If you are new to Bitcoin, you have likely heard talk of "bubbles" and "all-time highs" in the price. Indeed, Bitcoin has had a meteoric rise in popularity, notoriety, awareness, and, yes, price. It is rare today to find someone who hasn't at least heard of Bitcoin. However, vague awareness is far from widespread use or adoption. For those who remember a world before email, there was a time when no one outside of computer technology companies or research universities used email. Then, seemly overnight, if you did not have email, you were likely Amish. For a technology progressing from novelty to ubiquity, it is undervalued and misunderstood up until it reaches a tipping point...
A Netflix Case Study
Over the last 20 years, fortunes have been made for those who had the foresight to invest in internet technology companies. Most prominent among these successes are the so called "FAANG" stocks: Facebook, Amazon, Apple, Netflix, and Google. While there are noticeable differences in terms of product offerings (hardware vs. software, social vs. entertainment vs. computer tech, etc.), all of these companies leveraged internet protocols (TCP/IP, SMTP, HTML, etc.) to deliver some combination of superior utility and lower cost to consumers. Because the value offered was so far superior to the alternatives, the rise of these companies was all but inevitable. To illustrate this point, let's take a closer look at Netflix.
Prior to Netflix, the big name in home entertainment was Blockbuster. Founded in 1985, Blockbuster grew over the next decade into the largest video-rental chain in the US. By the late 1990's, one was usually only a stone's throw from one of there 9,000+ video-rental stores. By this point, the company had over 84,000 employees, 65 million customers and was valued at $3 billion. As is often the case, Blockbuster sat on its de-facto monopoly position and, instead of innovating and seeking to provide additional value to customers, settled into rent-seeking behavior. At its peak, Blockbuster was bringing in $800 million in late fees per year.
Netflix entered the market in 1998 with a compelling offer; beating Blockbuster in price, selection, and convenience. Netflix's DVD-by-mail business model was able to undercut Blockbuster because it eschewed retail locations (reducing overhead) for an internet-based model of client acquisition and business operation. By the time Netflix added video-streaming in 2007, the writing was on the wall for Blockbuster, which filed for bankruptcy in 2010.
With hindsight, Netflix dethroning Blockbuster by adopting internet technology seems obvious. For the executives running Blockbuster during the late 1990's and early 2000's, the internet was a curiosity which they vastly underestimated. Netflix was able to challenge and eventually devour the competition because the conditions were ripe for disruption. Blockbuster was a de-facto monopoly which became soft, lazy, and ultimately failed to recognize that the topography of the market had been forever altered by the invention of the internet.
In the years surrounding the bankruptcy of Blockbuster, Netflix soared from ~$4.00/share in January, 2009 to a peak of around $42.00/share in July, 2011, a more than 10x rise. In the following 6 months, the stock crashed to ~$9.00/share. The peak and crash were no-doubt the result of near-term mania. Markets exhibit the tendency to fluctuate in this manner, especially when processing the shakeup of an industry as had just occurred with the death of Blockbuster. Perhaps some investors figured that the high-growth days were behind Netflix. With Blockbuster gone, there was little left to conquer and so growth would surely be less impressive in the future. What sellers of the stock didn't understand at that time was that Netflix was not just a Blockbuster replacement, but rather poised to directly compete with television stations and theaters. $42/share for a Blockbuster killer was perhaps overvalued, but $42/share for a company destined to take on the entire entertainment industry was a steal. Over the next decade, Netflix went on to 10x once again. Sellers missed the potential by not recognizing the total addressable market for Netflix.
Before you run off and buy Netflix stock, it is important to know that the value of the entire global entertainment market is about $2 trillion and Netflix is now valued at about $200 billion. So, unless you see a credible path forward for Netflix to take 100% of the market, it is likely that its days as a high-growth stock are behind it. The Netflix model has been copied and commoditized and competition from Hulu, Disney+, YouTube, and others will limit the growth potential of this enterprise, not to mention the backlash from conservatives over the infamous Netflix original 'Cuties.' But I digress. Back to Bitcoin.
Bitcoin's Total Addressable Market (TAM)
Now that we've exhausted our case study of Netflix, let's apply what we've learned to another disrupter: Bitcoin. As with the Netflix chart above, Bitcoin has traded at or near an all-time high for much of its history. This should be expected of any company or technology that is supplanting an incumbent by completely rewriting the rules. Mindlessly parroting "watch out, Bitcoin is at an all-time high!" is a sure-fire way to miss out on the most important invention since the internet itself. Bitcoin's ascent has been mind-numbing compared to all other investments in human history. If you had been fortunate enough to know about Bitcoin in 2011 and bought 100 when the price was $1.00/BTC, you would be sitting on $3.5 million today. Even the best FAANG stock, Amazon, would yield around $1,600 for a similar $100 investment. 16x isn't bad but a 3,500x return is another story! Bitcoin has grown in value by such magnitude that the only way to view the entire price history is with a log chart (which compresses the price). Perhaps it is understandable that people come to Bitcoin with so much skepticism. After all, if something seems too good to be true, isn't it so?
What detractors are missing is that Bitcoin is not like a company dealing in frivolities like Netflix. The entertainment market is peanuts compared to what is at stake with Bitcoin. As stated above, Netflix commands 1/10th of the entire global entertainment market, with a total valuation of around $200 billion. Online video streaming services have become increasingly commoditized, such that Netflix has likely seen its best days already from an investment perspective. Bitcoin, on the other hand, is playing in a much larger pool. Bitcoin's total addressable market (TAM) is money... all money globally. Starting with gold (which is Bitcoin's "Blockbuster"), we should see an easy 15x from here for Bitcoin to a $10 trillion market cap ($650 billion today). Next, just taking M2 (Broad Money), which is around $100 trillion, we would see another 10x. These numbers do not account for overvalued real-estate markets, global debt, and derivates which total into the quadrillions. To get a better sense of what this looks like, Visual Capitalist has done a nice job. Simply put, Bitcoin's TAM is at least $100-150 trillion. What does this mean for Bitcoin's future value?
- Bitcoin dethrones gold? We will see $500,000/BTC.
- Bitcoin becomes global money standard? We head to $5,000,000/BTC.
Bitcoin is a disruptive, winner-take-all technology
This article is being delivered to you over the internet which relies on several protocols including TCP and IP (often written as TCP/IP). In the early days of the internet, there were competing protocols such as IBM's SNA and OSI. Without going too far into the history, SNA was proprietary and OSI was overly complicated compared to TCP/IP. Ultimately, the market chose TCP/IP because it is an open standard and was relatively simple to use. Now that the internet has been built out with this standard, switching to another, even one which is "better" is proving very difficult. IPv4 (the old standard for IP) has an upgrade called IPv6 which is only at about 30% adoption in the ~15 years since release. Simply put, computer networking protocols, are very "sticky" and difficult to change.
Bitcoin is the first internet protocol for money which has worked. Others tried and failed at what Bitcoin achieved as far back as the 1990's. As with TCP/IP, it is likely there will only be one major money protocol for the internet. Bitcoin has a significant lead at this point, commanding 67% of the market. Because this technology is new and difficult to understand, many pretenders and fraudsters have copied Bitcoin's architecture, added a few inconsequential tweaks, and lured in unsuspecting victims with "the next Bitcoin." What the pretenders are all lacking is the understanding that Bitcoin is first and foremost a monetary technology.
Bitcoin is not now competing with PayPal or Visa (although a day will come when it does). Today, Bitcoin is competing with gold and fiat currencies like the US Dollar and the Japanese Yen. Bitcoin is the first money with perfect, mathematically precise scarcity. There will only ever be 21 million bitcoins. Does anyone know how many US Dollars there will be in the future? History has shown us that the answer is many, many more. The reason we can trust Bitcoin's monetary policy is that, unlike upgrading from IPv4 to IPv6, there is no benefit to anyone running a bitcoin node to "upgrade" to a new version of Bitcoin with a higher monetary base. Why would millions of people rob themselves voluntarily?
Bitcoin has a stable monetary policy, which grows in credibility every day that it continues to produce blocks every ~10 minutes. With this solid foundation, the Bitcoin protocol will continue to grow in usage across the globe and will be upgraded with additional protocol layers. For example, Visa-scale payments are being built out now with a second layer protocol called Lightning Network (LN). Ultimately, Bitcoin will beat out the competitors thanks to the strong network effects of internet protocols and will become the global money standard.
What if it never comes back down?
"Hyperbitcoinization," the period of time in which Bitcoin trades places as the unit-of-account in most peoples minds with government money, is likely to come faster than many anticipate. As with other internet technologies, there is a gradual period of growth and refinement of the technology followed by a face-melting period of growth in usage.
This s-curve of adoption is likely to proceed very rapidly for Bitcoin because most of the infrastructure is already in place (smart phones to hold and spend BTC, internet saturation, etc.) and the need is greater than ever with all governments across the globe in a battle to see who can debase their currency the quickest. Is it prudent to wait for a "pull back" to get off of 0 with BTC? What if the price never comes back down? Bitcoin is no where near its full growth potential with the total addressable market still several orders of magnitude larger than Bitcoin's current market capitalization. Even a small allocation today could be a live-changing investment in 10 years.