Cathie Wood thinks Bitcoin could reach $500,000. Is she right?

The ARK chief was prophetic in her Tesla call. Can she do it again?

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

ARK Invest CEO Cathie Wood has been one of the best investors of the modern era.

Her flagship exchange-traded fund ARK Innovation ETF (NYSEMKT: ARKK), which focuses on disruptive tech stocks like Tesla, Roku, and Square, has returned more than 400% since its founding in 2014, outperforming the S&P 500 by nearly a factor of four, and Wood garnered much acclaim when five of her funds returned more than 100% last year.

Though ARK ETFs have mostly slipped this year with the broader sell-off in growth stocks, given her track record, it's worth paying attention to what Wood has to say.

The ARK chief has been a big backer of Bitcoin (CRYPTO: BTC) and said at a Barron's virtual conference last November that she saw the cryptocurrency hitting $500,000. Amid the recent crypto crash, Wood reaffirmed her price target on Bitcoin, though she acknowledged the environmental concerns that led Tesla CEO Elon Musk to say his company would no longer accept the digital currency as payment.

Let's take a look at Wood's argument before we examine whether it can hit $500,000.

Wood's take

Back in Nov. 2020, Wood argued that a number of catalysts were supporting Bitcoin's growth. She called it the reserve currency of the digital ecosystem and essentially said it was the crypto equivalent of the dollar.

Wood also noted that the central bank distributed currencies (CBDCs) that countries like China and the U.S. are beginning to create are bullish for Bitcoin and other crypto coins. They will help legitimize cryptocurrencies by giving the idea behind them a government stamp of approval and by highlighting the advantages of cryptocurrencies in general. Those include the fact digital coins like Bitcoin are pseudonymous and can't be tracked to the user, unlike the digital yuan that China is launching.

The ARK chief also pointed to the increasing institutional embrace for Bitcoin, and said that if institutions were to allocate around 5% of their funds to Bitcoin the way they have with asset classes like real estate or emerging markets, that would lift the price to $400,000 or $500,000.

At those levels, Bitcoin would be worth roughly the same as all of the gold in the world. That fits with another argument for Bitcoin's value, as many backers claim it's digital gold due to it being capped at 21 million coins, which creates artificial scarcity.

Can Bitcoin really get to $500,000?

Back in 2018, Wood slapped a split-adjusted $800 price target on Tesla, which seemed outlandish at the time as it called for the stock to increase by more than 1,000%. However, Tesla eclipsed that price last year, making Wood look prophetic.

The $500,000 price target for Bitcoin implies a similar gain as the currency would have to increase about 12 times to reach that mark. 

The price target itself makes a good headline, but it's less relevant than Wood's overall bullishness. Price targets give investors a perception of precision that isn't possible even in the stock market, and is even less realistic in an asset class without any fundamentals like cryptocurrency.

Wood's math to get to a $500,000 Bitcoin price assumes that institutional investors would build up to a mid-single-digit allocation in the cryptocurrency, something she also said was "not going to happen." The example was more of an academic one than a realistic one, and an example, along with Bitcoin's supposed equivalence to gold, of how Bitcoin could reach a price of $500,000.

In other words, investors shouldn't expect Bitcoin to hit such a level anytime soon, especially as that would imply adding roughly $10 trillion to the cryptocurrency's market value, or the equivalent of about a third of the S&P 500.

Still, Wood's bullish stance shouldn't be ignored as she has been right so far about several other disruptive innovations, and her funds have been aggressively gaining exposure to Bitcoin through purchases of the Grayscale Bitcoin Trust and Coinbase.

Bitcoin's recent volatility shows the asset still remains highly speculative and confidence in its long-term growth is fickle, but if it does become the digital reserve currency as Wood argued, it could hit her price target given a long enough time frame.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Jeremy Bowman owns shares of ARK Innovation ETF, Roku, and Square. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Bitcoin, Roku, Square, and Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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