The Sohn Annual Investment Conference in New York is often a place where the best hedge fund managers and investors on Wall Street present their best stock selections, from Amazon to Valeant Pharmaceuticals. And for the first time in the event’s 23-year history, one of those investors used the Sohn conference on Monday to recommend a certain digital investment: Bitcoin.
John Pfeffer, a partner in his London-based family firm Pfeffer Capital, not only bets on Bitcoin, but gives it the bold target price of $700,000, about 75 times the current price of nearly $9,500.
While Pfeffer did not put a time limit on his prediction, his appreciation exceeds even the optimistic forecasts of other influential investors, such as venture capitalist Tim Draper, who earlier this month predicted that the price of Bitcoin would reach US$250,000 in 2022.
“Bitcoin is the first viable candidate to replace the gold the world has ever seen,” Pfeffer, a former partner at the private equity firm KKR, told the crowd at the Sohn Investment Conference at Lincoln Center in New York City. “So, if Bitcoin becomes the dominant non-sovereign stockpile, it could be the new gold, or the new reserve currency.”
Pfeffer’s mathematics works like this: First, it assumes that Bitcoin can logically replace all the gold bars currently in the hands of private investors, in other words, the gold bars that people keep in a safe deposit box or bury in their backyard, simply a way to put their money in something more reliable than paper. (The gold bars in this example are also what is known as a “value store”. “Bitcoin is much easier to store and safe,” Pfeffer said.
The current value of all privately owned gold bullion is about $1.6 trillion, according to Pfeffer. Assuming that there will be 18 million Bitcoins in circulation when the kryptom currency completely replaces the gold ingot (so far 17 million bitcoins have been produced, of the 21 million that may exist), the implied value of a Bitcoin would be US$ 90,000. This is Pfeffer’s most conservative scenario, which gives him an 8% chance of success.
But Pfeffer has even greater hopes for Bitcoin, which could eventually be for the central banks what the traditional reserve currencies are today. (From euro to Japanese yen, governments have cash abroad to pay international debts and complete other cross-border transactions. “It is conceivable that Bitcoin will displace some forms of reservation over time,” Pfeffer said at the conference.
Total foreign reserves are currently worth US$ 12.7 billion, he added. While it is unlikely that Bitcoin will fully replace all foreign reserve currencies, Pfeffer also modeled scenarios in which Bitcoin would represent a quarter of such reserves, implying a return of 20 times current prices.
And if Bitcoin’s total value is the equivalent of all foreign reserves, US$ 12.7 trillion – including both bullion gold and combined reserves – that would mean a price of US$ 700,000 per Bitcoin.
“As an investor, what we are most interested in right now is that Bitcoin could become the dominant non-sovereign currency,” Pfeffer said. Although it puts only a 1% chance that Bitcoin will reach US$ 700,000, the possibility alone is enough to “make a small, long-term, venture capital-type bet to buy and save,” he said.
In other words, Pfeffer added, his strategy is, “Buy the ticket, and take the tour.
In addition to Bitcoin, Pfeffer has previously invested with other cryptomes in the last two years, but has since reduced its encryption portfolio back to only Bitcoin.
He concluded, he said, that many other cryptom currencies do not function simply as money, but as so-called utility tokens, that is, they are used to perform a specific operation, and serve as more than just a pure currency. (The cards tied to Ethereum’s network, for example, are used to execute so-called “smart” contracts.
Using the economic theory of money, known as the “exchange equation,” Pfeffer postulated that a network of cryptomoney is as valuable as its total economic activity, divided by the speed at which money changes hands.
Because utility tokens will inherently be exchanged frequently, their value will be constantly under pressure, Pfeffer said, “I think they will become value traps.
Bitcoin, on the other hand, offers the opposite proposition, Pfeffer added:
“There is a way out of this value trap, and that’s for people to store their wealth in a crypto asset,” he said.
That’s where Bitcoin comes in, supporting his original thesis that Bitcoin will replace gold.