Tim Draper is a billionaire. He made his money in venture capital, founding Draper Associates in July 1985. He’s also a big believer in cryptocurrencies, making his first investment in 2014 when the bitcoin price was approximately $600.
To say that Draper is bullish about cryptocurrencies and the price of bitcoin would be an understatement. Recently, Draper explained why he thinks the bitcoin price could hit $250,000 by 2022 or 2023 — currently trading around $7,550. If Draper’s correct and it reaches his target by the end of 2023, investors are in for a compound annual growth rate of over 140%.
Not many stocks can claim this kind of return over the past four years.
Is Draper crazy, or crazy smart? Probably a little of both. Here’s why.
Here’s What Has to Happen
In October 2017, I predicted that the bitcoin price would hit $10,000 by Oct. 11, 2018, exactly one year later. At the time, it was trading around $4,400. It hit $10,000 in December 2017, rising to $20,000 before collapsing.
Now, I have to be honest. My prediction was based on the opinions of several people far more informed on the subject. I wouldn’t pretend to have been the “one” to have gotten it right. However, I do think my observations parallel some of Draper’s reasons for the price of bitcoin hitting $250,000.
My rationale for pushing the idea of buying bitcoin had everything to do with the fact it’s a 24/7 investment that can be bought and sold anywhere, anytime. In the world of stock investing, nothing comes close.
“Bitcoin removes those shackles, which are precisely why it has the potential to hit $10,000 or more in short order. There isn’t anything in the world of investing that’s nearly as democratic in my opinion,” I wrote in October 2017.
“Sure, the fear of the unknown makes investment gurus like Howard Marks bristle at the idea of cryptocurrencies having real intrinsic value, but Warren Buffett once had a problem with technology and airline stocks—and now he owns both.”
For the price of bitcoin to take off, it’s got to gain traction with institutional investors and everyday business people. Until then, companies like Visa (NYSE:V) and Mastercard (NYSE:MA) will continue to control the payments industry.
The first thing that has to happen for the Bitcoin price to hit $250,000, according to Draper, is that the rate at which bitcoin miners are rewarded for performing the calculations required to keep the Bitcoin blockchain running — referred to as “halvening” — must fall to 6.25 bitcoin per $100,000 from 12.5.
Draper sees a price of $250,000 approximately six to 12 months after the halvening occurs. The halvening is expected to take place in May. If so, it should hit $250,000 by the middle of 2021, well before the billionaires 2022/2023 prediction.
Are you confused yet? I know I am.
Nonetheless, the premise of a higher bitcoin price has to do with the fact there will be half as much bitcoin available once the reward is halved. The previous two halvings increased the bitcoin price by as much as 10 times.
But that only gets us to $72,000 a bitcoin. To get the rest of the way, two segments of society have to adopt the cryptocurrency: women and business people. Draper said:
I think the flood gates are about to open because it turns out that women do about 75-80 percent of the shopping and only 1 out of 15 Bitcoin wallets is held by a woman. So once women realize they are wasting 2.5-4 percent every time they swipe their credit card they will definitely be starting to look for a better solution.
Draper’s saying that once women en masse realize they’re paying 2.5% to 4% for the privilege of using credit cards instead of cash, they’ll warm to the idea of using bitcoin as a form of currency to save money. It makes sense, although a lot of men could also benefit from this understanding.
Also, on the other side of the transaction, the businessperson who sold the goods will come to realize that the fees they pay to process payments are unnecessarily high.
Once women and business people fully realize the potential benefits of bitcoin, the demand will skyrocket, as will the price. Will it hit $250,000? Your guess is as good as mine.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.