Tim Draper knows how to make money off bitcoin…
Draper is one of the most successful venture capitalists in the world. In 2015, the World Entrepreneurship Forum named him “Entrepreneur for the World.”
He once had a 10% stake in the video and text messaging application Skype. In 2005, eBay bought Skype for $2.5 billion. (Microsoft later bought Skype in 2011 for $8.5 billion.)
But his wildest investment came in 2014.
That’s when he bought 30,000 bitcoins at an auction held by the U.S. Marshals Service. The bitcoins were seized by federal authorities from a black market website shut down by the FBI.
The value of the digital currency spiked immediately after the sale… And the 30,000 lot was worth more than $19 million around the end of the auction.
To date, he’s already made $16 million on that investment.
Few have profited more from bitcoin and its underlying blockchain technology than Draper. In the last three years, he’s made several investments in blockchain startups.
So when he predicted bitcoin would reach $10,000, I took notice.
Here’s the thing… Draper’s not alone.
Bobby Lee is CEO of BTCC, China’s first bitcoin exchange. Today, it’s one of the largest bitcoin exchanges in the world.
Lee predicts bitcoin could reach $11,000 by 2020.
If you want a more conservative estimate, South African entrepreneur Vinny Lingham believes it will hit $3,000 by the end of 2017.
(Lingham is a participant on South Africa’s version of the reality show Shark Tank and made the show’s first-ever bitcoin investment.)
As of Friday, bitcoin traded around $980. Even if we just base our prediction on the low end of $3,000, it could more than triple this year.
But I believe bitcoin will settle somewhere between Draper’s and Lingham’s projections.
I crunched the numbers and will show you three reasons why bitcoin could be worth at least $4,200 in three years.
And if Draper is right (and he’s one of the best minds in this space), bitcoin investors could be sitting on a potential 10-bagger or more…
Three Questions We Need to Ask
Bitcoin is a cryptocurrency. And like any currency (for instance, U.S. dollars or gold), it can be used to make payments, as an investment, or as a store of value.
To determine what bitcoin could be worth over the next few years, I looked at what its price would be under each of those three scenarios. That led me to three questions…
What if hedge funds buy bitcoin as an investment?
What if investors use bitcoin as a store of value?
What if bitcoin is used primarily as a currency?
I crunched the numbers on each scenario, and here’s what I found…
What If Hedge Funds Buy Bitcoin as an Investment?
Bitcoin is a perfect ballast for a hedge fund portfolio. Here’s why…
Bitcoin’s correlation to other assets is extremely low. That means its price does NOT move in tandem with other assets.
Let’s say a hedge fund wanted to diversify its portfolio of risky assets (such as small-cap stocks or junk bonds).
It could add bitcoin to provide diversification. If a risky asset class tanks, bitcoin would provide ballast because it’s not correlated to those assets.
Right now, the hedge fund industry has $3 trillion in assets under management. And except for a few small funds, none of those assets have gone toward bitcoin.
I crunched the numbers and used a very conservative estimate. If just 3% of those funds were allocated to bitcoin, that would boost its price to $4,293.
So under Scenario 1, we could see bitcoin quadruple from today’s price. Not bad… But under the other two scenarios, it could go even higher.
What If Investors Use Bitcoin as a Store of Value?
A good store of value is any asset that can maintain its purchasing power over time.
Historically, gold has been the go-to asset for wealth preservation. Like gold, bitcoin can also serve as a store of value. (I wrote about this topic last month.)
According to the World Gold Council, there are 186,700 tonnes of gold in the world. That’s about 6 billion ounces. Gold trades at about $1,200 per ounce. That means all the gold in the world is worth $7.2 trillion.
What if just 5% (another conservative estimate) of gold holders switch to bitcoin?
If that happened, more than $360 billion would flow into bitcoin. That would send the price to $17,150 per coin.
What If Bitcoin Is Used as a Currency?
Bitcoin’s use as a currency is growing exponentially. It’s now accepted by 100,000 merchants across the world, including Microsoft, Dell, Wikipedia, Expedia, and PayPal.
As bitcoin catches on, we expect more people and more businesses to use it as a medium of exchange.
However, like many new technologies, bitcoin got its start in underground economies. Due to its anonymous nature, it’s the preferred currency for online black markets.
Let us be clear. We don’t endorse the use of bitcoin for illicit transactions. It’s simply a medium of exchange, like cash.
(In fact, billions of dollars are used in street-level black markets every day across the world for the same reason as bitcoin: Cash is anonymous. Nevertheless, people continue to spend, save, and invest with U.S. dollars. The same is true of bitcoin.)
As a digital currency, bitcoin’s price rises the more it’s used—regardless of what it’s used for.
There aren’t many concrete statistics on the size of black markets. But research suggests it could be $10 trillion. If bitcoin captures just 10% of that market, its price would rise to $47,619.
To reiterate, bitcoin has already begun to emerge from the shadow economy. Today, it’s an accepted form of payment by legitimate companies, as we pointed out above.
Eventually, we believe it will be used as much as any other currency. So as bitcoin goes mainstream, the price could go even higher than the above projection.
Based on the three scenarios above, I believe bitcoin will rise to $4,200 over the next three years. That’s more than four times higher than where it is now.
Here’s how I came to that number…
I calculated the expected return based on the probability of each scenario happening (see the table below).
|Bitcoin becomes worthless||$0||10%||$0|
|Bitcoin settles at $1,000||$1,000||75%||$750|
|3% of hedge fund assets go into bitcoin||$4,293||5%||$215|
|5% of worldwide assets are shifted from gold holdings to bitcoin||$17,150||5%||$858|
|Bitcoin captures 10% of black market||$47,619||5%||$2,381|
Here’s how to read the table:
- The first column lists the various scenarios I’ve laid out above.
- The second column lists the price of bitcoin if that scenario comes to pass.
- The third column lists the probability of a scenario happening.
- The fourth column is the weighted average price. (It multiplies the price by the probability of the event happening.)
Let’s not forget that we looked at each scenario in isolation. Any combination of these events could send prices much higher than my estimate.
Don’t Dismiss Bitcoin’s Ride Higher
If you watch the network effects of bitcoin like I do, you see that it’s only getting stronger. (The network effect occurs when a good or service becomes more valuable as more and more people use it.)
My message today: Go out and buy some bitcoin.
Currently, our buy-up-to price for bitcoin is $1,500 per coin. But you can buy much smaller units than that.
My favorite way to purchase bitcoin is on an exchange called Abra. I put together a free instructional video for Daily readers on how to use Abra right here.
For just a few bucks, you can take part in the greatest technological innovation since the internet. And potentially make 50 times your money doing it.
Analyst, The Palm Beach Letter
Editor’s Note: In the March 23 Market Briefs, we asked if widespread automation would necessitate a universal basic income (UBI). The PBRG community responded…
From John N.: Universal basic income is just welfare all over again. But the very notion of this points out the crying need for Americans to become financially educated. Lack of financial savvy has been a problem in this country for many decades. So I applaud your work at The Palm Beach Daily to correct this situation. Keep up the good work… It’s desperately needed.
And more praise for one of our most popular ideas…
From David B.: I’m very pleased and impressed by the work you are doing for your subscribers, especially in the area of cryptocurrencies. I knew almost nothing about them until you started covering them. Though certainly not an expert, I am much more knowledgeable and have been investing in your recommendations.
From Tim M.: Big T, I want to thank you for all of the research you’ve been doing on cryptocurrencies. This has been one of the most interesting and profitable investment ideas for me so far. I feel like your research has put me way ahead of the curve on these.
From Johnny B: I would like to suggest that you break down your references to cryptocurrencies into two categories: cryptocurrencies and “app coins.” The whole field is difficult enough to understand without trying to differentiate between the two terms.
Editor’s Reply: The difference between cryptocurrencies and “app coins” (sometimes called crypto-tokens or digital tokens) is similar to the difference between cash and stocks. Cryptocurrencies are “digital cash” you can spend or save, and app coins are “digital shares” in a company.
Think of it this way… If you had shares of IBM, you wouldn’t use them to buy a cup of coffee at Starbucks. They’re equity in the company. App coins work in a similar way. They’re equity in a blockchain company. On the other hand, digital cash (like bitcoin) can be used as a store of value or medium of exchange.