibly return on Lightning Network lease channels).
This is difficult to predict as it will eventually come down to the bitcoin HODLers. They will be the ones who determine the equity risk premiums they are willing to accept for their bitcoin.
Based on current bitcoin-denominated interest rates (6 percent at BlockFi), we would likely expect the equity risk premium to be higher as this is the rate for fairly safe debt, hence the ‘equity risk premium’. It may be realistic for an S&P 500 company to have a risk premium on stocks of between 0 percent and 30 percent.
While this depends on how the market weighs specific business risks, it is generally reasonable to expect around 10 percent, indicating that investors will not be willing to part with HODLed BTC unless they expect a 10 percent return to match goes with the risk of investing. in a publicly traded stock.
What percentage of the Store Of Value (SoV) is in shares?
Below is a data table showing what percentage of the assets stored in publicly traded stock valuations are simply looking for a generic SoV (i.e. bitcoin). Note that this data table uses Wyoming Red Ribeyes’ discounted cash flow (DCF) models as a typical fictional S&P 500 company.
The two predictor 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 rate 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 could be reallocated to bitcoin.
This estimate varies depending on the two predictor variables. On the low end (0 percent risk premium on stocks and 0 percent inflation), bitcoin, for example, will capture only 46 percent of the wealth stored in publicly traded stocks. However, at the top end (30 percent equity risk premium and 10 percent negative inflation), bitcoin will capture 90 percent of the real wealth stored in the S&P 500.
Updated pricing goals
Starting with the basic assumption that Bitcoin eats the wealth stored in gold, M2 and global debt, we start at $ 17.1 million per BTC.
Using our analysis to determine that bitcoin will take up 77 percent of global stocks, that pushes the total BTC market cap to $ 427.9 trillion, indicating a price of $ 20.4 million per BTC. From there, we can conservatively add that bitcoin takes the SoV out of real estate (50 percent of total real estate), pushing us to a total BTC market cap of $ 568.4 trillion, indicating a price of $ 27 million per BTC .
Compared to our previous price target, which included both stocks (50 percent) and real estate (50 percent), it only increased $ 1 million (from $ 26 million to $ 27 million). However, $ 1 million BTC sounds pretty good right now.
Future research
We also want to dive into real estate valuations because we simply used a baseline of 50 percent to determine the wealth stored in real estate that will be absorbed by bitcoin. This can be higher or lower. In addition, in the future, we could try further to value the productivity gains that bitcoin will deliver, as well as the high propensity to hold a counterparty risk-free and dilution-risk-free asset.
The global equity figures are from Visual capitalist and the “Mimesis Bitcoin Investment Research Report.”
This is a guest post from Mimesis Capital. The views expressed are their own views and do not necessarily reflect those of BTC Inc or Bitcoin Magazine