The Crypto Call Option

I can remember the first time I heard about Bitcoin, I was sitting in a shared office with a co-worker back in 2013 when he described a new digital currency that was gaining some notoriety.  I did some quick research and wrote it off as a passing fad that was fueled by cyber criminals and tech speculators.   I did not think much about it again until the Fall of 2017 when its soaring price garnered headlines across the business world.  I recognized the bubble and, since I did not want to deal with a crypto exchange, I bought some shares of Greyscale Bitcoin Trust (GBTC), whose price is correlated to the price of Bitcoin.  I watched its value soar until it hit its high of $19,783.06 on December 17, 2017, then sold my shares as my shares’ price plummeted.  At that point, I took my profits and dismissed Bitcoin.


However, this year I began to take notice of it again.  I watched the price climb from the mid-$3,000s in January to $8,000 in May.  This performance got my attention and led me to do some deeper research on Bitcoin.  What struck me was its resiliency.  Bitcoin has gone through two bubbles, from 2013-2014, when its price rose from $13 to $1,163, before declining to $152 in early 2015.  Then again in the aforementioned 2017 boom and crash.  Although its price is volatile, there is clearly underlying value in this asset because it has been able to rebound following these two crashes.  After doing my research, I concluded that buying Bitcoin is, essentially, a call.  In the coming decade I think one Bitcoin will either be worth well over $100,000, or nothing depending on a number of factors.

In doing my research I found that people fell into two camps: crypto evangelists and crypto skeptics, with few in the middle.  I put myself in the rare third category as a crypto realist.  I recognize both the potential and the risks of Bitcoin and other crypto assets such as Ripple and Litecoin.  The following is a succinct explanation of my line of thinking on both angles:

Why Bitcoin could be worth more than $100,000

I draw from both my personal experience traveling around the world and a study of Bitcoin’s performance over the past decade to see its potential to exceed $100,000.  Although most in the United States do not experience it, paying for goods and services is challenging in many areas in the world.  Typically, people use cash and I was surprised to see that many vendors do not have reliable credit card payment systems.  I remember travelling to Zimbabwe in 2017 when many ATMs had simply run out of money.  It was thus next to impossible to buy anything.  However, I noticed that many of the people I interacted with had smartphones.  A global, digital currency that can be used for direct, peer-to-peer payment would solve the banking issue many experience.  Thus, global adoption could skyrocket, driving up Bitcoin and other crypto asset’s prices.

From a data-driven standpoint, a conversation with Dan Morehead, CEO of Pantera Capital, on the Unchained podcast drew my attention to Bitcoin’s incredible growth potential.  He highlighted the fact that, looking at Bitcoin’s price on a logarithmic scale, it has grown at a 235% CAGR.  Using this growth rate, it will only take a couple of years for one Bitcoin to be worth more than $300,000.  Although this number seems crazy, Morehead highlights the fact that he first thought Bitcoin would be worth more than $5,000 when it was selling for $100, and no one thought this would be possible.  As we have seen Bitcoin cross the $1, $100, $1,000, and $10,000 thresholds, doubters have seen each next level as unattainable.  So, why should Bitcoin not reach the $100,000 mark in a few years?

Why Bitcoin could be worth $0

It seems Bitcoin’s price is largely driven by speculation on its viability as a global payment system.  I personally do not view my cryptocurrency as anything I would spend, but rather as an asset I am holding.  Bitcoin and other cryptocurrency’s volatility makes its adoption as a currency difficult.  Right now, people either keep their cryptocurrency stored on hard drives or in crypto exchanges such as Coinbase.  Unless it becomes widely used as currency, people will rely on exchanges to convert their crypto assets into government backed currency.  My thought is that, should cryptocurrency threaten big banks’ business in financial transactions, the banks will work to maintain their business model.  The easiest way it seems to accomplish this end is to block withdrawal from crypto trading platforms to an individual’s bank account.  If this is the case, the value of crypto will plummet unless it has already become a globally accepted currency that has largely replaced government backed currency, which is a highly speculative proposition.

So, do I think you should invest in cryptocurrency? Yes, absolutely.  It seems that the asset has incredible growth potential, resiliency, and has proven skeptics wrong time and time again.  How much do I recommend you invest?  Only as much as you are ok to lose.

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