Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
Bitcoin's standing as an asymmetric asset endows enormous growth potential. What's more, the capital needed to support that growth isn't as extensive as some may think. An aggregate 1% institutional allocation may be enough to tip the balance into bitcoin's favor.
But this can't happen without those all-important first movers. In May, Wall Street veteran Paul Tudor Jones made his move. Within a letter to shareholders of his hedge fund Tudor Investment Corp, Jones laid out a compelling argument in favor of bitcoin:
"The best profit-maximizing strategy is to own the fastest horse […]If I am forced to forecast, my bet is it will be Bitcoin."
In his own words, Jones' recommendation came off the back of some of the most "unorthodox economic policies in modern history." Referring, of course, to the unprecedented printing of money worldwide—responsible for pumping US national debt by over $4 trillion in 2020 alone—Jones hits on bitcoin's raison d'être.
Jones later revealed his exposure to bitcoin. In an interview with CNBC, the Wall Street vet alluded to holding 1-2% of his assets in bitcoin.
Bitcoin's Path to a Trillion-Dollar Market Cap
Shortly after Jones' foray into the bitcoin market, Ryan Watkins, an analyst with on-chain analytics firm Messari Research, attempted a thought experiment.
What would it look like if institutional investors followed Jones and allocated a "low single-digit percentage" to bitcoin, the analyst asked?
The answer? According to Watkins, a trillion-dollar market cap.
The analyst bases this assumption on the idea that the aggregate total of global assets under management in endowments, family offices, sovereign wealth, pension and mutual funds amount to over $104 trillion—a figure that appears to sync up with PwC's AUM estimation for 2020.
Watkins submits that due to the sheer breadth of global AUM, a low digit allocation from every branch of institutional investors could usher inflows of over $1 trillion into the bitcoin market.
What this may imply for bitcoin's price point depends on several assumptions.
Research by crypto analyst and venture capitalist Chris Burniske attempts to address dollar inflows and its impact on bitcoin. Burniske indicates that fiat flows into a market can aren't represented by a 1-to-1 move in the underlying asset and can actually end up amplified: a phenomenon aptly dubbed the fiat amplifier.
Per the analysis:
"The fiat amplifier aims to investigate the impact of a net dollar put into crypto, or a net dollar taken out of crypto and how that impacts network values."
While extremely difficult to pinpoint, Burniske estimates bitcoin's fiat amplifier to range anywhere from 2–25x, depending on the conditions of the market and the pressure of inflows.
Using this metric, Messari proposes that an aggregate 1% institutional allocation into bitcoin could bring its market cap well over $1 trillion—approximately $50,000 per BTC. And judging by the upside potential, that's a fairly conservative estimate.
Interestingly, based on several analyses employing indicators such as the Sharpe ratio—a measure of risk-return when adding volatility—as well as modern portfolio theory (MPT), a paradigm dictating that allocating capital between multiple assets can maximize expected returns, optimal bitcoin allocation comes out at around 1-6%, depending on risk appetite. In other words, for institutional investors, even the smallest amount of exposure is a no-brainer.
The Road to a Global Reserve Currency
Bitcoin's market cap upside similarly supports its placement as a global reserve currency. Analysts believe that for bitcoin to become a truly stable currency and thus function as a reserve currency, its market cap would first have to surpass that of gold—currently valued at around $10 trillion. Given that a mere 1% institutional allocation could boost bitcoin's market cap by as much as $1 trillion, this isn't an altogether far-fetched goal.
Former head of Goldman Sachs hedge fund sales and macro analyst Raoul Pal shares this sentiment. Speaking on a recent episode of the Keiser Report, Pal opined that bitcoin could comfortably reach a $10 trillion market capitalization during incoming market cycles—particularly if it becomes the "future of the financial system."
"If it becomes an ecosystem, and we believe it will be, and it will take the whole ecosystem with it as well, then yes, I think a $10 trillion number is easily achievable within that process."
Bitcoin's road to reserve currency status has never been closer to actualization. Amid economic catastrophe, the asset has stood its ground proving its worth as a hedge against macro risk. And soon, with enough capital backing, bitcoin could arguably assume the mantle.
To paraphrase the late analyst and bitcoin financier, Tyler Jenks: at $10 trillion, bitcoin could curb unconstrained debt growth, replace sovereign currencies, and act as the reserve currency of the world incapable of inflation or deflation.