How DeFi adoption will impact on the market cap of the King of Cryptos.
When discussing bitcoin with investors who are new to the crypto sector this is their recurring question “… all very interesting but ultimately what can I do with bitcoin? What can I buy with it?”
True, adoption for bitcoin is somehow an issue, but it is also a poorly understood issue. Bitcoins´adoption is normally related to the growth of its addresses (?) or its use as a currency, to buy things. Either way, the mainstream debate is mainly focused on the wrong issues. Since bitcoin is primarily used as a store of value, its adoption as a store of value is not exactly compatible with the use as currency — indeed it is hoarded rather than spent.
While the adoption of bitcoin as digital-gold and as store of value is certainly the key driver at the moment — which will heavily impact on its market cap and price when it will gain even only a fraction of the gold´s market share — this still pales compared to what will be the future main driver for bitcoin adoption.
Enter DeFi, Decentralized Finance or Democratized Finance as many call it.
For those new to the word, DeFi is quite simply the replication of legacy financial services, such as lending, payments, trading, asset management, insurance etc, provided via blockchain based applications in a decentralized manner. Clearly, the introduction of new technologies does not only improve on traditional financial services, but more importantly it creates opportunities to develop entirely new services, products and markets which were before today unheard of, like DAOs (Decentralized Autonomous Organizations), the tokenization of entirely new asset classes and the creation of scarcity-driven value for new digital assets.
On January 1st there were only 1.425 BTC locked in DeFi projects globally. On August 17th, the amount of BTC committed was over 48.000. At the current price of USD 12.400 this makes well over half a billion USD. For the legacy financial sector this is peanuts, it is a drop in the ocean of a multi trillion dollar market. That´s why they do not pay attention, not yet at least.
But for the newly born DeFi sector it is a 33,8x growth in just 8 months. And it keeps accelerating. Also the total value expressed in USD of the whole DeFi sector has gone up from USD 2 billion to over USD 6 billion in just the last two months.
Technological innovation is very subtle. At the beginning it is understood solely by very few tech proficient people within restricted circles and it is very difficult to predict what kind of changes such innovations can bring into people´s lives and businesses until it gets mass adoption.
That is one of the reasons why — together with complement effects, network effects and viral product features — technology adoption is non linear.
But when it gets traction, then it literally goes parabolic. But no worries, we are not there yet this is still the beginning.
Since bitcoin represents the king monetary asset and the store of value for the whole crypto sector, its market cap goes hand in hand with the growth of DeFi applications, services and products. Bitcoin lubricates the DeFi system bringing liquidity to it and it acts as THE trusted monetary asset pledged as a collateral in many applications.
Also note that — so far — bitcoin has been mainly tokenized (i.e “wrapped” into an ERC20 Ethereum Token) for use within the Ethereum blockchain.
But what will happen when new DeFi applications will start to emerge also for the Bitcoin blockchain? Sceptics about the capability of the Bitcoin protocol to handle large transactional volumes will have to think again. Some are already working on using smart contracts on the Lightning network for trading derivatives. The difference between the use of bitcoin in DeFi applications running on Ethereum and its potential use on its own protocol is that “There’s a really big gap between DeFi, as Ethereum is trying to do it, and P2P finance,” Rubin said. “Uniswap is really great. But they tokenize their liquidity pools. … We [Bitcoiners] are talking about finding a way for people to work directly with each other.”
Essentially, Bitcoin DeFi projects aren’t using derivatives of bitcoin like WBTC, they aim to enable traders to use directly bitcoin. And the consequences, in terms of bitcoin adoption, will be huge.
So, let´s tentatively jot down some figures, just to have a rough idea of where bitcoin´s market cap might stand in a number of hypothesis:
1. let´s assume that bitcoin´s adoption as digital gold continues and it gains X% of the market cap of gold currently at USD 13 trillion, based on an estimated above ground stock of 190.000 Tonnes and the current price of USD 1.990.
2. let´s further assume that bitcoin´s adoption in DeFi applications increases and it gains X% of the market share of global legacy financial services, asset management and insurance sectors. Please note that the statistical figures taken from Investopedia are not entirely reliable. But that was the best I could quickly find without doing a thorough data search which is not the scope of this article.
As you can see from the table above, in the first hypothesis we estimate a market cap of between USD 1,3 trillion to USD 3,9 trillion depending on the market share gain over gold (10% min to 30% max). This will project a BTC price between USD 68.000 and USD 205.000.
In the second hypothesis we estimate gaining a much lower market share of the legacy financial services with DeFi applications, between 5% and 20%. BTC projected prices here vary much more as a consequence of the different market cap of each specific sector. Clearly though, DeFi adoption is not limited to just one sector, therefore they must be summed up. This is what we have done in the third hypothesis where we have summed up, conservatively, the minimum market share gains for each legacy financial sector together with the gold market. Here we project a BTC market cap of USD 4,73 trillion and a price of USD 248.000. The monetary supply of BTC is set conservatively at 19 Million considering that there is widespread consensus that between 2 to 4 millions BTC are already lost for good, hence the 19 million max supply seems reasonable.
As said, this is just an estimation and there are many more variables that should be taken into account, including the fact that bitcoin will probably have to share the benefits of DeFi adoption with other emerging cryptocurrencies in the future. But I am sure one gets the picture. One can play with the figures as much as wanted, but there is little doubt that the future market cap of bitcoin will be a multiple of todays´. Barred adverse technological developments or currently inconceivable problems at Bitcoin´s protocol level, the only rational question is how many times a multiple of today´s price its future price will be.
Hold tight interesting times ahead.
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Andrea Bianconi is an international business lawyer with over two decades experience, a scholar of Austrian Economics, monetary history and geopolitics, a believer in the future of Bitcoin and Blockchain-based technologies, a consultant to the sector and a speaker/panellist at conferences and events. Founder and CFO of the Luxembourg based www.thinkblocktank.org, a member of the untitled-inc and an active contributor to the Berlin blockchainhub.net, and the German Blockchain Bundesverband Bundesblock.
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