FundStrat Global Advisor co-founder Tom Lee turned heads when he first predicted that the bitcoin price could reach $25,000 by 2022, but he has maintained this bullish stance even amid the severe downturn that immediately followed China’s ban on initial coin offerings and bitcoin exchanges.
In the first episode of Business Insider’s web segment “the bit”, Lee explained his methodology in arriving at the $25,000 number — which he says is a conservative estimate. He revealed that FundStrat values bitcoin similarly to how it would value a social network — using a principle known as Metcalfe’s law. He says that, according to Metcalfe’s law, the value of a network is the square number of its users:
“And so if you build a very simple model valuing bitcoin as the square function number of users times the average transaction value. 94% of the bitcoin moved over the past four years is explained by that equation,” Lee explains.
He adds that, in the digital age, “personal information is our gold”, and because bitcoin is essentially a database with an unprecedented level of security, it is digital gold. He uses this comparison quite literally; he expects that younger investors who have never known a world without the internet will increasingly use bitcoin as a store of value in place of precious metals, as their parents and grandparents did:
“And if personal information is our gold, bitcoin is our digital gold. So we think that the gold market, which is 9 trillion, and for a generation of investors gold was their store of value. I think this next generation of young people view bitcoin as their store of value.”
He estimates that if bitcoin captures 5% of the gold market, it should achieve a fair market value of $25,000. “It’s actually the most conservative collection of elements to get to [that number],” he asserts, as it ignores inflation and assumes that investors will hold a smaller percentage of alternative currencies in their blended portfolios than most cryptocurrency investors currently do.
“You could easily get to $100,000, $200,00 numbers,” he adds, stating elsewhere that, “I think you can easily see a liquidity-based move in bitcoin that’s much beyond our target prices” if institutional investors enter the crypto markets.
Indeed, hedge fund manager Mark Yusko — relying on similar analysis to that of Lee — believes there is a 75% chance that the bitcoin price will reach $500,000 within two decades and states that it could rise as high as $1 million.
For the short-term, meanwhile, Lee has set a mid-2018 bitcoin price target of $6,000 — a forecast that initially appeared optimistic but increasingly appears quite conservative.