How the Bitcoin Market Cap Explains a $1 Million Price Prediction

The Bitcoin market cap plays a key role in making sense of Bitcoin value predictions of $10,000, $100,000 and even $1 million.

First, I must point out that, technically speaking, the "Bitcoin market cap" is something of a misnomer. It's what people have come to call the total value of all the bitcoins mined so far multiplied by the current Bitcoin price.

Bitcoin market capThe reason is that it mimics the market cap of a stock. But while the term is not quite accurate, the Bitcoin market cap is a convenient shorthand for describing what all the world's bitcoins are worth at a given point in time.

And it has become a tool for calculating future Bitcoin value.

As of today, the Bitcoin market cap is $3.2 billion. That's 14.22 million bitcoins times $225, the price of Bitcoin on Monday afternoon.

That $3.2 billion total doesn't seem like a lot of money for a technology that's expected to revolutionize the world of finance.

Other global currencies have very high values to facilitate all the transactions that must happen every day to keep the global economy functioning.

For instance, the M2 money supply of the U.S. dollar, the world's reserve currency, is just shy of $12 trillion. For the euro, it's 9.86 trillion euros, or $10.76 trillion.

The $3.2 billion Bitcoin market cap isn't even a lot in the industry of global transactions.

Just look at PayPal, a relatively small player in the transaction industry. It processes $60 billion worth of transactions every quarter. And credit card giant Visa Inc. (NYSE: V) processes $1.2 trillion every quarter.

But don't let these numbers fool you. The Bitcoin market cap will go higher...

The forces that today are driving millions of dollars in venture capital investment in Bitcoin will eventually start to drive the Bitcoin market cap to the levels needed for it to become a global financial tool. Just take a look at what's ahead for Bitcoin prices...

A Bigger Bitcoin Market Cap Means Higher Prices

Many of the lofty Bitcoin price predictions we've seen are based on the idea that the Bitcoin market cap must grow exponentially as use of the digital currency grows.

At its core, it's simple supply and demand. New bitcoins are created at a fixed rate - a rate that slows over time. The last bitcoin will be created in 2140, for a total of 21 million.

As Bitcoin becomes integrated into the financial system - a process already begun by dozens of startups as well as several Wall Street companies - demand will rise. Since the supply is fixed, the only possible response to the rise in demand is a corresponding increase in price.

The Bitcoin market cap will grow to the size required to do all the things people want to do with it. Because it avoids banks and their high fees, Bitcoin figures to capture chunks of the $2 trillion market for electronic payments, the $1 trillion market for e-commerce, and the $514 billion remittance market.

Nasdaq recently started using the Bitcoin blockchain technology for recordkeeping on its Nasdaq Private Market. Patrick Byrne, the CEO of (Nasdaq: OSTK), filed a prospectus last month with the U.S. Securities and Exchange Commission to issue $500 million worth of stock using a similar system.

These are precisely the kinds of uses that will require a bigger Bitcoin market cap.

Back in January, Cameron and Tyler Winklevoss predicted the Bitcoin market cap would grow to $1 trillion based on use cases like these. The twins are heavily invested in Bitcoin and are awaiting SEC approval of their Bitcoin ETF, the Winklevoss Bitcoin Trust.

Assuming their prediction occurs within a decade or so, when about 20 million bitcoins will exist, that gives us a Bitcoin price of $50,000.

Wences Casares, the CEO of Bitcoin wallet startup Xapo, is thinking bigger. Much bigger.

"There are roughly 10 million people in the world who hold Bitcoin; there's less than a million people who are actively using it for payment. If you believe that we're going to get a billion people in Bitcoin - in 21 million coins - the only way, is by the price going up. It's simple math. And going up a lot. A half million dollars, a million dollars a coin - something ridiculous like that," Casares said at the Bitcoin & the Blockchain summit in San Francisco in February.

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A Bitcoin price of $1 million would create a Bitcoin market cap of more than $20 trillion.

Even some Wall Street analysts have recognized how the need for a much larger Bitcoin market cap could result in a drastic increase in the price of Bitcoin. Here's what Wedbush Securities analyst Gil Luria told Investopedia last year:

"If Bitcoin lives up to its potential and becomes the working capital of international trade, instead of countries and companies sitting on yen, U.S. dollars, Swiss francs, they could just use Bitcoin for cross-border transactions. It would be far more efficient. If that were to happen, Bitcoin would be taking $10 trillion of foreign currency that sits in multinational companies. If that were the case, each Bitcoin could be worth $1 million."

The Bottom Line: Bitcoin price predictions that seem insanely high now make sense when you understand the role of the Bitcoin market cap. As more people and institutions start to use Bitcoin, supply will not be enough for the spike in demand. That eventually will cause a massive increase in the price of Bitcoin, to as high as $1 million.

Bitcoin's Hidden Washington Allies: One issue that needs to be settled for Bitcoin to become widely used is government regulation. That process has started. But while some fear cumbersome rules that will hold Bitcoin back, the digital currency has a lot friends on Capitol Hill - more than you'd think. In this exclusive interview, Perianne Boring, head of the Chamber of Digital Commerce in Washington, gives us the inside scoop...

Follow me on Twitter @DavidGZeiler.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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