One Bank’s Case For Bitcoin $500,000: The Fed’s Balance Sheet Will Hit $40 Trillion In 2050

Yesterday, when bitcoin was crashing, ARK Invest’s Cathie Wood sparked some laughter (especially among the crypto bears) when in her interview with Bloomberg TV she presented her bitcoin price target: $500,000.

While this was in keeping with Wood’s traditionally hyperbolic forecasts (like Tesla to $3,000 for example), one could make the argument that at least in 2020, the market did give Wood’s crazy forecasts the benefit of the doubt (if not so much in 2021). But more importantly, one could also make the argument that Wood may be right… even if she herself has no idea why.

The real reason why one can make a case for bitcoin $500,000 (hardly very shocking: JPM’s “fair value” bitcoin price target has been $146,000 for months) comes from Deutsche Bank’s Jim Reid who in his Thursday chart of the day mocks the market’s taper fears, saying that “even after a taper this is far from the end of balance sheet expansion”, and forecasts that “if the Fed balance sheet to debt ratio stays at the post GFC average (c.30% vs c.38% current) then the Fed balance sheet would be around $40tn in 2050 from just under $8tn today.“

In other words, we are looking at a 5x increase in the Fed’s balance sheet, one which would unleash an unprecedented tsunami of liquidity and even more unprecedented destruction of the fiat system (which is also why the Fed is planning on rolling out the digital dollar in coming years). And since the Fed’s balance sheet growing 5x means that other central banks would have to keep pace or else see their own currencies soar, we are looking at global central bank liquidity of roughly $100 trillion by 2050.

Seen in this light, is a bitcoin market cap of $10 trillion (which is what it would be at $500,000), or just 10% of global central bank balance sheets, really that crazy?

Here is Reid’s full note:

Thinking about thinking

Did the Fed minutes last night give the first hints that the Fed is thinking about thinking about tapering? Even the subtle language shift was enough to prompt an immediate c.7bps sell off in 10yr real yields. In this very heavily indebted world real yields are crucial to financial stability so it’s slightly concerning that “thinking about thinking” could have such an impact. It hints that the taper may not be straight forward when it eventually arrives.

Having said that, I strongly suspect that even after a taper this is far from the end of balance sheet expansion. Today’s CoTD shows the path of US public debt in recent years with the CBO’s forecast out to 2051. We also show the Fed balance sheet.

The debt will need to be funded and if the Fed balance sheet to debt ratio stays at the post GFC average (c.30% vs c.38% current) then the Fed balance sheet would be around $40tn in 2050 from just under $8tn today.

Clearly the realized outcome won’t be a smooth upward line, but it’s hard to imagine what is likely to be a heavily-indebted future without substantial increases in the Fed’s balance sheet, irrespective of what happens in the next few quarters.