Do you believe John McAfee is right about Bitcoin hitting $500,000 in 3 years?
This question originally appeared on Quora, the knowledge sharing network where compelling questions are answered by people with unique insights.
Answers below are by Joseph Wang, Anatol Antonovici, Vladimir Novakovski and Avinash Barnwal.
Answered December 8th, 2017
Maybe not three years, but ten. Also about “where the hell is bitcoin going to get USD 8 trillion from?” Easy. I happen to think that bitcoin is going to be the primary settlement system for trading between China, India, Russia, the Middle East, Latin America, and Africa and will replace the US dollar is the world’s international currency.
So for example, I’m in Hong Kong. I’m loaning someone in Tanzania 20 million Tanzanian shillings (about 9000 USD) to run a chicken farm and we are setting up a loan to a coffee plant to buy Chinese machinery. I want HKD. He wants Tanzanian shilling. The Chinese factory wants Renminbi.
Suppose I then get a Mexican investor that wants Mexican Pesos? What if the farmer wants to write an app and wants to pay a Russian programmer. What do you suggest we use *other* than bitcoin?
The only *possible* thing we could use other than bitcoin is US dollar. The trouble is that Tanzania only has 3 billion USD in foreign reserves. That’s not nearly enough USD for all of the farmers that want to buy Chinese goods. As far as Chinese yuan. The Chinese government has been trying unsuccessfully for the last ten years to internationalize the RMB. Ultimately I don’t they don’t want to lose control of the RMB.
And then there is Myanmar, Cambodia, Tajikistan. I want to pay a goat herder in Tajikstan to get some fine cashmir. All he needs is a cell phone, and he can take bitcoin. Bitcoin solves all of that. You think of all of the trade that is going to be done with bitcoin.
If you run the numbers, then USD 500k per bitcoin is really, really low. (Oh by the way. If you want to get into credential wars. I have a Ph.D. in astrophysics, and I worked seven years at JPMorgan doing quantitative finance. I personally think credentials are bogus, but they come in useful when people try to invalidate other people’s arguments.)
Answered December 29th, 2017
How can someone know (or believe) if McAfee is right about Bitcoin hitting $500,000 in three years? He made his point, but we should wait for three years to see whether he was right or not. We cannot even predict the price of a stock or of a fiat currency pair, let alone the Bitcoin’s price, which is the most volatile asset as of today.
Currently, Bitcoin price is driven by emotions – everyone wants to enter the game to make some profit. Few people really care about the functionality and potential of Bitcoin as a decentralized system and as an alternative currency. Most of the investors only care about buying cheap and waiting for the price to go continually higher. So, when a market is driven by emotions, everything can happen – such a market cannot be accurately predicted since our emotional nature is unstable. It is like watching a kid playing – you never know what he would do next. In a few months another cryptocurrency star may appear, which may replace Bitcoin – people will quickly switch their attention to that one. The sentiment is the key here. In theory though, it is possible for Bitcoin to touch $500,000, even in three years.
In 2020, Bitcoin supply should be 18 million.
File:Total bitcoins over time.png
A price of $500,000 per Bitcoin would mean a total market cap of $9 trillion. For comparison, the USD money supply (M2, which includes more than just banknotes and coins – it is also about money deposits and less liquid forms of money) is $14 trillion.
United States Money Supply M2 | 1959-2017 | Data | Chart | Calendar
Considering the increasing inflation, in 2020, the total USD supply might be around $16 trillion – the point is that Bitcoin’s market cap would be more than half of USD total supply. So, can Bitcoin do that? Well, it can. This is because Bitcoin is a global cryptocurrency rather than a US one, so we should measure the total value of all the currencies out there. In 2016, this figure (broad money) was $80 trillion according to CIA Factbook. In 2020, this figure should be around $90 trillion given the inflation. So, Bitcoin would have a share of 10% of the whole Forex market. This is realistic, at least in theory. If central banks would buy Bitcoin for their reserves – Central Banks Will Add Cryptocurrencies to Reserves, Says Blockchain.info CEO – Cryptovest – and if it goes mainstream, everything is possible. And remember – Bitcoin has much room for growth. Today, there are less than half million people holding at least one Bitcoin. Anatol Antonovici’s answer to How many people have at least one bitcoin? There are only 1500 wallets holding at least 1000 Bitcoin ($14 million). Such a price is not out of this world, but Bitcoin can lose competition against a more advanced blockchain. No one knows for sure what will happen. Anyway, it doesn’t mean predictions are not helpful. Anatol Cryptovest – Author
Answered Dec 10 · Featured on HuffPost and Quora’s Twitter
It’s interesting that almost all existing analysis of cryptoassets, including in other answers here, are from the point of view of fundamentals (or lack thereof). It’s often useful to look at things quantitatively instead.
So here, what we really want to understand is the probability of bitcoin reaching $500,000. There are a few ways to do that. First, we can assume a completely random process and take a “gambler’s ruin” perspective. What is the probability that a random process will hit $500,000 before it hits $0? Given that the price as of Dec 2017 is about $15,000, we’d get $15,000/$500,000 = 3%. Another approach is to model price as a lognormal process, which is a reasonable assumption to make for a broad set of assets. See Why do prices and income follow a log-normal distribution? We’d then need to estimate volatility and expected return of bitcoin. Expected return is harder to estimate — we can use the historical return, but that’s a pretty biased estimate. For example, if you pick a stock that performed the best out of the S&P 500 in the last 5 years, would you expect that stock to have the same expected return going forward? Mostly likely not. Same with bitcoin — unless you already made a prediction of its expected return before the really high realized return we see now, your Bayesian prior should be lower. With that said, the general methodology of how to estimate distribution with a lognormal process for asset price is described here: John Young’s answer to What is the bitcoin price prediction for 2019? Based on this, depending on how liberal you are about estimating expected return, you’d be looking at a probability in the 1–10% range of reaching $500,000 in the next year. Further methods would involve looking at option prices. Right now, there’s not a particularly liquid market for options yet, but with bitcoin futures opening today, that may change soon. With option prices, you’d actually be able to trade a call option with $500,000 strike, and the price of this option would roughly be proportional to the probability of reaching that level by a certain maturity date. So — to summarize, we are probably looking at a range of 1–10% probability of reaching $500,000 in the next year, depending on how you model it. Beyond that, it’s harder to know, with changes happening to the market like introduction of futures, but eventually there may be a liquid market for making such predictions through options.
Answered December 14th, 2017
This can be a fun exercise for Statisticians to predict Bitcoin exchange rate. Lot of Off the Shelf probability distributions can be tested to fit the data such as Student t , Laplacian ,Inverse Gaussian , Generalized hyperbolic distributions and other heavy tail and Skewed distributions. This paper does exactly that Statistical Analysis of the Exchange Rate of Bitcoin
Key highlights – Generalized hyperbolic distribution fits the best and finally we can predict the exchange rate based on derived probability distribution of future dates combined. To highlight further it says, in particular, the exchange rate in about six years from the 13th of September 2011 could exceed 10172920 with 1 percent chance and could be less than 13.36 with 1 percent chance. Also, the exchange rate in about nine years from the 13th of September 2011 could exceed 4637660718 with 1 percent chance and could be less than 146.519 with 1 percent chance.
These estimates can further be improved by generating resamples using block bootstrap. It can definitely reach 50,000 but it can also lead to lot lower value as well. As this is high risk and high return investment. P.S. – I will calculate P(∑xi∑xi >ln(50000/33)ln(50000/33)) for n = 2000, 3000 and 5000. 33 – Exchange rate of Bitcoin on 13 Sep 2011.
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