Today's aim is straightforward: I'll assist you in determining if you should purchase Bitcoin, Ethereum, or both. The topic of discussion today is crypto's long-term potential, followed by the war between Bitcoin and Ethereum, and finally, what I'm doing myself.
Crypto's Long Term Potential
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| pic credit: twitter|RareLiquid |
So, as you can see from the picture above, In this data we'll be focusing on Ethereum, Bitcoin, the crypto market, and gold today. As you can see, crypto's market capitalization is still quite small in relation to the entire value of all assets in the world, and these are the statistics that many people cite to argue that crypto still has a lot of opportunities to grow.
The best case for Bitcoin, in my opinion, is the store of value argument. Personally, I don't think Bitcoin will become the money of the future since its fees are too high, and other emerging crypto initiatives are better at filling that need.
Instead, I believe Bitcoin will become widely recognized as digital gold, and this will be our starting point for our research today. Let's look at some numbers.
The gold market was 11.3 trillion dollars in April 2021, while the whole crypto market was 1.8 trillion dollars or 16 percent of the gold market. Bitcoin has lately plummeted and now trades at around $50,000, representing around 51% of the crypto industry with a market valuation of 933 billion dollars at the time of writing this article.
Ethereum is now trading at roughly $2,300 and has a market capitalization of 266 billion dollars, accounting for 14% of the cryptocurrency market. As I previously stated, if we assume bitcoin is digital gold, considering how quickly the crypto market has developed in recent years, I believe it is reasonable to expect the crypto market to grow anywhere from half to double the size of the gold market in the next five to ten years.
So today I'll go over three different scenarios. First, consider a scenario in which the overall crypto market rises to be half the size of the gold market. Second, a base case in which the crypto market reaches the current scale of the gold market, and finally, an optimistic case in which crypto doubles the gold market's size.
Bitcoin vs. Ethereum
Let's talk about the battle between Bitcoin and Ethereum now. Just to set the scene a little bit Ethereum is known for its ability to support smart contracts and give a platform for developers to construct decentralized applications, whereas Bitcoin is more of a store of a value play.
Most people believe that Bitcoin and Ethereum can coexist since they serve fundamentally different use cases. It's like asking if Apple and Tesla can coexist: they're both tech firms, but they serve very different industries and have completely different consumers and products, so it's not really important to ask if they can coexist; rather, it's a question of which one is the better investment.
So I'll go over our three scenarios and illustrate varying returns dependent on the dominance of Bitcoin and Ethereum in the crypto marketplaces.
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| pic credit: coinmarketcap |
As you can see from this graph, Bitcoin's market share has fluctuated between 30 and 70 percent over the last several years, while Ethereum's has ranged from a few percent to 31 percent.
Utilizing these data, I've basically shown Bitcoin's dominance ranging from 30% to 70% of the overall crypto market for each scenario, and Ethereum's dominance ranging from 31% to 5% for each scenario, so we're just using percentages that have been attained in the past to make our projections credible.
The implied market cap for each asset is then calculated by multiplying the dominance percentage by the entire crypto market value and dividing by the available supply to arrive at the implied share price.
We then calculate the overall implied return as well as the five and ten-year annual returns, implying that these are your annual returns if you believe the entire crypto market can expand to the market cap in each scenario at some point within the next five to ten years.
Now, just to warn you ahead of time, I'm going to go over a lot of numbers in this next portion of the article, which will be a little dry, but it will set the stage for what I personally plan to accomplish, so please keep reading.
Starting off with our conservative case if we believe that the crypto market can become half of gold's current market cap, which is a three times jump from where we are today, then we see that Bitcoin's total implied return goes from 82% to 324%, which implies a 13% to 33% annual return in five years or a 6% to 16% annual return in 10 years.
For Ethereum, the total implied return is 6% to 558% and this range is huge because Ethereum is trading at a much smaller base right now, and currently is only 14% of the market while Bitcoin is already at fifty percent This gets us to a 1 percent to 46 percent five-year annual return, and a 1 percent to 21 percent ten-year annual return.
Let's next move on to the base case. If we believe that the crypto market can grow to as large as gold's current market cap in the next five-ten years, which is a six times jump from today's crypto market cap, then we see that Bitcoin's total implied return goes from 263% to 747% and this implies a 29% to 53% five-year annual return versus a 14% to 24% 10-year annual return.
For Ethereum, the total implied return ranges from 112% percent to 1216% which implies a 16% to 67% five-year annual return and an 8% to 29% 10-year annual return.
Lastly, let's move on to the optimistic case. If we believe that the crypto market can grow two times as large as gold's current market cap in the next five-ten years, which is a 12 times jump from today, then we see that Bitcoin's total implied return goes from 626% to 1,594% and this implies a 49% to 76% five-year annual return and a 22% to 33% 10-year annual return.
Now before you think that these numbers are way too optimistic and crazy, many believe that Bitcoins can surpass gold's market cap and as you can see in this scenario, if Bitcoin maintains its dominance at 50% and grows to 11.3 trillion which is gold's market cap today, then this scenario is within the realm of possibility.
For Ethereum, the total implied return ranges from 325% to 2,532%, which implies a 34% to 92% five-year annual return and a 16% to 39% ten-year annual return.
Okay, if you've made it this far into the article and read everything, you're a hero, and hopefully, you found it interesting to see the insane returns that crypto can provide, which is why I believe that crypto should be a part of almost everyone's portfolio, even if it's only a small percentage point because the potential reward is so great.
So I've shown you a lot of numbers but haven't really gotten into what it all means, which leads to the next section.
Conclusion (What I'm Doing)
I believe the crypto market has a good possibility of catching up to gold's current market worth of $11.3 trillion in the next five to ten years, therefore I'll take that as our base case scenario for our research. If it sounds ridiculous, keep in mind that bitcoin was formed in 2009, so we're only a decade or so into the crypto market, and it's gone from $0 to two trillion dollars in less than a decade.
I really think we're in the early stages of the crypto market and barring any really intense regulation that bans crypto from the major markets or countries in the world. I think that more institutional investors like hedge funds which really have a lot of the big money companies with balance sheets that are really really large and want to invest in something besides just cash like Tesla and Square have already done by investing in bitcoin.
These kinds of things will just increase adoption more and more as time goes on and just think about it as if we're in the early stages of the internet back in the 2000s and of course, there will be some ups and downs with the market, but the point is basically I think we're in the early stages, gold's current market cap today of 11 trillion I think is pretty achievable.
When you look at the data, it's evident that Ethereum has a lot more potential, but it depends a lot on whether Ethereum can improve its technology because fees on Ethereum are currently far too expensive and slow in comparison to other crypto projects. Bitcoin, on the other hand, has a very clear use case as a store of value, and it also has the strongest brand.
But, returning to the facts, I believe that Bitcoin and Ethereum have a strong possibility of falling within the price and market size ranges shown in this table, and, more particularly, that Bitcoin's dominance will range from 40% to 50% over time.
While Ethereum will have domination of 18% to 25%, and because Ethereum has a clearly superior return, if I were to choose a ratio, I would put roughly 75% in Ethereum and 25% in Bitcoin.
Of course, because crypto is so volatile, all of the figures we looked at today will change substantially over time, so when Bitcoin and Ethereum values go up or down a lot, the returns will seem different, but I'll make sure to share updated information and data.
Disclaimer: Please remember I am not a financial advisor so please treat all content as for education and entertainment purposes only.