In December 2013, a Wall Street analyst working at a sell-side shop outside of the more prestigious bulge bracket banks published what could be the first sell-side research report about an interesting somewhat new digital asset called Bitcoin (BTC 0.28%). Ever heard of it?
Working for Wedbush at the time, Gil Luria in his report said many things about Bitcoin. He called it a disruptive payment technology and said there is a "meaningful probability Bitcoin (the specific currency/conduit) may not succeed." Luria also called it a "safe haven currency" and said there are scenarios Bitcoin could trade at 10 to 100 times its current price. Bitcoin traded at abut $1,000 at the time. All in all, that's a pretty good research note when you consider that Bitcoin briefly surpassed $100,000 earlier this month.
In a new report issued more than a decade later with his current firm, D.A. Davidson, Luria, along with his colleague Alexander Platt, says that after all of Bitcoin's accomplishments, there is now a small probability the token could replace the U.S. dollar entirely and reach a whopping $5 million price per token. Here's why.
A self-fulfilling prophecy
In 2013, Luria laid out a range of outcomes and potential price targets for Bitcoin. Since then, Bitcoin and its network have overcome every challenge thrown its way including countless competitors. It's also seen trillions of dollars transferred through its network. After achieving so much, Luria is now predicting a small probability of Bitcoin one day replacing the U.S. dollar:
We would ascribe a 1-2% chance to that outcome, which would be enough to explain the current asset price. Since the global money supply is in the magnitude of $100 trillion, bitcoin becoming [All of] Money would imply a value closer to $5 million per bitcoin. If one believes that there is a 1-2% chance for this outcome, and that there are other valuable use cases for the bitcoin network otherwise, the current $100,000 price would reflect that.
While a 1% to 2% probability doesn't sound like much, Luria wrote in his report that he wouldn't have contemplated such a situation a decade ago. He might have prescribed a 0.1% chance of this occurring five years ago, so his odds have risen significantly. Ultimately, Luria believes that the growing adoption of Bitcoin could turn his thesis into a "self-fulfilling prophecy."
Bitcoin recently got a ringing endorsement from Federal Reserve Chair Jerome Powell, who described Bitcoin as a competitor to gold -- and therefore a way to hedge inflation. Luria believes Bitcoin's main utility is as a store of value. Bitcoin in many cases has traded like a high-growth tech stock. However, Luria believes that Bitcoin's lower correlation to inflation is because it's lived in a U.S. economy that is awash in cash due to the Fed's easy-money policies since the Great Recession.
Luria also noted that Bitcoin's second-best utility is as a speculative trading asset. Strong liquidity, around-the-clock trading, and constant flow of news make Bitcoin the "perfect trading asset."
Could Bitcoin really replace the dollar and reach $5 million?
I don't think anyone can answer this question with any real certainty and making long-term price predictions is a fool's errand. However, with Bitcoin topping $100,000 nothing is impossible so I think Luria's 1% to 2% chance is probably a fair assessment.
Still, the greenback has looked formidable in recent years. While it's not at highs experienced in 2022, the U.S. dollar is as expensive as it's been since the early 2000s. President-elect Donald Trump has promised to implement policies such as further tax cuts and tariffs, which would likely strengthen the dollar. U.S. gross domestic product also looks promising right now. Of course, this can change quickly as lower interest rates and signs of a weaker economy could emerge. But the U.S. dollar remains the world's reserve currency.
Investors should focus less on Bitcoin's ultimate price target and more on how it can be used in a broader portfolio. There's growing evidence it can hedge inflation and potentially serve as safe haven in times of uncertainty due to geopolitical events or if the U.S. government experiences further fiscal issues.
That's why I think investors can hold at least some Bitcoin as a long-term asset. At the end of the day, while Bitcoin has traded with volatility, those who have held it long-term have likely seen better returns than most.
