4. Payment Card Fees
2013
Merchant Discount
Rate
Total Fees Generated
($ billion)
Global Credit Volume $8,597 2% $172
Global Debit Volume 11,970 1% 120
US Credit 2,486 2% 50
US Debit 2,250 1% 22
Total Global $20,567 $292
Total US 4,736 $72
7. Large Range of Outcomes
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
BTC
V
$1,000,000
8. Simplified Valuation Framework
Outcome $/BTC Probability Probability Weighed
"Napster"
Outcome
- Overtaken by another coin
$0 50.00% $0- Fatal flaw uncovered
- Broadly made illegal
"Segway"
Outcome
- Specific use cases take hold $1,000 49.95% $499.50
"Internet"
Outcome
- Bitcoin becomes global working
capital of trade
$1,000,000 0.05% $500
Prob-weighted outcome $1,000
11. GDP from Trust Based Industries
Federal Reserve banks, credit intermediation, and
related activities
435,033
Securities, commodity contracts, and investments 184,592
Insurance carriers and related activities 413,066
Funds, trusts, and other financial vehicles 45,463
Real estate 1,917,249
Rental and leasing services and lessors of
intangible assets
177,146
Legal services 225,249
Sum of Trust-Based Service Sectors 3,397,798
As a percentage of GDP 21%
2012 2012%
Gross domestic product 16,244,586 100.0
Agriculture, forestry, fishing, and hunting 201,138 1.2
Mining 429,656 2.6
Utilities 275,148 1.7
Construction 581,073 3.6
Manufacturing 2,034,333 12.5
Wholesale trade 962,694 5.9
Retail trade 927,849 5.7
Transportation and warehousing 471,637 2.9
Information 776,740 4.8
Finance, insurance, real estate, rental, and leasing 3,172,548 19.5
Professional and business services 1,937,240 11.9
Educational services, health care, and social
assistance 1,339,698 8.2
Arts, entertainment, recreation, accommodation,
and food services 596,547 3.7
Other services, except government 352,014 2.2
Government 2,186,268 13.5
12. Venture Capital
$242
$40
$33 $32 $26 $20
$14 $14 $12
$0
$50
$100
$150
$200
$250
$300
Total Xapo BitPay Coinbase Circle BitFury KnCMiner Chain BitGo
13. Venture Markups
$600K
Seed Round (9/12)
* Note: Data per Crunchbase with value increase estimated based on common metric of new investor's interest is
between 15% and 20% of the enterprise (~20% dilution).
$25MM
B Round (12/13)
~40X
VALUE
INCREASE
(estimate*)
~60X
VALUE
INCREASE
(estimate*)
$510K
Seed Round (1/13)
$30MM
A Round (5/14)
Want to talk today about the Wall St. perspective – quantifying the opportunity for bitcoin – putting some hard numbers around concepts that get talked about a lot.
My day job is as a stock analyst at Wedbush Securities – a 59 year old investment bank and brokerage headquartered in Los Angeles.
And I was quite content doing that until a year ago when I read the original Satoshi paper…
And the description of a payment netwrok that is superior in every way then the ones I was studying opened my eyes.
So I took the red pill
Only in my version of the Matrix, the role of Morpheus is played by Brock Pierce
I realized how deep I was when I got home and instead of turning on sportcenter, I was watching Vitalik Buterin on Youtube.
People in this room can probably all agree that the set of opportunities for bitcoin is vast and growing, but let’s start by quantifying a couple of the large short term opportunities.
So back to my day job – the networks and banks that support card payments and electronic payments infrastructure generate about $300 billion of revenue a year specifically for helping merchants accept credit cards and debit cards.
That is a $300 billion global tax for the benefit of being slightly more convenient than cash. Tax gets paid by merchants but clearly consumers are paying for much of it.
Less than 10% of that actually goes to Visa and Mastercard – most goes to banks but still makes for a good business for all involved.
Than we look at remittance – cross border money transfer
A lot of estimates about exactly how big that is, but if we use about $400 billion of transferred volume that is a $20 billion market for facilitating that movement.
And this particular tax obviously paid by the poorest people that can least afford it.
So here is what that means for how I couch the value of bitcoin.
I know bitcoin is a financial instrument the likes of which we have never seen and it looks like a currency and a commodity, but I think of bitcoin as equity in a payment network.
I guess I am a hammer so to me everything looks like a nail.
But BTC is only a very promising start up. If it was a biotech company it would be a molecule for a drug that could cure the common cold.
And in a sense it was crowd funded – it constantly pays in equity to the network nodes that operate it, what we call miners.
So it is bigger than some of the niche networks like Blackhawk and Green Dot but still smaller than the incumbents V and MA.
BTW WU is about 9 billion and and MGI 700 million
But assigning an expected value for bitcoin is considerably harder than valuing Visa.
I can say within 2 standard deviations that V will be within $300 and $1000 in 10 years. That is a pretty narrow range. Basically the difference between V growing 5% a year and 20% a year.
For bitcoin that range is $0 under some scenarios and $1 million in other scenarios. That is a lot harder to value.
Drilling down on that thought the way we think of valuing bitcoin is as weighted probability of outcomes.
Obviously there are an infinite number of potential outcomes – thank you for the dozens of you that emailed me about that, but in order to set the framework and illustrate an approach – let’s look at three categories:
One I call the napster outcome – bitcoin started a revolution but won’t be the one to capitalize on it.
The second I call the Segway outcome – a lot of hope but in the end only niche uses – for Segway that is city tours and mall cops and for bitcoin maybe it is just in remittance.
And the third is the one the people in this room believe in – that eventually bitcoin becomes the working capital of trade and replaces all other currency reserves held for trade which would put its value in the 1 million dollar a bitcoin ballpark.
Assigning a probability to each outcome and taking the weight gives you an approximation of the value of a bitcoin – in this case $1000.
Now what this wide range of outcomes creates is volatility – if the market perception that we will get scenario 3 goes up from 0.05% to 0.06% that adds $100 to the price of bitcoin and vice versa.
But volatility is not all bad – traders live for volatility – you can see that the more volatile the market is the more trading volumes there are.
This is a picture of cash equities.
As Barry Silbers says speculating is one of the first killer application of bitcoin.
And hopefully it can create the monetary base that will make the other applications possible.
Obviously a lot of things move the price of bitcoin in the short term and all will be discussed at length at the conference.
And we would all rather be at $1000 than at $100, but what I personally find compelling about bitcoin is that the technology will continue to develop regardless.
And longer term I think we have bigger ambitions for what the technology can do beyond payments and remittance.
Now that we have this technology if something can be decentralize it will be decentralized (I think that is from david Johnston).
And if that is the case let’s think about what are the industries whose main function it is to provide trust between two counterparties – and when you do that you come up with some pretty big numbers.
When you take all those industries - securities trading, insurance, real estate, legal services – now you are talking about 20% of GDP – more than $3 trillion of activity in the US alone. That is what gets people excited whether bitcoin is at $100 or $1000.
And that is what is getting venture excited, with hundreds of million of investments in the space in just a few months
and some valuations already going up by 40x and 60x
And to me one of the best measures is how many developers are applying their most valuable asset – time – into bitcoin technology.
But unlike the world I live in where companies are graded and scrutinized every three months – I am taking the longer view on bitcoin. Like other new major technology disruptions the disruption from bitcoin will take longer than expected but have an even more profound impact than anticipated.
The only way bitcoin succeeds is if everybody keeps working through the trough of disillusionment and through the chasm of adoption. If we give up because bitcoin prices go down, we will get the napster outcome for sure.
But if the community works through this period it will save the poorest people from the taxes they pay financial institutions…
and maybe even create the opportunity for billions of people to emerge out of poverty just like you have been talking about since you all took the red pill.
And hopefully there is a role for some of us wall street types to help along the way
Thank you.
