For those lucky enough to have bought Bitcoin in March: congratulations! With Bitcoin prices hovering around $20,000, you lucky souls have seen almost a 300% return in just nine socially distanced months.
But does that mean it’s too late for everyone else to jump into Bitcoin? Well, it depends.
Here’s the exciting thing about Bitcoin. The cryptocurrency could easily reach $30,000 in 2021. In fact, bitcoin options traders are already anticipating $32,000.
But several things must happen first. And it has a lot less to do with Bitcoin adoption and a lot more to do with investor risk-taking.
Here’s what history tells us it would take for Bitcoin prices to hit $30,000.
1. Bitcoin Price in 2021: The Stock Market
Many first-time buyers assume Bitcoin trades as a “store of value,” much like gold or bonds. After all, the cryptocurrency shares many characteristics with more traditional fiat currencies.
But ask any experienced Bitcoin trader, and they’ll immediately tell you that Bitcoin acts the complete opposite. Instead, BTC is a “risk-on” asset: its prices tend to go up when investors want to take more risk and down when they’re heading for safety. Witness the massive run-up in Bitcoin just as U.S. stocks were reaching their all-time high.
And financial data backs the anecdotal evidence. Since 2015, Bitcoin prices have shown a 24% correlation with the S&P 500 index. That’s far higher than its 3.3% correlation with gold and 15% with bonds.
The relationship should remain strong through 2021 — Bitcoin investors still tend towards more aggressive capital gains over conservative growth. That means, for Bitcoin to reach $30,000 in 2021, we’ll probably also see S&P P/E multiples (a measure of stock market price) expand from 33.0 times today to perhaps 40.0x.
2. Economic Stimulus
So, what would drive the S&P 500 to a 40.0x multiple, or around 4,100? It would take a lot of economic stimulus by the U.S. government. Now, that might seem surprising to some. Bitcoin is an international currency, so why should U.S. congressional actions affect its value?
And what’s causing such a stir on Wall Street right now? A potentially massive stimulus bill by the incoming Biden administration. Even with a split government, deal-making between Mr. Biden and current Senate leader Mitch McConnell could lead to a $2.4 trillion stimulus package, or even larger.
That would give the U.S. economy a much-needed shot-in-the-arm and raise stock values (and Bitcoin) even further. Further dithering on Capitol Hill, on the other hand, will likely send the U.S. economy into a tailspin. That would wipe out stock market gains, causing regular stock investors to yank money out of Bitcoin and other risky assets. Bitcoin prices would subsequently plummet.
That means, for Bitcoin prices to hit $30,000 in 2021, Congress needs to pass stimulus large enough for the U.S. economy to keep humming.
3. Bitcoin Catches Mainstream Attention
There’s a final “secret sauce” that investors need to power Bitcoin to $30,000. And it has little to do with technical analysis or day-trading (at least, not directly). Instead, Bitcoin will have to catch the public’s imagination, much as it did in its massive run-up in 2018.
Older investors might remember the collectible coin craze of the late 1980s. Index prices skyrocketed tenfold from $18,000 to $180,000 from 1979 to 1989 as investors bid up prices for three-cent nickels, Morgan silver dollars and other rarities. A similar phenomenon happened with fine wines in 2009-2010 as wealthy Chinese and an up-and-coming middle class snapped up Bordeaux fine wines faster than auctioneers could find them.
In both cases, these bouts of “mania” were fueled by the public opening its eyes to a once-rarified asset class. And while prices of collectible coins and fine wines eventually collapsed after running up too far, a similar pattern is starting to emerge in Bitcoin.
When Cash App, Square’s (NYSE:SQ) popular mobile payment service, launched a Bitcoin integration in 2018, it made the currency that much more accessible to millions of potential investors. Now that PayPal (NASDAQ:PYPL) is looking to launch its own in-house Bitcoin services in early 2021, that would open the cryptocurrency to even more users.
For Bitcoin to reach $30,000 in 2021, a similar “mania” will have to happen as with coins, wines, tech stocks and Florida real estate. When your next-door neighbor (or an aging parent) starts buying Bitcoin, you’ll know that the cryptocurrency’s time has come.
Bitcoin Price in 2021: Should You Buy Today?
Bitcoin is an inherently risk-on asset. It’s traditionally provided little downside protection when stocks have slumped (as it did in March 2020), but it’s also offered super-normal returns when times are good.
And luckily for Bitcoin investors, 2021 is shaping up as a return to “good times.” Human ingenuity has come together to create multiple coronavirus vaccines, and countless acts of selflessness should get most of the world protected by the end of the year. Despite almost 1.5 million dead worldwide from this terrible virus, the world economy looks set to recover eventually.
But if the U.S. and world economy starts to sputter, don’t look to Bitcoin to protect your wealth. For all the candlestick charts and lines the technicians produce, none of it will matter. Like it or not, Bitcoin prices and the world economy are joined at the hip.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.