Will Bitcoin Get to $1 Million?Highlights
There is a -0.70 Pearson Correlation Coefficient between the supply of bitcoin and its price. This negative correlation is more logarithmic than linear. As the supply gets closer to zero the price will rise quicker in raw numbers. This logarithmic relationship extended forwards in time to zero supply gives a Bitcoin price of around $460,000
There is a 0.85 Pearson Correlation Coefficient between the transaction volume of Bitcoin in USD and its price. Showing a strong positive relationship
Transaction Volume in Bitcoin in USD has been largely rising with the price, but the number of transactions has been relatively low in comparison, staying between a range of 200k and 400k in the last 5 years. Suggesting that big players are transacting in larger numbers but the quantity of transactions isn’t rising to the same degree.
Most Americans have heard of Bitcoin, so how much more awareness is there left to drive up demand?
A study found that the main determinant for cryptocurrency prices is the relative cost of production. If the mining cost for Bitcoin rises too high then the upper price estimations will become limited
There is a fundamental problem with the argument that Bitcoin will reach $1 million.
Introduction
There have been many investors, large and small, who have claimed that Bitcoin could hit $1 million per bitcoin Jones, C. (2021). The timelines vary. Some don’t have one and others say in the next couple of years (Cuthbertson, 2022), Kharpal, A. (2021).
In this report, I will be discussing their claims and any merit they may hold. I will attempt to dispute these claims from a fundamental point of view.
Just to point out before I begin, I accidentally deleted all the data that I used for the calculations after I had done the analysis. If you want the analysis and the data - just reply to this post.
Background
The reason some estimate Bitcoin reaching such a high price is the supply is limited. The problem with this argument is, that the supply of everything is limited. Yes, even the US Dollar. The magic money machine is limited. So, for this argument to work the limitations of the supply have to be meaningful. Supply and demand go hand in hand. But I would say, in my opinion, demand is more important than supply. If I create a painting, I then duplicate the painting into ten copies. The supply is ten. But to be frank, who would want to buy a painting that I have drawn? Nobody. So even though the supply is limited the demand is non-existent, so it doesn’t matter. The price of those painting would be determined by the market price. That is the last sold price on the free market. But I haven’t sold any since the demand is zero, so the price is also zero.
Let’s look at it the other way round.
If I don’t create any painting, but the demand for my paintings is extremely high, then the moment I create any painting the price will be very high as well. As I increase the supply, the price should eventually go down. The market's interest is first, in my opinion, that drives prices, second is the supply. Of course, to have a healthy market you need both to be sufficient. Supply on its own means nothing. It just means something exists nothing else. Demand on its means there is interest. So, the potential is there. The moment supply matches the demand that interest turns into something and that something is valuable.
So, the problem I have with this argument is, that the supply of Bitcoin on its own means nothing. Only when combined with demand does the argument have any potential merit. Assuming ceteris paribus, the only three ways the price of Bitcoin could go any higher is if the demand increases with the supply remaining constant. Or the supply falls with the demand remaining constant. Or the demand increases with the supply falling. The supply of Bitcoins is falling right now, it has since the beginning. So, the next thing to establish in this logic is, is the demand increasing, stagnating, or falling? This answer will tell us if the price carries on going up, Ceteris paribus and if that price will reach $1 million.
Before I get to that, just out of interest I thought. Is there a correlation between the supply of Bitcoin and its price? Assuming demand remains stable, let's see if the supply will change the price.
Supply Analysis
I got the monthly close data for the Bitcoin price and the number of Bitcoins in circulation.
The first assumption I had was the total supply of Bitcoin taken away from the total number of bitcoins in circulation is the left-over supply. That is a big assumption, since some long-term investors may not have their Bitcoins in circulation. Also, another problem is that quite a few Bitcoins in circulation may not even be accessible and may have been lost. So, the real leftover supply of Bitcoins would probably be lower than what I had calculated. Regardless this is just a simple analysis to find a correlation so these assumptions in my opinion are not that important. I doubt I would from, let’s say, a strong correlation to a weak one once the assumptions are violated.
The data set was from 2014 to 2022 (finance.yahoo.com. (n.d.). There were in total 91 data values. During a Pearson Correlation, the value was -0.70. This suggests there is somewhat of a strong negative correlation between the leftover supply of Bitcoins and the price. However, there are a few problems. The first and most obvious one is, that this method of analysis assumes there are no other variables involved that, in this case, affect the price. Another problem is correlation doesn’t mean causation. So even though there may be a correlation between the supply and price that doesn’t mean one is affecting the other. This is more pronounced once you realise that the 2017 large price increase in Bitcoin may have been done by market manipulation (Rooney, 2018). The same may be said of the 2021 increase. If these price increases are due to market manipulation or even just a demand increase rather than the supply affecting the price, then the relationship between supply and price maybe even less pronounced than the data suggests. However, the main problem is that even though the correlation coefficient is -0.7. Once you look at both graphs plotted against their time. It doesn’t seem to be a correlation. The supply of bitcoins decreased from a high of 7.6 million in 2014 to a low of 1.97 million in 2022. That’s a -74% decrease. While the Price increased by over 10711% during that time. If we flip the supply data, we see a mere 289% increase. Once we do a scatter plot of the supply vs price, we see that the decrease in supply against price is not very linear. The supply decreases from 7.7 million to 4.8 million and in that time the price rose from $338 to $1071. But after the price rose above $10,000 in 2017 and then went on to $60,000 in 2021. The supply didn’t decrease as much. This decrease seems more logarithmic than linear. The R^2 value was 0.89. If I get the logarithmic line and extend it near zero. So, the supply of Bitcoins left is almost gone. The price of one bitcoin is only around $460,000. So, analysing the relationship between the supply of bitcoins and their price gives us an estimated maximum value of one bitcoin at around $460,000. Not $1 million. I must admit this analysis is very brief and basic, but the main point you should take is, that as the supply dwindles out, the price in raw numbers, would be expected to increase. So, smaller supply decreases will lead to larger price increases as the supply gets closer to zero.
Demand Analysis
Now it's time to analyse the demand for bitcoin and see if it is going up. The main measurement I will use for this is the transaction volume. I will then relate it to price the same way I did for the price. Looking at the transaction volume in USD for Bitcoin, we see that the chart seems quite similar to the price. Once you do a Pearson Correlation the coefficient comes out at 0.85. Suggesting a strong positive correlation between the two. If the transaction volume of Bitcoin increases would that be a strong signal for a price increase? The answer is Yes. However, the number of confirmed transactions per Bitcoin has never topped 1 million. Since 2017, the range has been between 200k - 400k (Blockchain.com, n.d.) Suggesting that the transaction volume increase has been due to larger USD volume and not the number of transactions increasing. This could suggest that people are transacting with bitcoin but just with higher amounts. This could also mean that the interest in bitcoin from a transaction point of view is not exactly going up.
Also, another way to guess the demand for Bitcoin is the number of wallets created. Analysing this measurement, we see that the number of wallets is estimated to be over 100 million. However, the number of active wallets is most likely lower and those wallets that do exist probably do not have that much value. Furthermore, more and more people are becoming aware of bitcoin, but the real interest doesn’t follow suit. 89% of Americans have heard of Bitcoin but that number is not represented in transaction volume or even wallets in existence (Buy Bitcoin Worldwide, n.d.).
To conclude, the transaction volume can be a very good indicator of the future price of bitcoin. However, the real interest in bitcoin isn’t following the awareness and acknowledgement of bitcoin. In my opinion, the average person has heard of bitcoin but doesn’t seem to be interested in working or transacting in bitcoin. This doesn’t much from a price point of view but questions the future usage that many bitcoin investors claim. This would mean the demand is not necessarily going up to a significant degree. Especially to a degree that would allow for $1 million per bitcoin. To explain why this doesn’t mean much from a price point of view, many people think that buying power means the price will go up in a certain asset but that’s not the case. There could be 10,000 buyers in a particular asset and one seller. If the seller has more monetary power, then the price of the asset would most likely go down. So even though the number of people using bitcoin may not reach the level many bitcoin investors want, that doesn’t mean the price won't.
Also, though the the demand for bitcoin does seem to be increasing, it is largely been driven by larger investors who are transacting in very large volumes, hence why the transaction volume in USD I increasing but the number of transactions isn’t too the same degree, this may not be a problem for the price, since the large investors would have big buying power. But these large investors will not be able to manipulate the market since they will most likely be regulated. So the interest from the general public doesn’t seem increasing to the degree bitcoin investors want and even though big investors are getting into bitcoin, I doubt they will be able to pump the price up to $1 million.
Study on what determines cryptocurrency price
One interesting thing to note is, that there was a very good study (Hayes, 2017) investigating what drives the value of a certain cryptocurrency. This study found that the main determinant for prices is the relative cost of production. If the cost of mining bitcoin rises too high, then it will not be profitable for miners to mine and that would increase the transaction cost and time of bitcoin - leading to a price fall. This means to get to $1 million per bitcoin, the transaction costs need to be dramatically reduced for miners. If you do not see that happening, then you also shouldn’t see the price getting to $1 million.
Main Argument
Now to my main argument as to why bitcoin may never get to $1 million per bitcoin.
Let me set the stage, if we have a company that has one million shares to sell at $1. If I buy all the shares the company's market cap is at $1 million, but more importantly I have effectively “pumped” one million dollars into the asset, in this case, the company's shares. Using this logic, we can see why Bitcoin may never get to one million. The current market cap is 619 billion dollars. At 32,546 dollars per Bitcoin (coinmarketcap, 2019). For the price to get to one million the market cap would have to grow by almost 30 times. This means the market would be around 19 trillion. So, using the logic above, for Bitcoin to get to one million there must be almost 18.5 trillion dollars pumped into Bitcoin. A question now arises, is that viable? It took Apple almost 40 years to get to a market cap of just 2.47 trillion. Google, 15 years to get to around 1.5 trillion. The value of all gold ever mined is around 9.6 trillion (www.goldeneaglecoin.com, n.d.). So, to me, the market cap of Bitcoin getting to 19 trillion seems very unlikely, there just isn’t enough interest in the asset to get it there. One may say, well what if it isn’t seen as an asset but rather a currency.
That would mean more people would buy into it to use for transitions, but the problem is if the price keeps rising then the currency applications go down. Why would I sell my bitcoins to buy a car, let's say, if a week later the price of bitcoin may go up 10% next week? The more volatility in bitcoin the less the viability as a currency, the less volatility means the harder it will be for the price to reach one million. So, the argument, that the currency applications will lead to one million is very weak. The logic is also very extremely weak, if the price rises then the currency applications are lowered, so how can one say currency application will lead to a large influx of capital that will drive the price to $1 million.
Conclusion
To conclude, the is a good relationship between the supply of bitcoin, the demand for bitcoin and its price. But even though I do see Bitcoin being a part of our future, these relationships do not point to $1 million per Bitcoin. I would keep an eye on the transaction costs for Bitcoin and how profitable it is for miners to get a good idea of where the market could be heading in the future. Also, I would stay away from the very high and unsubstantiated claim of $1 million per Bitcoin.
References
Cuthbertson, A. (2022). Bitcoin price passing $1 million means society has collapsed, early investor warns. The Independent. Available at: www.independent.co.uk .
Jones, C. (2021). One Analyst Has Bitcoin Reaching $4 Million. Forbes. Available at: www.forbes.com .
Kharpal, A. (2021). Bitcoin at $1 million? Some analysts are bullish but others warn of risks ahead. CNBC. Available at: www.cnbc.com .
finance.yahoo.com. (n.d.). Bitcoin USD (BTC-USD) Price History & Historical Data - Yahoo Finance. Available at: finance.yahoo.com .
Rooney, K. (2018). Much of bitcoin’s 2017 boom was market manipulation, research says. CNBC. Available at: www.cnbc.com .
Blockchain.com (n.d.). n-transactions. Blockchain.com. Available at: www.blockchain.com
Buy Bitcoin Worldwide (n.d.). How Many People Own, Hold & Use Bitcoins? (2022). www.buybitcoinworldwide.com. Available at: www.buybitcoinworldwide.com .
Hayes, A.S. (2017). Cryptocurrency value formation: An empirical study leading to a cost of production model for valuing bitcoin. Telematics and Informatics, 34(7), pp.1308–1321. doi:10.1016/j.tele.2016.05.005.
coinmarketcap (2019). Bitcoin. CoinMarketCap. Available at: coinmarketcap.com
www.goldeneaglecoin.com. (n.d.). Value Of All The Gold In The World | Golden Eagle Coins. Available at: www.goldeneaglecoin.com .
