Everyone heard of the eighth wonder of the world- compounding.
So what happens if you take the asset with one of the best CAGRs in the recent decade and put it through compounding?
Does this greatly increase your chances of FIRE (Financially Independent, Retire Early)?
I'm curious to find out.
And interestingly, I came across this website- https://bitcoincompounding.com
This website provides various models for extrapolation of Bitcoin's growth in the next 30 years or so and allows you to work out your chances of FIRE via Bitcoin compounding.
Generally, it works like any other FIRE calculator with the only difference being that the asset being used here is Bitcoin.
The website has 7 different models in extrapolating Bitcoin's growth. There is a detailed explanation on what these models are on the website (see below).
(Source: https://bitcoincompounding.com)
Generally, these 7 models differ in a few ways, one of which is the aggressiveness of the price growth anticipated. All models project a drop of the CAGR over the next few decades. The more conservative models will project a bigger drop. Model 4 and 7 are known to be the more conservative models with model 6 being the default one- which claims to have a good balanced mix in the factors for price projection and is also in accordance with the Power Law.
In case you are wondering what the Power Law is, you may refer here.
Below is a chart derived from the Power Law. The two bands you see here are derived from the resistance price and support price.
All prices of Bitcoin should still within this band for the Power Law to remain valid. In case you are wondering what's the projection of Bitcoin prices based on the Power Law, here are two conclusions (or rather assumptions).
The price will reach $100,000 per bitcoin no earlier than 2021 and no later than 2028. After 2028, the price will never drop below $100,000.
The price will reach $1,000,000 per bitcoin no earlier than 2028 and no later than 2037. After 2037, the price will never drop below $1,000,000.
Let's see if these assumptions remain valid in a couple of years.
So, back to the FIRE calculator.
Let's assume the following scenario and see how successful your FIRE simulation using Bitcoin will be.
1) You have 1 BTC now.
2) You want to withdraw $50,000 (U.S dollars) annually from 2030 onwards as part of your FIRE plan
3) You will remain invested in BTC and will only draw down from your Bitcoin to fund your annual withdrawal from 2030 onwards.
Default Model 6 is used in the calculation.
(Source: https://bitcoincompounding.com)
(Source: https://bitcoincompounding.com)
Based on the projection, you will be largely successful in your FIRE plan. This might sounds a little impossible as you might think. The price of 1 BTC is hovering around $75,000 (U.S dollars right now). How could you be able to withdraw $50,000 (U.S dollars) annually for so long without any significant impact?
In fact, you will still be left with 50% of your BTC stack at the end of 30 years.
Well, the reason is due to the high compounding rate of BTC. You can see from the infographic above that the CAGR is in the region of 30+ to 40+ in the initial 10 years. In case you are thinking this is not realistic, the CAGR of bitcoin in the past 10 years is around 56%. So I'm not going to say that such a projection is unrealistic.
If we were to push the figures a bit harder, the model actually projects that you can withdraw almost $103,000 (U.S dollars) annually from 2030 onwards without running out of Bitcoin if you have 1 BTC right now and stay invested throughout.
I think this exercise brings a perspective on how we could increase our chances of FIRE if we were to just invest a little in BTC. Of course, I'm not going out in blind faith and believe everything that the model throws out. But I think this exercise has more than proven that BTC compounding could be what we just need to achieve FIRE.
Are you going to take your chances?
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