RESEARCH NOTE 18 December 2023
Bitcoin Will Surpass Fiat Banknotes Within Ten Years Executive Summary
Bitcoin’s size in USD will surpass that of global banknotes in the foreseeable future. Bitcoin is anticipated to grow to a market capitalization equivalent to that of global banknotes, estimated at around $8 trillion. This projection is based on its current adoption curve and associated price trends.
Bitcoin to overtake gold. The value of gold, currently at about $13 trillion, is expected to increase in the next two decades. Bitcoin, following its adoption trend, is projected to surpass this value by 2038, potentially reaching a market cap of $50 trillion, which would equate to approximately $4 million per Bitcoin.
The fastest growing asset. Bitcoin is probably the fastest-growing asset on the market, with adoption at about 20% per year and network effects adding an additional 20% per year, Bitcoin continues to surpass the growth rates of fiat, gold, equities, debt, and real estate.
A Tiny Asset When comparing the market size of Bitcoin to other asset classes, it becomes evident that Bitcoin is miniscule. With a market capitalization of only 0.570 trillion dollars, Bitcoin's economic footprint is significantly dwarfed by more traditional asset classes. Banknotes alone, representing physical currency, have a market size of 8 trillion dollars, which is more than 14 times the size of Bitcoin. This gap widens further when Bitcoin is compared to other major asset classes like global private equity at 11.7 trillion dollars, and commodities, which stand at a colossal 43 trillion dollars. These figures highlight Bitcoin's nascent state in the global financial ecosystem. Further emphasizing Bitcoin's diminutive scale, central bank assets amount to 70 trillion dollars, a value that
underscores the vastness of government-supported financial instruments. Even more striking is the comparison with global public equity and M2 (a measure of the money supply that includes cash, checking deposits, and easily convertible near money) which are valued at 94 trillion and 131.5 trillion dollars respectively. Global debt towers at 300 trillion dollars, global real estate is valued at 326 trillion dollars, and notional derivatives top the chart at 715 trillion dollars. A hiccup in any one of these asset classes dwarfs the entire Bitcoin footprint by several orders of magnitude.
Declining Bitcoin Supply Bitcoin’s market capitalization (better termed “reserves” like gold, since Bitcoin does not capitalize anything), is much smaller than typically reported by the press and popular websites. The concept of Bitcoin's market capitalization is often based on the issued supply of coins, currently about 19.57 million, which is misleading due to the actual number of bitcoins that are available and circulating. This discrepancy arises from the fact that a significant portion of Bitcoin is irretrievably lost each year. Such lost Bitcoin are permanently removed from the supply and consequently, Bitcoin’s unit price is slightly higher as a result. "Lost coins only make everyone else's coins worth slightly more. Think of it as a donation to everyone."
—Satoshi Nakamoto
Research suggests that about 4% of Bitcoin's supply is lost annually. It is estimated that the true number of Bitcoins currently in circulation is 13.2 million. That number declines by about 500 Bitcoin per day as the rate of loss now exceeds the rate of production. The decline in Bitcoin's available supply is a critical factor that traditional market cap calculations fail to account for.
18 December 2023
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Bitcoin Will Surpass Fiat Banknotes Within Ten Years
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18 December 2023
Fastest Growing Asset Class
FIGURE 2 Bitcoin and Banknotes Trillions
The "Lowest Price Forward" (LPF) for Bitcoin represents a unique approach to understanding its price history, emphasizing the trend where once Bitcoin reaches a certain price level, it never falls back to that level again. This method tracks the lowest price of Bitcoin from a given date onward, and as time progresses, this lowest price increases, indicating a trend of continual growth. This pattern isn't a predictive model but rather a historical record of Bitcoin's price behavior, which has consistently shown an upward trajectory over the years (Figure 1).
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Bitcoin’s Price Trend, Lower Bound 100,000 10,000
That is not to say that Bitcoin will replace banknotes, just that it will be of equal size (when converted to US dollars). Bitcoin can potentially reach a value equivalent to the total value of global banknotes without displacing them as a medium of exchange due to several factors:
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1. Different Use Cases: Bitcoin and banknotes serve different purposes and use cases. While banknotes are widely used for daily transactions, Bitcoin is increasingly viewed as a digital store of value, similar to gold. It can be seen as a hedge against inflation or a speculative investment rather than a direct substitute for cash transactions.
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The sustained trend in Bitcoin's LPF is closely tied to its adoption rate. As more people have embraced Bitcoin, its foundational user network—including active addresses, hash rates, transaction counts, nodes, and miners—has expanded, solidifying its value via network effects. The current trend indicates that, conservatively, Bitcoin will continue to grow at about 43% per year.
2. Market Capitalization vs. Velocity: The value of Bitcoin is often discussed in terms of market capitalization, which is the total value of all Bitcoin in existence at the current price. This does not necessarily reflect the amount of Bitcoin actually being used for transactions. Banknotes, on the other hand, have a high velocity of circulation; they are constantly being exchanged for goods and services. Bitcoin's market cap can match or exceed that of global banknotes even if it isn't used as frequently in day-to-day transactions.
Banknotes The first rung on the asset class ladder for Bitcoin to surpass is not gold, it is banknotes. Based on the adoption curve trend in Bitcoin, and its associated price and capitalization, Bitcoin will be as large as the banknote segment by 2032 (Figure 2).
Bitcoin Will Surpass Fiat Banknotes Within Ten Years
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18 December 2023 3. Investment and Speculation: A significant portion of Bitcoin's value comes from its appeal as an investment vehicle. Many people buy and hold Bitcoin, speculating on its future value, rather than using it as a currency. This investment demand can drive up the market cap without Bitcoin needing to replace traditional currency for everyday transactions.
can realistically be valued at 45 trillion dollars (Figure 3). FIGURE 3
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4. Parallel Systems: The financial ecosystem is diverse and capable of supporting multiple forms of value storage and transfer mechanisms simultaneously. Just as gold exists alongside fiat currencies without displacing them, Bitcoin can also coexist with banknotes. They can complement each other, with Bitcoin serving as a digital alternative for some financial activities while banknotes continue to facilitate others.
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5. Digital and Global Nature: Bitcoin's digital nature allows it to have a global reach without the physical limitations of banknotes. Individuals and institutions all over the world can hold significant amounts of value in Bitcoin without it being in physical circulation, thereby contributing to its market cap.
Centoshis and Megasats Bitcoin, assuming it continues its S-curve adoption trend, would be worth 50 trillion by then. This level equates to approximately $4 million per coin. While that number is enormous, consider that it equates to just $0.04 per Satoshi. In all likelihood, whole Bitcoins would be traded institutionally while smaller investors would trade in Satoshis. Consider a denomination called the Centoshi equivalent to 100 Satoshis. A $4 value is comparable to a share of common stock. A Megasat, 1 million Satoshis worth $40,000, is likely another standard denominations that facilitates midsized transactions.
6. Wealth Preservation: In countries with unstable economies or volatile currencies, Bitcoin can serve as a means of wealth preservation. People in such regions may convert their savings into Bitcoin to protect against devaluation, even if they continue to use local currency for everyday purchases. In essence, Bitcoin's value proposition is not necessarily tied to its function as a medium of exchange. Its role as a store of value, investment asset, and technological innovation allows it to accrue value independently of its use as a day-to-day transactional currency.
US Equity It is difficult for Bitcoin to grow beyond the size of gold. This is largely due to limitations associated with global access to electricity and internet, as well as the likelihood that Bitcoin’s saturation point is limited by the size of average global wealth. As a savings asset, Bitcoin adoption requires that people have money to save. Most in the world do not.
Gold Gold has a current global reserve value of about 13 trillion. This value is expected to increase by between 3 – 16% over the next two decades. By 2038, gold
Bitcoin Will Surpass Fiat Banknotes Within Ten Years
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18 December 2023
Bitcoin Will Surpass Fiat Banknotes Within Ten Years
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18 December 2023 We could speculate that, by 2045, Bitcoin’s size could exceed that of the S&P 500. The market cap of all stocks in the S&P 500 would be about $300 trillion. At that size, one Bitcoin would be worth at least $20 million (Figure 4). FIGURE 4
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Summary In summary, this research note provides an informative comparison of Bitcoin's market size with other major asset classes, highlighting its current position and future potential. Despite a relatively small market capitalization of $0.570 trillion, especially when compared to larger markets like banknotes and commodities, Bitcoin shows promising growth prospects. The key points to note are its smaller yet growing market presence, the impact of lost coins on its market capitalization, and the significant potential for growth in the coming decades. This analysis suggests that Bitcoin, while currently a minor player in the global financial landscape, could become a much more significant asset class in the future.
Bitcoin Will Surpass Fiat Banknotes Within Ten Years
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18 December 2023 References
fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other investment product or vehicle. Cane Island Digital Research LLC is not a tax advisor. A tax advisor should be consulted to evaluate the impact of any tax-exempt securities on portfolios and the tax consequences of making any particular investment decision. Inclusion of a security within an index is not a recommendation by Cane Island Digital Research LLC to buy, sell, or hold such security, commodity, or any other asset, nor is it considered to be investment advice. Closing prices for indices are obtained by a third party and have not been verified for accuracy.
Cane Island Digital Research. (2019). “Why Bitcoin’s Price is Never Looking Back.” www.cane-island.digital/s/research-note-412.pdf —. (2020). “Estimating Bitcoin’s Adoption Curve and Maximum Price.” www.cane-island.digital/s/research-note-629212.pdf —. (2020). “There Will Never Be More Than 14 Million Bitcoins.” www.cane-island.digital/s/research-note-417.pdf —. (2021). “Using Metcalfe’s Law to Forecast Digital Asset Returns.” www.cane-island.digital/s/research-note-32221.pdf —. (2023). “Internet Adoption as an Indicator of Bitcoin’s Future Price.” www.caneislandcrypto.com/premium-research Desjardins, Jeff. “All of the World’s Money and Markets in One Visualization (2022).” Visual Capitalist, 5 Dec. 2022, www.visualcapitalist.com/all-of-the-worlds-money-and-marketsin-one-visualization-2022/
These materials have been prepared solely for informational purposes based upon information generally available to the public and from sources believed to be reliable. No content contained in these materials or any part thereof (“Content”) may be modified, reverse-engineered, reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of Cane Island Digital Research LLC. The Content shall not be used for any unlawful or unauthorized purposes. Cane Island Digital Research LLC and its third-party data providers and licensors (collectively “Cane Island Digital Research LLC Parties”) do not guarantee the accuracy, completeness, timeliness or availability of the Content. Cane Island Digital Research LLC Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content. THE CONTENT IS PROVIDED ON AN “AS IS” BASIS. CANE ISLAND DIGITAL RESEARCH LLC PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM ERRORS OR DEFECTS. In no event shall Cane Island Digital Research LLC Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages.
Nakamoto, Satoshi. “Re: Transactions and Scripts: DUP HASH160 ... Equalverify Checksig: BitcoinTalk forum.” Nakamoto Institute, www.satoshi.nakamotoinstitute.org/posts/bitcointalk/126/ 17 June 2010. Peterson, Timothy. "Metcalfe's Law as a Model for Bitcoin's Value." Alternative Investment Analyst Review, vol. 7, no. 2, Q2 2018, pp. 9-18. —, —. 20 March 2019. "Bitcoin Spreads Like a Virus." SSRN, ssrn.com/abstract=3356098 —, —, “When to Own Stocks and When to Own Gold”. The Journal of Wealth Management, Winter 2018, 21 (3) 26-36. https://ssrn.com/abstract=3535152.
Disclosures Bitcoin and digital assets are highly volatile, subject to manipulation, lack of regulatory oversight, and protective legal framework. Its value is largely derived from its acceptance as a store of value and a medium of exchange among those who use it. Consequently, prices may fluctuate widely and unexpectedly, resulting in long and short-term losses. Do not invest more than you can afford to lose.
In addition, Cane Island Digital Research LLC may provide a range of services to, or relating to, many organizations, including issuers of securities, investment advisers, broker-dealers, investment banks, other financial institutions, and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address.
Data provided in this document are indices. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. Cane Island Digital Research LLC does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. Cane Island Digital Research LLC makes no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. Cane Island Digital Research LLC makes no representation regarding the advisability of investing in any such investment
Bitcoin Will Surpass Fiat Banknotes Within Ten Years
Cane Island Digital Research LLC, its owners, clients, and affiliates may have investment exposure to the assets described in this document. Cane Island Digital Research LLC may therefore be biased in its assessment of the factors, methodologies, and valuation results described in this report. There may be other factors, methodologies, and valuation results that could allow one to arrive at different and contrary conclusions to those in this report. We did not make an assessment of the effectiveness, accuracy, or suitability of this or any other set of factors, methodologies, or valuation results.
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18 December 2023 which cannot be and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance.
Charts and graphs are provided for illustrative purposes. Past performance is not necessarily an indication or guarantee of future results. The charts and graphs may reflect hypothetical historical performance. Index information presented herein is back-tested. Back-tested performance is not actual performance but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index(es) was officially launched. However, it should be noted that the historic calculations of an index may change from month to month based on revisions to the underlying data used in the calculation of the index.
The index returns shown do not represent the results of actual trading of investable assets/securities. Cane Island Digital Research LLC maintains the index(es) and calculates the index levels and performance shown or discussed but does not necessarily manage actual assets associated directly with the index. Index prices do not reflect payment of any sales charges or fees an investor may pay to purchase the assets underlying the index(es) or investment funds that are intended to track the performance of the index(es). The index data shown would be reduced by the imposition of these fees and charges and would cause back-tested performance of the securities/fund to be lower than the index data shown.
Prospective application of the methodology used to construct the index(es) as well as revisions to data may not result in performance commensurate with the back-test data shown. The back-test period does not necessarily correspond to the entire available history of the index(es). Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Back-tested data and/or information reflects the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to financial markets in general
Bitcoin Will Surpass Fiat Banknotes Within Ten Years
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