This cryptocurrency could grow by 23,000% in the next 2 decades, according to MicroStrategy’s Michael Saylor

Although Bitcoin (BTC -0.53%) is at the time of writing nearly 25% below its all-time high of $73,750 reached earlier this year, there are plenty of bullish crypto investors who are still convinced that Bitcoin will skyrocket in the long term. Among them is Michael Saylor, founder and executive chairman of MicroStrategy (NASDAQ: MSTR)who recently doubled down on his prediction that a single Bitcoin would be worth $13 million by the year 2045.

At last report, MicroStrategy held 226,500 bitcoins with a market value of about $14 billion. It bills itself as “the world’s largest corporate holder of bitcoin and the world’s first bitcoin development company.” Bloomberg reported last month that Saylor himself owns about $1 billion worth of Bitcoin.

Based on Bitcoin’s recent price of $55,000, a target of $13 million represents an astronomical 23,000% return if you buy today and hold for the next two decades. Obviously, a lot has to happen for that to become a reality. Let’s take a closer look.

Bitcoin’s Long-Term Performance

Yes, seeing a price of $13 million for Bitcoin can induce quite a shock. But if you dig into the numbers, the math starts to make sense. And a lot of that has to do with the compounding power of money. If any asset is allowed to rise in value for a long period of time, the results have the potential to shock.

In the case of Bitcoin, it would take a compound annual growth rate (CAGR) of 30% for the magic to happen and jump from $55,000 now to $13 million in 2045. In other words, if Bitcoin can grow in value at 30% per year over the next 21 years, an initial investment of $55,000 would turn into $13 million.

And while it may be unlikely, a 30% CAGR for Bitcoin is not out of the question. From 2011 to 2021, Bitcoin delivered annual returns of 230% per year. And Bitcoin has returned about 150% in 2023. Already this year, Bitcoin is up more than 30%. In the last five years, the only blemish was 2022, when Bitcoin fell by almost 65%.

So what can investors realistically expect? In an interview this month with CNBC, Saylor predicted that over the next two decades, Bitcoin’s annual return will steadily decline over time, from about 44% a year to 40% to 35% to 30% to 25% to. .. well, you get the point. The ultimate long-term number for Bitcoin, Saylor says, would be the annual return of S&P 500 plus an additional 8% to compensate investors for the additional risk.

At some point, of course, it’s worth thinking about what a $13 million price for Bitcoin really means. Based on the current coin supply in circulation of 20 million, this implies a future market capitalization of $260 trillion. That exceeds the value of any tech stock today, and in fact, exceeds the value of the whole S&P 500which today amounts to about 45 trillion dollars.

Even if we assume that US stocks grow at a rate of 10% per year for the next 20 years, a price of $13 million still implies that Bitcoin would represent an amazing amount of the world’s wealth in the year 2045. For this reason alone, it pays to have a healthy dose of skepticism about the future trajectory of Bitcoin prices.

Bitcoin as an asset class

For much of its history, Bitcoin has been uncorrelated to any major asset class, making it very unique from a risk diversification perspective. Simply put, Bitcoin can falter when other assets fall.

Image source: Getty Images.

Thus, Bitcoin is growing in favor with billionaire hedge fund managers, who increasingly see it as a way to hedge risk. In some cases, this risk may be economic, such as inflation risk. In other cases, this risk could be geopolitical. In the CNBC interview, Saylor uses the example of missile strikes to illustrate this point. What do you do as an investor if you wake up one morning and hear that there have been missile strikes somewhere in the world?

Until recently, the answer to this question might have been: Buy gold. But there is growing popularity in the idea that Bitcoin is “digital gold”. Some investors buy Bitcoin, and not gold, as a hedge against worst-case scenarios occurring around the world. It sounds surprising, but Bitcoin could actually be a safe haven asset.

All this means: the more Bitcoin can solidify its status as a valuable asset class in its own right, the more likely its price will skyrocket over the next two decades. That’s because investors will be willing to allocate more and more of their portfolio to it.

Risk factors

Of course, there are several factors that could derail Bitcoin over the next two decades. For example, if Bitcoin’s annual returns drop significantly over an extended period of time, investors may decide they can get the same kind of return while taking on much less risk by simply buying hot tech stocks.

Or, even worse, the US political and regulatory establishment could turn against Bitcoin. For example, there could be a crackdown on Bitcoin mining given concerns about environmental impact. Or, US regulators could decide to ban Bitcoin altogether, as they have done in China and other countries. At the very least, the government could make things harder for Bitcoin owners simply by making a few quick changes to the US tax code.

That said, I remain bullish on Bitcoin’s long-term prospects. As long as it continues to deliver anywhere near the kind of performance it has over the past decade, investors will likely be very happy with Bitcoin’s valuation 20 years from now, even if it’s nowhere near the astronomically high valuation predicted by Michael Saylor from MicroStrategy.