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 Author Topic: Bitcoin as Online Payment Processor/Trying to Calculate Minimum Intrinsic Value  (Read 1580 times)
Qoheleth
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 November 16, 2012, 11:41:49 PMLast edit: November 16, 2012, 11:53:50 PM by Qoheleth

From 2011Q4 to 2012Q3, Paypal's total payment volume - the sum USD value of all transfers through its system - was \$136 billion.

Let us postulate that in the future, Bitcoin/BitPay is able to absorb 10% of Paypal's market share in online money transfers - this is ambitious, but not delusionally so. In that case, Bitcoin would have an annual TPV of \$13.6 billion. The bitcoin network seems to take slightly over an hour - let's say 1.2 hours - to finalize a transaction (according to the "six confirmations" rule used by most clients). This means that assuming the network's transfers are uniformly distributed (the most conservative estimate possible - generally speaking there will be spikes and the biggest spike is the most important), Bitcoin must be able to represent \$13.6/365/20 = \$1.8 million in value at any given time. Folding in the data that the peak day for PayPal transactions - Black Friday - has a volume equal to about 248% that of an average Friday, we can conservatively estimate the peak requirement of "how much value the Bitcoin network must represent" as about \$4.46 million.

The most recent estimate that I have read - a paper analyzing the Bitcoin network - seems to believe that about 78% of Bitcoins in existence are either dead or in long-term storage. Assuming this ratio remains roughly accurate, the total number of coins available to represent transactions is (21 Million *  0.22) = 4.4 million BTC.

Thus: if Bitcoin is able to absorb 10% of Paypal's market share in online money transfers, the lower bound for the value of 1BTC is about \$1.01.

If there is something that will make Bitcoin succeed, it is growth of utility - greater quantity and variety of goods and services offered for BTC. If there is something that will make Bitcoin fail, it is the prevalence of users convinced that BTC is a magic box that will turn them into millionaires, and of the con-artists who have followed them here to devour them.
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 November 17, 2012, 12:00:34 AM

what if 1 bitcoin was 10% as popular as 1 oz silver coins

what then?

ElectricMucus
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 November 17, 2012, 12:07:54 AM

what if the moon is made of cheese?

My conclusion from this thread would just be that the infamous 78% are actually closer to 99%.
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 November 17, 2012, 12:10:38 AM

what if the moon is made of cheese?

My conclusion from this thread would just be that the infamous 78% are actually closer to 99%.

Most of the evidence I've seen is to the contrary, and the cheese theorists keep pretty quiet these days.
Qoheleth
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 November 17, 2012, 12:15:03 AM

what if the moon is made of cheese?
Certainly, I made quite a few assumptions. But this is the Speculation forum - isn't that the point?

what if 1 bitcoin was 10% as popular as 1 oz silver coins

what then?
Well, bullion silver isn't a currency these days - people seem to use it as a store of value, if anything. So I'd need some estimate as to the total amount of bullion silver in the world before I could calculate the necessary BTC price to store the same value.

If there is something that will make Bitcoin succeed, it is growth of utility - greater quantity and variety of goods and services offered for BTC. If there is something that will make Bitcoin fail, it is the prevalence of users convinced that BTC is a magic box that will turn them into millionaires, and of the con-artists who have followed them here to devour them.
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 November 17, 2012, 01:02:53 AM

Clever thinking, but I don't think it works for a couple reasons.

Your premise that the transaction volume of  BTC is 10% of Paypal is completely arbitrary, and since the lower bound is directly proportional to that number, it too is completely arbitrary.

You assume that each BTC is used once (i.e., the velocity is 1). The reality is that the same BTC could be used over and over, and that would reduce the lower bound.

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Qoheleth
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 November 17, 2012, 01:43:51 AM

Your premise that the transaction volume of  BTC is 10% of Paypal is completely arbitrary, and since the lower bound is directly proportional to that number, it too is completely arbitrary.
I'll grant that. It's the biggest assumption of this thought exercise, and was chosen mainly as a back-of-the-envelope target for growth.

You assume that each BTC is used once (i.e., the velocity is 1). The reality is that the same BTC could be used over and over, and that would reduce the lower bound.
No, I assume that each BTC is used once per hour - that is, that all BTC are in continuous motion. Any faster and people are spending their BTC before they get their six confirmations.

Of course, if BTC lie dormant between spendings, then the amount of money circulating at any given time is less than what was estimated, and the floor rises.

If there is something that will make Bitcoin succeed, it is growth of utility - greater quantity and variety of goods and services offered for BTC. If there is something that will make Bitcoin fail, it is the prevalence of users convinced that BTC is a magic box that will turn them into millionaires, and of the con-artists who have followed them here to devour them.
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 November 17, 2012, 02:13:21 AMLast edit: November 17, 2012, 02:23:39 AM by cunicula

From 2011Q4 to 2012Q3, Paypal's total payment volume - the sum USD value of all transfers through its system - was \$136 billion.

Let us postulate that in the future, Bitcoin/BitPay is able to absorb 10% of Paypal's market share in online money transfers - this is ambitious, but not delusionally so. In that case, Bitcoin would have an annual TPV of \$13.6 billion. The bitcoin network seems to take slightly over an hour - let's say 1.2 hours - to finalize a transaction (according to the "six confirmations" rule used by most clients). This means that assuming the network's transfers are uniformly distributed (the most conservative estimate possible - generally speaking there will be spikes and the biggest spike is the most important), Bitcoin must be able to represent \$13.6/365/20 = \$1.8 million in value at any given time. Folding in the data that the peak day for PayPal transactions - Black Friday - has a volume equal to about 248% that of an average Friday, we can conservatively estimate the peak requirement of "how much value the Bitcoin network must represent" as about \$4.46 million.

The most recent estimate that I have read - a paper analyzing the Bitcoin network - seems to believe that about 78% of Bitcoins in existence are either dead or in long-term storage. Assuming this ratio remains roughly accurate, the total number of coins available to represent transactions is (21 Million *  0.22) = 4.4 million BTC.

Thus: if Bitcoin is able to absorb 10% of Paypal's market share in online money transfers, the lower bound for the value of 1BTC is about \$1.01.
Nice work. I like your exercise. Here is another interesting exercise for you.

Suppose we use your math, but introduce one small tweak. Rather than relying on proof-of-work, bitcoin is redesigned as a proof-of-stake system. All txn fees go to bitcoin owners rather than hardware owners. Assume that the average txn fee of 0.1% of a sent balance. Fees then contribute to bitcoin's market value. The interest rate becomes very important here because it determines the conversion of expected fee revenue streams into present market value.

0.1% implies that \$13.6 billion in txns generates \$13.6 million in fees per annum. Assume an annual interest rate of 10% (this is high because of risk). \$13.6 million in fees per annum then has a present value of \$136 million.

Lower Bound on Market Cap = (\$4.46 million + \$136 million) = 140.46 million
Coins = 21 million [the hoarded coins are sitting around earning fees in this case]
Lower Bound on Price = \$6.70

Suppose that bitcoin is extremely low risk and has a 1% annual interest rate. With such low-risk, \$13.6 milloin in fees per annum equates to a present value of \$1.36 billion.

Lower Bound on Market Cap = (\$4.46 million + \$1.36 billion) = \$1.36446 billion
Coins = 21 million [the hoarded coins are sitting around earning fees in this case]
Lower Bound on Price = \$64.97

As you can see, the valuation of bitcoin is crippled by the PoW design.

[You could increase market cap arbitrarily by increasing the fee %, but this needs to be kept low to allow bitcoin to capture paypal's market share. I think 0.1% is reasonable.]
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 November 17, 2012, 06:04:43 PM

If it takes 10% of paypal tx then it would take at least the same from western union ccbill etc. I am suprised we are seeing mainstream adoption in wordpress before gambling/porn processing.

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