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The valuation is way off. It is nowhere near 160 million. At the very most multiplying their profits by ten would take it to $10 million. Raising capital doesn't count as sales or gross profit, so it isn't really something to be factored into the valuation.
Let's compare Bitpay with Ebay. For Ebay, the operating profits are near $2.85 billion. Its market cap is 65.84 billion. The P/E ratio is more than 23. Now look at Bitpay. The business is growing at a rapid pace, and profits are expected to touch $10 million per year by the end of 2014. So, I think that a valuation of $160 million is fair. Where did you get their profits? They've reported more than 1m in daily revenue processing, say it's 1.35m per day that's 500m per year. Their most expensive processing option is 1%. Their cheapest is 0.01% (pay 1$ or $10 a day to process $10k or $100k respectively). Let's be generous and say they average 0.80%. That means they take $4m in revenue a year. How much of that is profit? Well, Amazon has 0.35% profit margins in 2013, for example. Who knows, but I'd say 10% would be very generous. So let's say 10%. That means they take 0.4m in profit. Or look at something else, their team. They have about 35 employees and they're a software company in a competitive space. Software engineers easily make 100k, for Silicon Valley often 200k. And that's just salary. For every employee you then pay various expenses like taxes, healthcare, meal plans, software/hardware, office space, training etc etc. To say the average cost per employee is $100k would again be pretty generous for a typical software company. So that puts their employee costs at 3.5m already and we haven't even begun looking at their cost of liquidating bitcoin, making bank transfers to merchants or any of the server infrastructure they're built on. So 10m annual profits for 2014 I think is a complete joke. But that doesn't mean the valuation is wrong. I think 160m is a very normal valuation if you look at Bitpay's numbers today, their growth rate, the prospects of the market and apply a discounted cash flow model to that. Guess what, Richard Branson and Peter Thiel have done valuations before. |
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I'll add some comments about business valuation.
Say I've got a money-tree (like a goldmine with a certain reserve of gold) that pays out $100 every year for 10 years. How much would you pay for it? Well, the lifetime revenue is $1000. But you wouldn't pay $1000, because of the time value of money. $100 in 1900 is worth only $2 today due to inflation of prices, for example. When you have $100 today and accrue interest for 10 years, it's worth a lot more than getting $100 in 10 years. So there's some 'discount rate' every year, so the money-tree might only be worth say $750. The rate depends on many factors, it's just an example.
This is roughly how companies are valued. You look at revenue streams and discount them over some time and then pay for that, minus some risk factor that the company fails. In addition, you may pay for various assets, but sometimes they can be a small factor. After all, assets are only valuable to generate revenue which you already calculate, or to sell. But some assets aren't very valuable when sold. (e.g. if Bitpay or bitcoin fails, its bitcoin payment processing software or its bitcoins will have little resale value. So for Bitpay, revenues are the big factor).
So let's look at Bitpay, they've recently stated in a developer presentation that they process about 1-2m a day. Say 500m a year. They also made public they grow at about 10% a month, which is equal to Coinbase, Blockchain.info and Multibit for example, so it's a very reasonable number. We can also say they take 1% as fees like Coinbase does.
So their revenues are 5m annually, today, and their growth rate is 3x annually. So for the next 5 years that's 5m, 15m, 45m, 135m, 405m.
See now where the 160m valuation comes from? Of course, this is a very rough calculation. For example, they make less than 1% in fees to be exact, it's probably closer to 0.75%. Their 3x growth per year is of course impossible to continue indefinitely, it may slow to 2x or even 1.5x at some point. And I haven't applied the discount rate yet (which isn't huge, by the way), nor the risk that bitcoin fails. (but then, it is *venture* capital). If you value a company on its 10-year revenue stream like is often done, 160m is a very realistic rate.
Now, let's be clear, Bitpay didn't make this valuation by itself. You've got a number of silicon valley / entrepreneurial legends turned investors (top-ranking ones) who offered to buy close to 20% for 30m. THAT is the valuation. These VCs made the valuation. Now you can say it's ridiculous without any arguments, but if I'd have to guess, I'd probably side with the VCs. They're self-made. Not by a single stroke of luck, but by series of successful companies and successful investments. You can be assured they've done their homework.
I'm not versed in how all this VC funding works, but is it possible for an entity to state that they're funding $X, but in reality are not, hoping/knowing that a true source with deep pockets will come along, saying to themselves, "If that entity is in for $X, I'm in for $Y."? Thus, now there's real money, namely $Y, to use for operating, development, pool parties naked by the hot tub, etc. And, not just $Y, but other venture capitalist don't want to be left out of making bank, so they, too, join the flock pumping in $Zs. Yes and no. First of all, VCs do a lot of research and they employ a legal and financial team to review the company and audit the company. This will show whether there were actual investments or not. It's very difficult to fool a VC that you have more money than you do from investments, as the financial books are audited by an independent party commonly like Goldman Sachs or something. Secondly, some VCs are actually very clever. If they see lots of dumb money going into the company they'll say two things quite often. 1) There's too much money, no substance. This company has more money than it needs and, as every person with too much money, will spend it on unnecessary things. So if you invest even more, guess what, your money is going to unnecessary things that startups should stay away from. And 2) They'll see that where the company was worth X, pre-interest it cost say X, but after all the hype, it costs 2X even though it's still only worth X. In other words, when a company is really hyped up, it's often too late for the VC investment. For example, Bitpay was probably a bargain when it only had 2.7m and little interest from VCs, but now with 33m in funding from top dogs, it's going to be expensive to buy. And VCs don't like that. Thirdly, VCs do their own research and run numbers. A lot about valuation is mathematics on projected revenues, or some strategic advantage (e.g. Yahoo buying a mobile company to move to mobile more), and they don't change when a company has a ton of interest from VCs. It's still got the same projected revenues so the valuation is more or less the same. But if a VC wants to invest, and then blow it off, that's often a signal to other VCs that the projected revenues were wrong, or the company wasn't that great after it was audited. But finally, yes, yes of course. VCs are humans, and if they see everyone try to get in on it, they'll probably pay a higher price. But the effect isn't as big as one might think. VCs are a lot more aware of herd-mentality since the dot com bubble, but they're not perfect. |
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A company's valuation is based on discounted expected future earnings. With bitpay you have to look at how much will they be earning next year, then the next, then the next? We already know that their revenues grew 10x last year. We've also heard that BitPay is presently making buckets of profit. Bitcoin hasn't even began to hit consumer adoption yet, so if the trend continues then there should be many years worth of exponential growth with a high profit margin.
Exactly. Some numbers: Bitpay processes about 500m a year. Their revenue is probably about 0.75% of that, or say roughly 4m. They have 40k merchants now and they add more than 1k every week. They growth is about 10% monthly, or 3x annually. In other words, if you imagine their growth rate continues for 5 years, their revenues are 4m, 12m, 36m, 108m, 324m. Then add another 5 years of slower growth, and apply a discount rate to that. It's quite easy to see why a 160m valuation isn't ridiculous at all. |
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I'll add some comments about business valuation.
Say I've got a money-tree (like a goldmine with a certain reserve of gold) that pays out $100 every year for 10 years. How much would you pay for it? Well, the lifetime revenue is $1000. But you wouldn't pay $1000, because of the time value of money. $100 in 1900 is worth only $2 today due to inflation of prices, for example. When you have $100 today and accrue interest for 10 years, it's worth a lot more than getting $100 in 10 years. So there's some 'discount rate' every year, so the money-tree might only be worth say $750. The rate depends on many factors, it's just an example.
This is roughly how companies are valued. You look at revenue streams and discount them over some time and then pay for that, minus some risk factor that the company fails. In addition, you may pay for various assets, but sometimes they can be a small factor. After all, assets are only valuable to generate revenue which you already calculate, or to sell. But some assets aren't very valuable when sold. (e.g. if Bitpay or bitcoin fails, its bitcoin payment processing software or its bitcoins will have little resale value. So for Bitpay, revenues are the big factor).
So let's look at Bitpay, they've recently stated in a developer presentation that they process about 1-2m a day. Say 500m a year. They also made public they grow at about 10% a month, which is equal to Coinbase, Blockchain.info and Multibit for example, so it's a very reasonable number. We can also say they take 1% as fees like Coinbase does.
So their revenues are 5m annually, today, and their growth rate is 3x annually. So for the next 5 years that's 5m, 15m, 45m, 135m, 405m.
See now where the 160m valuation comes from? Of course, this is a very rough calculation. For example, they make less than 1% in fees to be exact, it's probably closer to 0.75%. Their 3x growth per year is of course impossible to continue indefinitely, it may slow to 2x or even 1.5x at some point. And I haven't applied the discount rate yet (which isn't huge, by the way), nor the risk that bitcoin fails. (but then, it is *venture* capital). If you value a company on its 10-year revenue stream like is often done, 160m is a very realistic rate.
Now, let's be clear, Bitpay didn't make this valuation by itself. You've got a number of silicon valley / entrepreneurial legends turned investors (top-ranking ones) who offered to buy close to 20% for 30m. THAT is the valuation. These VCs made the valuation. Now you can say it's ridiculous without any arguments, but if I'd have to guess, I'd probably side with the VCs. They're self-made. Not by a single stroke of luck, but by series of successful companies and successful investments. You can be assured they've done their homework.
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Kraken is by far the best platform I've come across. The low volume is attributed to one fact that makes me extremely happy: they say no to trading in jurisdictions where they can't get complete legal clearance to work. That means large amounts of customers are unable to use Kraken because they comply with all laws. That means that if you can use Kraken, it's extremely safe. We need organisations like that. After all, jurisdictions will comply with BTC if they see the benefits and proper use of it in other places. What BTC doesn't need is an organisation doing business it's not allowed to do, shut down, get BTC people arrested and lose millions of customers' coins.
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Have you actually traded yourself yet, or is it just virtual profits in Excel?
Firstly, it's a great idea, arbitrage always is. But arbitrage is always limited by math, if the basic numbers don't work, the idea loses its complete value. Now the interesting question always is, if you make money doing this, why sell your technique? Especially a technique that has only 1 consequence, fewer arbitrage opportunities for yourself, thus canibalizing on any potential profits. There's only few reasons to still do this.
So that makes me skeptical from the get go.
As for the numbers. I ran a few theoretical cycles where you start with BTC and end with BTC. First you buy LTC, then buy a coin in LTC, then sell the coin in BTC. The numbers aren't really favourable, nor are they the other way due to the split between buy and sell prices. Going from USD to USD actually does work, but that's more an indication that BTC/LTC, BTC/USD, LTC/USD allow small arbitrage opportunity rather than any ltc-btc differences on alt coins. The transaction frequency is high too, so you're looking at least a percentage point in fees normally. When you factor in delays and price changes it becomes very hard to justify the risk on such small margins if they exist at all.
Generally you'll get two categories. Uninteresting, unhyped, dormant coins where due to a lack of interest arbitrage occurs between BTC and LTC. Problem here is that you usually have extremely low open orders and high sell/buy differences, because no coin-platform has a marketmaker yet. That means that if anything exists at all, it's at super low volumes of <$25, which is not great if you're looking at 2-3% profit. You also have a big effect on the market straight away.
On the other hand you have high volume coins like Quark, barely any arbitrage with enough volatility to destroy any tiny margins. Not worth your while comparing prices manually.
If you can automate it, that's great. If you trust in Cryptsy and their lack of transaction delays (don't), any calculation showing a profit should be a profit. I don't think there will be many opportunities, but if you leave it on 24/7, why not. As long as you stay away from fiat (apart from cashing out in weekly/monthly intervals), arbitrage should be fast enough to work.
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Thanks for sharing, interesting read.
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Well a few observations can be made:
Like e-mail is to mail, digital currency is to fiat money.
The fact that the majority of transactions will at some point in the future be digital is extremely likely, I'd put it close to 100%. However, the chance that Bitcoin will become and remain a long-term significant currency is much smaller, e.g. a 50/50. That means there's a good chance another digital currency will become popular. That's why some people invest in it when you can buy a thousand coins for a dollar, if any of these coins ever become worth a single dollar each, 1/800th of the price of a bitcoin, that's a massive profit.
Most of these currencies will simply fail, while others have interesting benefits that Bitcoin doesn't have. (faster transactions for example). Generally though, none of them can deliver on what's needed: momentum, a strong and innovative protocol a large fully decentralized network & ownership, massive user & merchant adoption, favourable opinions from government & media, a strong protocol and barely any monopoly benefits to the founders.
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Pretty sure you're safe.
Make sure to set up two-factor authentication on any bitcoin services. Also, Cryptsy for example stores my login information in a cookie by default, make sure to stop your browser from doing these things too.
Java apps to access cookies are commonplace also outside of Bitcoin.
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