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Coinbase CEO Brian Armstrong recently predicted that Bitcoin could hit $1 million within five years.
Bitcoin would need to grow at a rate of 55% per year to hit that lofty goal.
Institutional adoption is the biggest factor pushing Bitcoin higher.
A number of high-profile investors -- including Cathie Wood of Ark Invest and Michael Saylor of Strategy (NASDAQ: MSTR) -- have already predicted big things ahead for Bitcoin (CRYPTO: BTC). The consensus among these bulls is that Bitcoin could hit $1 million within the next few years.
The newest member of this club is Brian Armstrong, chief executive officer of crypto exchange Coinbase Global (NASDAQ: COIN). So is he (and the others) right?
The biggest reason to be optimistic about Bitcoin, Armstrong says, is the soaring rate of institutional adoption. Simply put, large institutional investors are now choosing to allocate a bigger and bigger portion of their portfolios to Bitcoin. That type of steady buying pressure is certain to move the price of Bitcoin upward over time.
The easiest place to see this buying pressure at work is with the spot Bitcoin exchange-traded funds (ETFs). In less than a year, these spot Bitcoin ETFs attracted more than $100 billion from investors.
Institutional adoption is also coming from Bitcoin treasury companies, all of them based on Strategy's business model of rapid Bitcoin accumulation using funds raised in the capital markets. According to the latest data from BitcoinTreasuries.net, these companies hold more than 1 million bitcoins, or about 5% of all Bitcoin in circulation. The lion's share, of course, belongs to Strategy, which has Bitcoin holdings worth an estimated $70 billion.
At the same time, the U.S. government is embracing Bitcoin as part of its overall plan to make America the "crypto capital of the world." The best evidence of this was the decision to launch a Strategic Bitcoin Reserve earlier this year. While this fund has not yet embarked on any new Bitcoin buying, the government considers Bitcoin a strategic asset worthy of stockpiling in the future.
Another factor in Bitcoin's favor is its inherent scarcity. The total lifetime supply of Bitcoin is capped at 21 million coins, and 19.9 million are already in circulation. So we are fast approaching a point where all the Bitcoin that can ever exist already circulates.
As the number of Bitcoin use cases grows, and as more institutional investors pile into Bitcoin, the demand for the coin is going to be off the charts. Soaring demand, combined with a fixed supply, should lead to higher prices. That helps to explain why Bitcoin has skyrocketed in value during the past few years.
So far, so good. A huge ramp-up in demand, combined with the scarcity enforced by Bitcoin's inflexible and unchanging algorithm, is a catalyst for price appreciation. Any Economics 101 textbook will tell you that. It's the law of supply and demand at work.
But there's just one slight problem with this thesis. Bitcoin is only up 20% this year, in what should have been a historic barnstorming type of year. Many thought that Bitcoin would easily double in price, from $100,000 to $200,000 by the end of 2025.
