Bitcoin Is Worth at Least $0.25
I think we are pretty terrible at pitching bitcoin the currency to intelligent newcomers.
So shockingly bad, in fact, that it’s almost like we are short selling the currency with our turns of phrase. We’ve largely satisfied the appetite of those in the sweet spot of the libertarian-goldbug-technologist-pioneer Ven diagram with our “digital gold” analogy, and we now need to hone a new, more sophisticated sales pitch.
Consider a scenario that you probably encounter once a week…
Someone from Wall Street or Silicon Valley comes up to you and says: “I love the blockchain, but hate bitcoin.” If you’ve been in the industry for a while, you probably take one second to marvel at the fact that the tech’s potential is now treated as a near-given (seriously, a massive departure from 18 months ago), and then proceed to explain why it is unreasonable for your skeptical friend to feel such conflicting emotions, because…well…a blockchain technically needs its native token to have value. Otherwise the tech just won’t work, you say. Very well put.
But then a strange thing happens. You talk about where bitcoin is accepted, what applications are being built and how bitcoin will look in five or ten years if only it successfully disrupts X, Y, and Z industries once it is properly regulated / legitimized. Yet you never build the bridge that explains exactly how bitcoin goes from an online drug currency to a remittance and correspondent banking killer. You will excitedly add that bitcoin is either going to the moon or zero (thanks for the insight, genius), but never talk about what the transition process from current prices to boom or bust looks like. The bust scenario is highly unlikely to be a straight line to zero! If even our blockchain-loving, bitcoin-denying imbecilic friend understands the underlying tech is valuable, it seems logical that we probably won’t ever see all blockchain-based native tokens go to zero at the same time even if bitcoin itself tanks. You might not point out this subtlety, but it’s important.
[TBI Note: By “you”, I mean me. I’ve been repeatedly guilty of this type of pitch. I’m projecting.]
These are two key insights, I think. 1) We need to build a better “financial bridge” to demonstrate that there is some fundamental value of the bitcoin currency. 2) We need to start talking about how native blockchain tokens have a certain theoretical collective minimum market cap based on the demand for the underlying tech at a given time.
As usual, I have a very bad idea for how to fix the pitch: we need to definitively make the case for bitcoin at a quarter.
Not a quarter of its all-time high (around today’s price), or a quarter of its current price (around today’s lowest marginal cost of mining), but a US-backed, George Washington fiat-coin quarter price.
For now, let’s assume that anything above that level (one thousandth of the current price) is pure bubbly mania. The good news here is that we can finally and convincingly establish a non-zero lower-bound for bitcoin or some future superior blockchain token.
Last year, BitPay claimed that it was processing $1 million per day in bitcoin transactions. Things seem to be slowing down a bit, so let’s assume that all of the bitcoin payment processors in the world now process $1 million in a given day. Next, let’s assume that at least as much volume takes place in peer-to-peer transfers (e.g. settling a bar tab, paying a foreign freelancer, sending tips or faucets, exchanging bitcoin in person, etc.). After all, it’s still easier to send money to another receptive individual than it is to pay at the point of sale or online. Finally, the highest estimates that I’ve seen for Silk Road’s at-the-time-of-purchase gross annual revenue was $35–40 million. Let’s assume that in the absolute worst case (from a brand perspective) the total black market bitcoin volumes are 10x that Silk Road estimate. With these assumptions, we’re looking at $3–4 million of bitcoin changing hands per average day in non-trading volume.
That actually jives with what we know to be true about the total daily USD-bitcoin volume. Even if over 90% of daily volume is related to day trading, our $3–4 million of non-trading volume assumption fits, and actually sounds pretty sustainable and conservative.
Remember, we’re just talking about beta uses of blockchain technology here — currency for enlightened tinkerers, paranoid cryptoanarchists, and yes, gamblers, pot dealers and porn addicts. We’re not even talking about the very realistic, but still unrealized 1.0 stuff, where venture-backed remittance services, enterprise-grade cross-border payment processors, fx settlement/clearing houses, and developing economy mobile money “banks” become real world things and burst out of beta.
How much of this ephemeral bitcoin crap do we need to actually run the beta tech? Theoretically, we only need enough to run 10 minutes worth of transactions, but in reality, most people who like bitcoin for its speed, low cost and anonymity benefits would probably be willing to hold their tokens for the day or longer.
Moreover, in a world where it takes 2–3 days to cash in or out of bitcoin because of the existing financial system’s limitations, a one day average holding period is friggin’ lightning and probably conservative. (Even if every business and consumer using bitcoin cashed in and out instantaneously, the intermediary services they would need to use to do these real-time conversions would still be subject to banking delays, so would need to hold the working capital.)
So making the unrealistic assumption that the same bitcoins turn over at the ridiculous rate of once per day, in order to satisfy 100% of the daily non-trading volume (remember, we’re completely ignoring the greedy speculators for now), one bitcoin out of the 14,000,000 in circulation would be worth…
$0.25.
But, hold on: we know there have been high-volume days in the past twelve months where a $0.25 bitcoin couldn’t possibly satisfy that day’s demand for the bitcoin payment rails. What would happen if smokers needed to transact $10–15mm of bitcoin for their weed this April 20th? Again, assuming the entire bitcoin money supply turns over once that day (it wouldn’t…ever), we’d need at least a $1.00 bitcoin in order to fill all of the orders. So it’s clear the monetary base (and thus the price per bitcoin) needs some sort of buffer between high dollar volume days and average days.
If we know that today’s $0.25 bitcoin could be worth $1.00 on 4/20 (or Cyber Monday, for the straight-laced folk), many of us are going to “hoard” our stakes. In currency terms, we’d call this $0.75 delta the “reservation demand” and the $0.25 the “transactional demand” for bitcoin.
At this point, anyone who is a believer in blockchain tech and the bitcoin payment rails (a large majority of those familiar with bitcoin, I think) shouldn’t have such a hard time accepting that there is at least $0.25 of transactional demand per bitcoin for even the somewhat sparse use cases for today’s rails.
Getting from worthless to $0.25 is the key leap, I think. And it’s time we start embracing that starting point and start building out the financial model for bitcoin’s “stock” beyond that.
Tomorrow, I’ll discuss why I think it is even easier to make the case for bitcoin’s ~$240 “reservation demand” than it is for its $0.25 “transactional demand”. Stay tuned…
For Entrepreneurs
The MIT E-Lab is a well established (20+ year) program that helps startups by matching them with MIT & Harvard business school students for a semester. The E-Lab is now looking for cryptocurrency related startups at various stages, so apply if you think this could help your efforts. (You don’t need to be local, but a c-level exec has to be in Cambridge frequently.) To apply, or for more info on E-Lab visit http://elab.mit.edu/.
Events
MIT Bitcoin Expo — March 7–8th
Get your tickets today — MIT is hosting its second annual Bitcoin Expo on March 7th and 8th!
This premiere student-run event, hosted by the MIT Bitcoin Club and Wellesley Bitcoin Club, features two days of panels and presentations from leading professionals and academics in the cryptocurrency space. You’ll hear from engineers who maintain and develop the core Bitcoin protocol, academics on the cutting edge of cryptocurrency research, and founders and executives of some of the hottest million-dollar startups in bitcoin.
Join hundreds of students and professionals as we learn about the most recent and upcoming legal and technical developments in Bitcoin. Delve into the heart of recent developments with experts like Gavin Andresen, Jeremy Allaire, Adam Ludwin, Charlie Lee, Constance Choi, Peter Todd, Jerry Brito, Joi Ito, Andreas Antonopoulous and many, many more.
Day One will provide insight into the Bitcoin mainstreaming process as well as the legal and security challenges for Bitcoin companies to overcome. Day Two will detail the inner workings of bitcoin and the new technologies that are emerging as the industry develops. Join us as we strive to understand the present and build the future.
The event is free for students and only $125 for 2 days for professionals.
For more information visit mitbitcoinexpo.org
Inside Bitcoins Conference and Expo — Berlin (Mar. 5–6), and New York (Apr. 27–29)
Inside Bitcoins is the largest bitcoin and blockchain technology focused event series worldwide. At each event you’ll hear about the latest challenges, trends, and opportunities in the industry from experts including Chris Odom, Co-Founder and CTO, Monetas; Marshall Swatt, Chief Technology Officer and Co-Founder, Coinsetter; Dan Morehead, Founder & CEO, Pantera Capital Management; Gil Luria, Managing Director, Wedbush Securities; and more.
Plus, TBI Daily readers get 10% off the Berlin and New York events with code TBIDAILY. See you there!
Jobs, Jobs, Jobs
Bitnet, San Francisco, Belfast, London (VC-backed)
-Leading digital commerce platform & former Visa team.
-Open positions: Engineering (Customer Success, Lead UI, Product, DevOps), Sales Director (EMEA), Sales Engineer (San Francisco)
-Check out Bitnet (https://bitnet.io/careers.html) and email jobs@bitnet.io
Coinbase, San Francisco (VC-backed)
-Largest “universal services” bitcoin company.
-Open positions: Security Engineer, Software Engineer (2–3 years mobile product development), Regulatory Compliance Investigator, (1 year conducting SAR investigations)
-Check out Coinbase (https://www.coinbase.com/careers/)
BitGo, Palo Alto (VC-backed)
-The leading Bitcoin multi-sig security company
-Open positions: Back-end / Front-End / iOS / Security Engineers, UX Designer
-Check out BitGo (www.bitgoinc.com/jobs) and email jobs@bitgo.com
Bolt, San Francisco (VC-backed)
-Stealth startup focused on consumer applications of Bitcoin.
-Open positions: Security Engineer, Ruby Engineer, UI/UX Designer, Executive Assistant.
-Check out Bolt (bolt.com) and email jobs@bolt.com.
Elliptic, London (VC-backed)
-Full-service bitcoin custodian.
-Open positions: Data Scientists and Front-end developers.
-Learn more and apply at elliptic.workable.com
Today’s Tid Bits
Check back tomorrow, Idiot.
Have a tip or feedback? Email me! (2bitidiot@gmail.com)
