In late 2020, bitcoin made headlines for surpassing the US$20,000 mark. Now, investment bank JPMorgan is betting it could reach as high as US$146,000 (AU$188,000), if it establishes itself as a safe-haven asset.
Currently, one bitcoin is worth around US$33,945 (AU$43,735) – that’s higher than its previous peak of US$19,783 in December 2017.
In a note to investors published on Tuesday, JPMorgan said the cryptocurrency could rally as high as US$146,000 in order to compete with gold, the traditional safe-haven asset.
But there are a few factors at play.
Bitcoin’s market cap currently stands at around US$575 billion; that’s the price of one bitcoin multiplied by the total number of coins in circulation.
In order for bitcoin to reach US$146,000, JPMorgan said the market cap would need to increase 4.6 times to match the US$2.7 trillion gold sector.
"Bitcoin's competition with gold has already started in our mind,” market strategists wrote in the note. They cited millennials as a big driver of the US$7 billion outflows from gold and US$3 billion inflows into the Grayscale Bitcoin Trust.
But seeing an outflow from gold and into bitcoin implies “a big upside for bitcoin”, something that will depend on the volatility of bitcoin converging to that of gold over the long term.
“The reason is that, for most institutional investors, the volatility of each class matters in terms of portfolio risk management and the higher the volatility of an asset class, the higher the risk capital consumed by this asset class.”
But it won’t happen quickly.
“A convergence in volatilities between bitcoin and gold is unlikely to happen quickly and is in our mind a multi-year process.
“This implies that the above $146,000 theoretical bitcoin price target should be considered as a long-term target, and thus an unsustainable price target for this year.”
In the last month alone, bitcoin has surged from US$18,803 to US$34,048, an increase of 55 per cent.
Why is bitcoin similar to gold?
Experts have dubbed bitcoin “digital gold” because it can’t be created; it needs to be ‘mined’, or unlocked.
So far, around 18.5 million bitcoin have been mined, which leaves less than three million left to be introduced into circulation. In other words, the supply is limited, and unlike gold, it won’t be replenished.
“We talk about crypto, especially bitcoin, as being the ultimate hedge in the long run,” managing director of bitcoin exchange Kraken, Jonathon Miller, told Yahoo Finance.
“There will only ever be 21 million bitcoins, so there will always be a limited supply. And the internet isn’t going anywhere. So, as far as digital money goes, and a native currency to the internet, it’s very hard to argue that bitcoin and other cryptocurrencies are going to go away.”
Like gold, it’s also an uncorrelated asset, which means when you have times of uncertainty and volatility, bitcoin is unlikely to be affected.
What are the risks of investing in bitcoin?
Bitcoin is known for being high risk, and there’s a reason for that.
“It’s a speculative market, so people often come out and make statements about what bitcoin can do in the future, and that creates a lot of volatility,” Miller said.
It’s also important to remember that when you’re dealing with bitcoin, everything is online, which means security is still a huge risk.
He added that dealing with a very secure provider is key, and doing your own research or speaking to a financial adviser about your investment is first is always a good idea.