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JP Morgan Says Bitcoin Could Reach $150k – If Volatility Drops

If Bitcoin became as big as gold, it would be worth $150,000, JP Morgan suggests. But not before its volatility becomes equal to that of gold.

Analysts at the investment bank JP Morgan upped their theoretical value of Bitcoin based on comparison with gold.

Namely, if Bitcoin’s market cap reached that of all privately-held investment gold, BTC would be at $151,000. The estimate is up from the last month’s $146,000.

However, with Bitcoin’s volatility taken into account, the numbers look a lot less favorable. As Bitcoin is roughly four times as volatile as gold, they calculated its “fair value” at $38,000. That is 12% below the current price of $43,400.

However, if the volatility differential narrowed to three times as much as gold, Bitcoin’s fair value would rise to $50,000.

JP Morgan analysts think that the volatility needs to drop substantially before institutional investors would be willing to bet on it.

The biggest challenge for Bitcoin going forward is its volatility and the boom and bust cycles that hinder further institutional adoption.

Valuing Bitcoin vs Gold

The gold parity formula is among the most popular ways traditional institutions value Bitcoin. Since BTC competes with gold as a hedge against inflation, it would make sense

JP Morgan explained its model of pricing Bitcoin back in January when its long-term target was $146,000.

This long-term upside based on an equalization of the market cap of Bitcoin to that of gold for investment purposes is conditional on the volatility of Bitcoin converging to that of gold over the long term.

They also explained why volatility matters to investors.

The reason is that, for most institutional investors, the volatility of each class matters in terms of portfolio risk management and the higher the volatility of an asset class, the higher the risk capital consumed by this asset class.

That means that Bitcoin’s volatility makes it much less attractive to institutional investors. Still, some predict that increased adoption and market value will eventually lead to a decrease in the volatility of Bitcoin.

This is unlikely to happen quickly, JP Morgan said.

A convergence in volatilities between bitcoin and gold is unlikely to happen quickly and is in our mind a multi-year process. This implies that the above $146k theoretical bitcoin price target should be considered as a long-term target, and thus an unsustainable price target for this year.

BTC vs Gold

However, the theoretical value at $151,000 does not mean that Bitcoin won’t go higher. Bitcoin could reach that price long before it reaches parity with investment gold, simply due to money printing.

As the model relies on the total value of investment gold, any change in the price of gold affects it. In turn, gold’s price is affected by the long-term growth of the money supply.

This means that, as long as the Federal Reserve continues to expand the money supply, JP Morgan will have to up its long-term target for Bitcoin.

Issues with the Model

Still, there are issues with the comparison, some in favor of Bitcoin and others not so. Firstly, Bitcoin some investors point out that Bitcoin has several monetary advantages over precious metal.

Firstly, gold’s supply is not fixed. Miners extract gold from the ground every day, which causes inflation. Gold investors call this inflation rate stock to flow (S2F) and it’s currently at 60. That means it will take 60 years to produce the current supply of gold.

Bitcoin’s stock to flow is currently at 25, lower than that of gold. However, that number will rapidly increase, as Bitcoin’s mining rewards halve every 4 years.

On the other hand, many investors still consider Bitcoin to be a speculative asset. Its potential demand is huge, but it depends on huge investments in tech that is not yet in operation.

Companies like Jack Dorsey’s Block are currently working on that tech, including the Lightning Network Developer Tools.

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In fact, the correlation between Bitcoin and tech stocks increased since the Fed turned hawkish on inflation. Higher interest rates, the ultimate instrument of hawkish monetary policy, hurt risk assets like tech.

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