The price of Bitcoin looks to the future

As we come to the end of 2021, it is common to reflect on the past year and produce crystal balls to predict the future price of bitcoin.

First of all, however, one of my favorite thoughts on the future in general comes by Jeff Bezos.

“I often get the question ‘What will change in the next 10 years? And that’s a very interesting question; it is very common. I hardly ever get the question “What’s not going to change in the next 10 years?” And I submit to you that this second question is actually the more important of the two – because you can build a business strategy around things that are stable over time … when you have something that you know to be true, even on in the long run, you can afford to put a lot of energy into it.

For Amazon, what Bezos meant was that for them, what won’t change is that customers will want a wide choice of products, low prices, and fast delivery. This is what they built Amazon around.

So how does this apply to the coming year and Bitcoin? As we move into 2022, we live in an extremely uncertain world, with COVID-19, record debt levels, rising inflation, socio-economic inequalities and growing geopolitical tensions. I in turn submit to you that the monetary policy and general structure of Bitcoin is one of the very few things on the planet that is not going to change over the next 10 years, or the next 20 years, or even the next 30 years. . And that stability is a source of strength for anyone holding bitcoin and a major incentive for anyone considering a long-term position.

Consider further this 30-year period for a second in the larger macro context. As of this writing (December 7), the 30-year US Treasury yield is about 1.7% per annum. This suggests that if we buy a 30-year treasury bill and hold it until 2051, it will return 1.7% per annum, or about 66% compounded. $ 1,000 would become $ 1,660 in 2051 if compounded at this rate.

Although this Treasury yield is described as “risk free,” we cannot predict the purchasing power of these dollars in 30 years. No one can tell. And if you want to imagine how far 2051 is, consider 30 years back to 1991. We’re talking about a world right after the fall of the Berlin Wall, the Gulf War (the first one), Mikhail Gorbachev, of President George Bush (senior!); this was all before the Internet explosion and when cell phones were scarce and just for “yuppies”.

What would an investor have faced in 1991, given a 30-year cash investment? The roughly 30-year return at the end of this year was 7.4% per annum. That’s up from 1.7% now, as previously reported. Prices are inverse to yields, so today’s bond prices are very high compared to 30 years ago. And since the other asset classes (equities, real estate, etc.) are valued relative to the risk-free rate, it is not surprising that we are in a bubble of everything.

It is for this reason that the likes of Preston Pysh and Greg Foss predict bitcoin potentially gnawing at global bond markets. It doesn’t matter that bitcoin doesn’t have a risk-free return as a growing number of bonds have negative returns in real terms. And for a long-term investor, what are the odds that $ 1,000 worth of Bitcoin will likely net more than $ 1,660 in 30 years? If you agree that it could be much higher, even if you assign a probability that Bitcoin will die completely, then you may be on a matter of position size.

So what about the future price of bitcoin? I like the analogy of bitcoin as a low-cost battery, recharging with increasing adoption and decreasing in value during times when holders are running for the hills. The price is simply a snapshot of when the buyer meets the seller at the margin to agree on the last price to acquire the use of that battery for a certain amount of bitcoin. For each participant, their holding could also be seen as a two-dimensional function of how much bitcoin they hold and how long they hold it. Call it “bitcoin years” (210 million years per decade) or “satoshi seconds” (a lot more!). At all times, all buyers choose their holding period as they wish.

Since the supply is fixed, the only thing that determines the price is demand – from new buyers who do not yet hold bitcoin, but also continued demand from existing holders who continue to pile up and hodl – c that is, how long does this period last? It is almost impossible to accurately predict the future demand of newcomers and the continued demand of current bitcoiners. Therefore, all models seeking to predict future prices are almost by definition garbage, including stock-flow (Listen to Cory Klippstein if you want much better details on that). It is also for this reason that Michael Saylor said “All your models are destroyed.”

That’s not to say I’m not overly optimistic. It’s just that bitcoin price predictions are a waste of time. Let’s get back to Bezos sentiment – don’t try to predict exactly what will change in the world in the future, but focus more on the essentials of Bitcoin that won’t change.

This is a guest article by BitcoinActuary. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

Richard L. Militello