The simple math that tells us how rich we could really get from Bitcoin
I’ve only been experimenting in crypto for a relatively short period of time. Yet during this time I’ve seen many articles and videos claiming only a tiny amount of Bitcoin will make you incredibly rich.
I’m confident my math skills are good enough to assess that it’s unlikely anyone is going to become seriously rich from Bitcoin based on a $500 to $1000 investment.
Let me explain…
Market Capitalization
Many newcomers to crypto start by assessing assets based on price. So, Bitcoin looks like it’s worth a lot at $50k, compared to Cardano at only $1.20. Cardano appears to be worth a mere 0.0024% of Bitcoin’s value.
Well, what if I told you if Cardano actually has over 1000x that, at roughly 3.7% of Bitcoin’s market value? This is due to a metric called market capitalization.
The market capitalization of a token is given by the following formula:
market cap = dollar price per token * total coins in circulation
For Bitcoin at current prices, this would give us roughly:
Bitcoin market cap = 55000 * 19000000 = 1045000000000
So the market cap of Bitcoin currently sits around a tidy 1 trillion dollars. When we evaluate a given asset, it’s important we always look at capitalization and not price, since this tells us the potential price increase the market could support.
So what if we invested $1000 now…? How rich could we get?
Get Rich Scenario 1
The first scenario we’ll consider is buying our Bitcoin now.
Everyone has their own definition of what “rich” means, but for this piece, I’m going to define it as having enough money to give up work.
A middle-class income in the US would be around $85k per year. The median age is around 40 and the average life expectancy is around 78. So let’s say we need to cover our salary for 40 years to give up work. This gives us a “rich” figure of:
rich = 40 * 85000 = $3,400,000
So to get rich from Bitcoin we’d need it to generate at least 3.4 million dollars to support a middle-class lifestyle for 40 years.
Is this possible based on Bitcoin invested now? Let’s find out…
The market capitalization of gold is estimated at around 11 trillion dollars. Bitcoin is often described as “digital gold” and there is speculation it may one day reach gold’s value, so let’s start with this.
To reach a market cap of $11T, Bitcoin would have to go up 10x in value. This doesn’t seem inconceivable since Bitcoin has already gone up by a factor of at least 10x since 2015, and a factor of over 75 million since it first launched!
So what would we need to invest now to be rich in say, 5 years, and Bitcoin reaches $11T market cap?
Amount to invest now = 3400000 / 10 = $340,000
So to have 3.4m in 5 years based on a 10x rise in Bitcoin price, we’d need to invest $340k.
Investing only $1k would give us $10k. This is a nice sum of money and a sizeable gain, but it’s hardly early retirement.
Get Rich Scenario 2
OK, so we’ve looked at a scenario where Bitcoin reaches the market cap of gold. It shows that unless we invest a huge sum of money, we’re not giving up work any time soon!
But what if Bitcoin had a bigger increase in value?
This time, let’s work backward from the figure we want to achieve and work out how much Bitcoin would need to go up to support that.
To retire early we’d need a return of $3.4M / $1k. So Bitcoin would need to go up by a factor of over 3000x. Based on current prices this gives:
Required Bitcoin market cap to get rich = 3000 * 1T = $3,000,000,000,000,000
So to retire early on a $1k investment in Bitcoin, its market cap would need to reach 3 quadrillion dollars! This is 10x the current total wealth in the world.
Get Rich Scenario 3
Some readers will be thinking: but Bitcoin is currently at all-time highs, now isn’t the time to be buying!
So in our third scenario, let’s consider the crypto market crashes, and Bitcoin goes back down to its 2015 price of $315. To make even $1 million from a $1000 investment, the price would still need to go up 1000x. Obviously, our $3.4m target gain would require a 3000x increase or more. So it doesn’t really matter when we invest, we still need to achieve the same relative increase.
A Realistic Investment
The gain from any investment is a function of the percentage increase in value and the capital invested. Realistically, to make life-changing sums of money from investing in any asset two things need to happen:
- Significant capital needs to be invested
- The price of the asset needs to increase substantially
In reality, no-one knows if the price of Bitcoin will go up or down, but some predictions have it reaching $500k per coin by 2030. If this were to be the case a $1k investment now would net you around $10k in 9 years.
That’s 5 times what we’d have if we put our money in an ISA with an 8% return. A very respectable increase.
Still, I wouldn’t start planning the retirement party quite yet…
Thank you for reading. If you’d like to find out more about my experiences investing in Crypto, you can learn about why you need a plan to survive the volatile market.
