What do institutional investors rely on when trying to predict the price of Bitcoin?

Goldman Sachs has stated that Bitcoin could reach $100,000 in the coming years but needs to take market share away from gold for this to happen. Bloomberg agrees with this assessment as they believe that Bitcoin has distanced itself from many speculative crypto assets.

JPMorgan, in 2021, made a forecast of about $146,000 for Bitcoin. Their model also assumes that the asset’s capitalisation will come from gold.

In these assessments, gold and Bitcoin act as a Store of Value market. The total capitalisation of this market is now about $3.5 trillion. Notably, $2.7 trillion private investments in gold (bars, coins, ETFs) and $800 billion Bitcoin capitalisation make up this number.

In Goldman’s and Bloomberg’s expert models, Bitcoin will increase its share in the aggregate market up to 50% in the future. With an approximate supply of Bitcoin of 20 million units and a projected value of $100,000, the Bitcoin market’s capitalisation will be $2 trillion. So if Bitcoin takes 50% of the Store of Value market, then the share of gold will also be about $2 trillion. This model implies that at least a quarter of the capitalisation of gold will flow into Bitcoin.

JPMorgan’s forecast suggests that the capitalisation of Bitcoin should be equal to the current one of gold ($2.7 trillion). For Bitcoin to take the place of the precious metal in the aggregate market, the gold cap must fall to the current capitalisation of Bitcoin, or about $800 billion. Is it possible?

It is unlikely in both cases considered, as there is no inverse correlation between the prices of these two assets.

Is Gold a Real Guideline?

The main question is why we consider gold as a guideline. In addition to gold, currencies of developed countries, stocks, bonds, land, and real estate can also act as a store of value. 

If we assume that funds from other value storage areas will come to Bitcoin, the gold peg does not make sense. Relying on the capitalisation of gold as the ultimate goal for Bitcoin seems more like another milestone of the digital currency.

However, JPMorgan adjusted the forecast to $38,000 in January. The company representatives said that Bitcoin would have troubles competing with gold as a hedging asset due to the high volatility. 

According to the current assessment, Bitcoin will gain a foothold at a volatility level of about x4 relative to the volatility of gold. Thus, JPMorgan believes that the fair price will be 1/4 of the target price of $146,000, i.e. $38,000. However, there is no previous data that the price of Bitcoin is somehow related to its volatility vs gold.

In mid-2017, Goldman Sachs predicted a rise to $4,800 with a further fall to $2,200. The fall did not happen, and the price of Bitcoin set a new record of almost $20,000.

In turn, at the beginning of 2019, JPMorgan stated that the price of Bitcoin could fall below $1,300. In reality, since then, the price has not dropped below $3,000.

We also remember last year’s forecast by one of Citigroup’s analysts about Bitcoin price reaching $318,000 by December 2021. He drew an analogy with the gold market of the 70s based on technical analysis. Later it turned out that these were not his first bullish predictions.

Personal Forecasts

Behind each forecast, there are specific people and not just analytical departments. Let’s look at previous and current expert forecasts to understand who to trust.

Peter Brandt

One of the most famous Bitcoin price predictors is Peter Brandt. This seasoned trader has gone from being a crypto sceptic to someone who believes that Bitcoin, not the dollar, should be portfolio’s unit of measure. He correctly predicted the 80% price correction for Bitcoin in 2018 from $20,000 to less than $4,000. 

Then in April 2019, he announced a rise to $50,000 within two years. His current forecast is $100,000. He also pointed to a price of $200,000 at the beginning of 2021, but later changed his mind. His assumptions are based on technical analysis; any fundamental event, like a leap or a sharp crypto ban can ruin these calculations.

Peter Schiff

Peter Schiff is another well-known person in the field of forecasts who came to prominence after predicting the 2008 crisis. However, he was not precise about the reasons. His $0 forecast for Bitcoin remains unchanged. Recently, he revealed another forecast where he expects Bticoin to fall below $30,000, then below $10,000, and further to $0. 

However, analysing his predictions over recent years clarifies that almost all of them are negative and have not yet come true. Apparently, Peter Schiff would be happy to return to the unrealistic gold standard, and most experts compare him to a stopped clock showing the correct time twice a day.

Ray Dalio

The creator of one of the largest hedge funds Bridgewater Associates, Ray Dalio also draws parallels between the gold and Bitcoin markets. He considers the current ratio between the capitalisation of gold (excluding jewellery) of $5 trillion and about $1 trillion capitalisation of Bitcoin to be fair in the future. Thus, with an offer of 20 million Bitcoins, the fair price is approximately $50,000.

We have deliberately avoided the opinions of members of the crypto community, as their professional activities, financial interests, or ideological preferences may affect the forecasts. 

Stock-to-Flow Price Model

One of the most famous non-institutional models is the Stock-to-Flow model, and it is also gold-related. After all, the mathematical model of Bitcoin was born from the analogy with gold and the coin is also scarce, and difficult to extract resource.

The Stock-to-Flow model considers the relationship between the current stock of a resource and its production level. The higher this ratio, the greater the value. 

For example, the current gold reserves are 190,000 tons, and the annual production is about 3,000 tons. On this basis, the Stock-to-Flow ratio is about 63. For silver, the same proportion is about 22. These are examples of high ratios. 

If the supply flow is high and many providers can deliver the resource, then its value in the market decreases. For example, crude oil has an S2F of ~0.25. According to the theory, resources with a ratio <1 are not scarce and their value is determined only by the utilitarian use. One of the main limitations of this model is based on the fact that Bitcoin has no practical use but it is used only as a store of value.

The S2F of Bitcoin is constantly changing due to the regular complication of mining. The block reward reduction, halving, occurs every 210,000 blocks mined or approximately every four years. After halving in May 2020, the S2F of Bitcoin rose from 25 to 50.

The creator of the S2F model is a user with the nickname PlanB. He was the first to describe the pattern and prove the dependence of the Bitcoin price on halving events.

To date, the S2F chart has been able to match the price movement of the first cryptocurrency quite accurately. However, according to its forecast, the current estimate of the cost is about $100,000. At the time of writing, the actual price is less than the estimated one by about 60%. 

Nevertheless, the model can’t determine the price at each moment unambiguously; it only reflects the general pattern. The creator claims that the price of $100,000 can be expected only in 2023. And in 2027, one may hope for $1,000,000.

There are also other limitations, similar to previous estimation methods. First, it does not consider unexpected external events that can significantly affect the price, like influencer tweets or vault hacks. Secondly, it does not take into account the impact of other emerging cryptocurrencies that can take away bitcoin’s market share.

Who’s Right

Predictions are called predictions for a reason, and only time can tell who was right after all. Mathematical models attempt to reflect the state of the real world, and each of them has limitations. They also operate either under certain conditions or in a certain period.

Currently, large companies tend to avoid forecasts based on technical analysis and operate more globally, comparing the Bitcoin and gold markets.

While these two assets have a lot in common, they are also fundamentally different. At the moment, Bitcoin as an asset combines the properties of both gold and stocks. Therefore, the competition model between gold and BTC for one market share is not the best concept.

The Stock-to-Flow model looks viable, but it will take a few years to say for sure.