Cryptocurrency enthusiasts cheered when bitcoin broke the $10,000 in November. Now one of the Street’s biggest bitcoin bulls has a long-term price target 1,000 times that number.
Thomas J. Lee, managing partner and head of research at Fundstrat Global Advisors, argues that bitcoin be priced at $10 million, albeit a decade or two from now. The former JPMorgan U.S. chief equity strategist made his case as the keynote speaker at the “Cryptocurrencies: Money of the Future?” conference put on by CFA Society New York on Tuesday evening.
And Lee holds that it will all be thanks to Millennials.
Since 1960, housing starts have coincided with generations hitting the age range of 25 to 45 years old, Lee maintains. But this new crop may have other ideas about where they put their money.
Lee notes that the 2016 rally in bitcoin began as Millennials started reaching their peak income years. That generation has a fondness for bitcoin; a recent survey conducted by Harris Poll showed nearly a third of Millennials prefer investing in bitcoin over stocks or bonds. They are also skeptical of financial institutions, Lee says, citing a Facebook showing 92 percent of the generation doesn’t trust banks (check out a pdf of the study here).
“At the end of the day, the easiest explanation of why crypto is going to turbocharge the next 10-20 years is that Millennials are comfortable with digital businesses,” Lee told the audience of financial analysts. “Trust is important and I think a decentralized digital currency is a great way to express trust.”
Lee then posted a chart (which we would have posted here but the photo came out blurry and, besides, we didn’t get rights to it) titled “Millennials LOVE Bitcoin and Blockchain” showing a logarithmic chart of bitcoin against the number of generations in their prime earning years. Lee projects a $10 million point by the middle of the 2030s, multiples of his previously stated long-term target of $100,000 just two months ago.
“Bitcoin could be a $10 million token before Millennials start to retire,” he enthused. “And they’re all going to retire because they can buy planets with all that money.”
Putting it mildly, that’s quite a lot to project on an asset that literally didn’t exist a decade ago and is backed by electrons.
The lack of tangible assets backing bitcoin doesn’t bother Lee, who notes that 77 percent of the S&P 500’s valuation is based on intangible assets. That number rises to 91 percent when looking at the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix, and Alphabet).
For the short term, Lee’s claims that just two variables—the total number of bitcoin accounts (standing as a proxy for total users) and the average transaction per account—explain 93 percent of the cryptocurrency’s price movement since 2013.
“It’s just risen because more people are creating wallets and using it,” he said.
“If you look at unique addresses, it almost tripled from August to December,” Lee added. “But if it goes up another 50 percent—that’s our projection—and if value per wallet rises another 10 percent, that gets you to roughly $18,000 by the middle of the year. So I think bitcoin from today is roughly a double.”
However, we should say that a lot of those accounts and transactions came about because of a surge in trading, not folks using bitcoins to buy a loaf of bread and a box of cigarettes at a local bodega.
Lee reiterates his price target of $25,000 bitcoin in the near-term based on the currency’s history over the last few years. Its declining periods average about 24 days, he calculated, with each decline amounting to a 60 to 70 percent retracement of its previous advances.
Bitcoin’s precipitous fall on Tuesday means it’s a bargain, according to Lee. “We’re very close to a bottom,” he told the CFA New York meeting. “But then the average rally is a 150 percent move over the next three months from that level. So again, if we were to think about that today, that would imply bitcoin would be close to $25,000 by the spring. So I think you want to be buying this pullback all day.”
Digital currencies will also change how companies raise capital, Lee contends. He even maintains that if Facebook had gone public today, it would have been as an initial coin offering (ICO) rather than an initial public offering as it did in 2014.
“Facebook is a network. They don’t charge their customers to use the Facebook service but you’re giving them all your private data. And that sharing of your digital information has created a vast amount of wealth for the equity holders of Facebook. So it’s inequitable that the guys who actually built the network got no reward but the guys who put in the seed money, just tiny amounts of seed money made all the money. So the idea is that a token today would be a way to reward user engagement but also allow the capital structure to benefit. So I think tokens really bridge that idea of customer loyalty with capital structure. And, again, it’s not that different from frequent flyer miles that can be monetized.”
As this was a meeting of analysts, Lee appears to have been compelled to throw in classic portfolio analysis. Bitcoin shows almost no correlation to stocks, and hedge funds and a negative correlation to gold, which he attributes to bitcoin taking away market share from bullion (more on that another day).
His analysis shows that a traditional U.S. portfolio of 60 percent equities and 40 percent bonds would deliver a 3-year annualized return of 6.5 percent with a volatility of 7 percent and a maximum cash drawdown of 8 percent. Swapping out just two percent of the equity for bitcoin would boost average returns by 250 basis points (2.5 percentage points) while lowering volatility and the maximum cash drawdown. For basic financial theory, that makes it a superior portfolio.
“Even if you don’t believe in crypto, because of its low correlation to other asset classes, it really shouldn’t matter what you believe,” said Lee. “This is liquid enough to diversify your portfolio.”
A fair point that’s hard for old school money managers to dispute so long as investors remember to keep their cryptocurrency asset levels at 2 percent and not, say, 200 percent.
“Bitcoin is establishing a new way to look at capital structure and businesses,” Lee concluded, but then strayed into the realm of this-time-it’s-different thinking that could make advocates of financial prudence wince. “Valuation models have evolved. Even if your professor says cash flow is king, how do you explain IPOs of negative cash flow businesses? And if you think bonds should always have positive rates, how do we explain negative interest rates and the fact that there’s $20 trillion worth of it? Eighty percent of bonds in Germany have negative rates. So it’s important to be open-minded.”
Open-minded, indeed, but one hopes not empty-headed.
Disclosure: The author is the spouse of a Facebook employee and owns shares in the company.
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July 25, 2018
