Bitcoin's ( BTC -10.13% ) price has skyrocketed more than 7,200% over the past five years, easily outperforming traditional assets and silencing the critics who claimed the cryptocurrency's gains were unsustainable.
In this year alone, Bitcoin's price has nearly doubled, even as China's crackdown on cryptocurrency trades throttled its gains. As of this writing, the price of a single Bitcoin hovers just above $56,000.
Some investors might think Bitcoin's price will gradually stabilize at these levels. But more bullish investors -- including ARK Invest's Cathie Wood -- anticipate even bigger multibagger gains. Wood recently claimed that Bitcoin's price could still soar to $560,000 by 2026. Is that target far too optimistic?
Image source: Getty Images.
Why Bitcoin might soar to $560,000
Bitcoin's earlier gains were mostly driven by younger retail investors. But after the pandemic struck in early 2020, a larger number of institutional investors started to buy Bitcoin, according to Philip Gradwell, the chief economist at the blockchain data platform Chainalysis. Those institutional purchases boosted Bitcoin's price and drew even more retail investors to Bitcoin, which turned the cryptocurrency into one of the best investments throughout the pandemic:
Source: YCharts
Wood believes that if all institutional investors allocated just 5% of their portfolios to Bitcoin, its price could hit $560,000 in five years.
But other catalysts are also on the horizon. Higher inflation or a recession could trigger more investors to buy Bitcoin along with gold and other precious metals as safe haven investments. Countries that are struggling with inflation could follow El Salvador's lead and start accepting Bitcoin as an official currency.
As Bitcoin is accepted as a legal tender in more countries, large banks, credit card providers, and digital payment platforms will need to accept the cryptocurrency along with other fiat currencies.
That cycle could drive more businesses to accept Bitcoin, and convince more consumers to buy Bitcoin. The expansion of the metaverse, which could blur the lines between the physical and digital worlds, could accelerate that process.
Bitcoin could also benefit from the potential collapse of more speculative cryptocurrencies like Shiba Inu (CRYPTO: SHIB). Those investors could pivot toward Bitcoin instead, and the subsequent market consolidation could stabilize its gains and reinforce its position as the world's top cryptocurrency.
Why Bitcoin might not reach $560,000
That outlook sounds rosy, but three headwinds could prevent Bitcoin from ever hitting Cathie Wood's price target.
First, there's the environmental cost of mining Bitcoin. Miners are already creating about as much CO2 as Greece with their electricity consumption. If Bitcoin's price hits $500,000, the Dutch economist Alex de Vries estimates miners will produce 617 million metric tons of CO2 each year -- which is 40% higher than Brazil's emissions and 70% higher than the U.K.'s output. Swedish regulators have already been calling on the E.U. to ban crypto mining across Europe to help achieve the goals of the Paris Climate Agreement.
Second, governments will likely hit Bitcoin and other cryptocurrencies with tougher regulations, since they can allegedly be used to evade taxes, launder money, or fund illegal transactions more easily than fiat currencies.
A growing number of countries -- including China, Bolivia, Colombia, and Algeria -- have already banned cryptocurrency transactions. India, Russia, and the U.S. are also reviewing potential ways to regulate cryptocurrency transactions. All that pressure could throttle Bitcoin's long-term gains.
Lastly, Bitcoin's volatility could prevent it from ever being widely used for everyday transactions. If you believe Bitcoin's price will rise tenfold over the next five years, you'd be far more likely to hold it. If Bitcoin's price stabilizes, it would become a more viable payment option -- but that stability would also prevent it from ever soaring to $560,000.
Meanwhile, countries could release their own digital currencies pegged to their own national currencies to compete against Bitcoin. Those transactions could be more stable, easier to track, and more environmentally friendly than Bitcoin and other cryptocurrencies.
Will Bitcoin ever soar above $560,000?
A few years ago, I would never have expected Bitcoin to hit $56,000. Therefore, it's certainly possible that more institutional investors could accumulate Bitcoin and propel its price past half a million dollars by 2026.
However, I think Cathie Wood's target of $560,000 is too high. Bitcoin might be worth a lot more by 2026, but the environmental and regulatory challenges could prevent it from hitting ARK's lofty price target in just five years.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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