It's a recurring comment, even in this forum: "Bitcoin value is purely speculative".Or: "Bitcoin is too volatile as a store of value, and besides (pseudo) anonymous transactions for shady businesses, it doesn't have any intrinsic value."
Let's see.
This morning I read about the new pricing layers of Bitpay. Next, I looked up pricing on other payment providers, something I wanted to do for a while but never got around to do. So what follows is a short summary of what I learned.
Let's say you're a small business owner (transaction volume: 10k USD per month). Or maybe a bit bigger? (100k USD per month). Or maybe you're reasonably big (1M USD per month) What are your options?
Until recently, your obvious choice for case #1 (10k), and probably #2 as well (100k USD) was pretty clearly...
PayPal -- open about fees (sort of), but f*cking expensiveWhen you go to the Paypal website, then the site for merchants, they pretty clearly show their pricing model: 2.2% to 2.9%. Let's give them that at least: they're open about it.
When you read a bit more about it though, it turns out there's a number of hidden fees that PayPal places onto the merchant, like unfavorable (for the merchant of course) transaction rates during the calculation. In effect, as a small to medium business you're looking at
PayPal fees around 3% of your transaction volume.Next, let's look at the 800 pound gorilla of payment processing:
Visa -- Cheaper, but fees are one intransparent messThere's no easy way, it seems, to find Visa's pricing model for you as a merchant from their website. There's this FAQ-style subsection...
but basically, it just tells you "There are fees. How much depends". Which is probably on purpose: it seems fees are (to a degree) negotiable with a large processor like Visa. The bigger your business, the more favorable the rates will be, presumably.
A bit later, I found this, which seems to give a more detailed overview of their fees. It's only a partial screenshot, by the way. The full list is much longer...
Yes. You read that right. There's a "Kilobyte (KB) Access Fee". Gotta pay for those precious KBs for each transaction, even in a centralized network.
To summarize: it looks like you are going to pay, on average, as a company big enough to work with
Visa, around 1.5% to 1.6% fees over transaction volume. About half of the PayPal fees. But from what I can tell, it's not really an option for small businesses (as defined above).
Bitpay -- "Purely speculative, no intrinsic value"Just kidding.
Look at this... "Pricing" is mentioned right at the top their frontpage, unlike Visa's page, where you couldn't possibly find that information. One could think their price is like a unique selling point for Bitpay...
So how much is it? Depends again on the size of your business...
Remember how I defined "small business" and "mid size business" above? 10k USD per month, 100k USD per month? Both of those would easily fall into the first category: a flat fee of 30 USD per month. So
Bitpay fees are equivalent to 0.3% over transaction volume (small business) and
0.03% for mid size business.
Only interesting for small fish, you say? Say you're in the range of 1M USD transaction volume per month. You'll get into their 2nd tier of pricing, paying 300 USD per month.
That's 0.03% fees again, as above. With a factor of 3 to grow, and still be in that tier (in which case your fees would be 0.01%).
I realize this is starting to sound a bit like an infomercial for Bitpay ("John, can you believe their super low fees?! It is just amazing!"), but it seems plain obvious to me that, in terms of raw transaction costs, Bitcoin is absolutely unparalleled, otherwise Bitpay couldn't offer prices like that.
Either the other payment providers (Visa, PayPal)
drastically lower their fees (we are talking an order of magnitude lower here), which is not going to happen, or they are going to suffer.
Alternatively, they can switch to Bitcoin as the underlying transfer mechanism, but then they'll need to justify their fees through additional services, like escrow. Which might actually happen, and it will probably be a viable business model to a degree. But almost certainly not to the tune of a factor 10 higher fees when compared to Bitcoin-based payment providers. Who could offer escrow services as well, if there's demand for it.
Hypothetical objection #1So let's say you object with "Volatility risk!".
Bitpay gives you the option for settling your payments 100% in fiat (USD, Euro, etc), 100% in Bitcoin, or any ratio in between. The merchant chooses the amount of volatility risk he's willing to take, up to and including "0%".
Hypothetical objection #2What about confirmation time? "10 minutes is too long in a brick and mortar store!".
Using raw Bitcoin transactions, that might be true. I claim that for Internet businesses, 10 minutes processing time is simply not a problem. It's not as if you usually ship within 10 minutes anyway. For brick & mortar stores, 10 minutes is too long, granted. So they'd have to take the rout of 0-confirmation transactions. Which opens them up to the risk of double spending attacks, right?
True. How convenient that, if Bitpay handles the transaction, they take the double spend risk. I guess they calculated it through and can see that the effort to execute a 0-conf double spending attack simply isn't worth it for everyday transactions. Whatever way they arrived at their conclusions, the merchant doesn't have to bother with it, so both Internet businesses and brick & mortar stores can use Bitcoin-based payment systems, risk-free.
tl;dr Paypal fees = 3%. Visa fees = 1.5%. Bitpay fees = 0.3% to 0.03%. There's your "intrinsic value" of Bitcoin, right there.
Addendum #1: This post isn't really meant as a raving, positive appraisal of Bitpay. I just picked them to illustrate a point: that, all other questions aside ("is Bitcoin a true currency?", "will it be a store of value?"), Bitcoin already has real, intrinsic value as a payment system, by being cheaper than anything else available.
Addendum #2: Alright, so let's tie this in with a bit of price speculation. I will make three assumptions, argue why they are relatively uncontroversial, and will derive a minimum price to represent the fair valuation per bitcoin, based on a barely speculative assessment of the fundamentals.
Assumption #1: The Bitcoin network
proper will see yearly payment volume at least as high as the current yearly payment volume of Paypal.
This is what ties this calculation in with my post above: I think it is extremely likely that, within a few years at most, Bitcoin will be used for payments (perhaps chiefly for Internet commerce) in the same range that Paypal is doing business. I personally believe it will far
surpass Paypal, but I'm trying to find a minimum here.
Paypal payment volume is about
200B USD per year.
Source.Note: I prefer not to equate "payment volume" and "USD denominated transaction volume over the network". "Payment volume" implies a necessary minimum valuation necessary to enable that payment volume denominated in USD, while "USD transaction volume" can freely rise and fall with the exchange rate.
Assumption #2: There are at most about
10M bitcoins in free circulation.
You can convince yourself by searching for the various calculations done on this forum that number being relatively conservative. Less than 13M bitcoins have been mined so far. Knowledge of permanently lost bitcoins + seized amounts + high value wallet addresses that haven't moved in years amounts to a number probably lower than 10M, but again: the goal is a minimum prize.
Assumption #3: 'Velocity of circulation of money' for Bitcoin is not completely determinable yet, but almost certainly below V_year = 10.
It's another regular exercise on this forum and blogs, to determine the velocity of money for Bitcoin.
Here's an analysis that looks at USD transaction volume and derives a value of around 7.3.Like I said above, I don't completely agree that USD transaction volume is quite the same as "meaningful payment volume", so I'd also like to look at the velocity of fiat currencies. We could reasonably hope Bitcoin to be as fast as cash (or monetary assets with liquidity similar to cash), so the comparison I feel is suited best is with M1 money supply, which had a yearly velocity between 6 and 11, during the last 20 years.
Source.
I would argue that setting the yearly velocity to 10 is a rather unproblematic choice then, as it is almost certainly too high, not too low. At a yearly velocity of 10, it certainly wouldn't be worse than what is usually considered the most liquid asset of choice (cash or cash-like instruments) in our economy.
Putting it together: (200B USD / 10) / 10M bitcoin =
2000 USD per bitcoinHere's how I see this number: 2000 USD is the currently lowest possible fair valuation per market traded bitcoin, based on fundamentals that are not true yet right now, but very likely to become true within a time frame of at most a few years.
My original post about payment provider fees serves as the justification for why I consider the change in fundamentals to be likely (i.e. Bitcoin will grow at least as big as Paypal), for the other values of the formula I have provided fairly conservative estimates, so I feel certain enough that 2000 XBT/USD is a currently fair valuation of Bitcoin assuming only very weakly speculative changes in the fundamentals.
Note please: this is a
minimum for a currently fair valuation per coin. There are many here on this forum who believe in vastly higher valuations (100k USD per coin. 1M USD per coin), but I'd rather not comment on the likelihood of those scenarios.
I claim that the above calculation is fundamentally different: instead of having to assume that relevant portions of the gold market migrate into the network, or that the Eurozone collapses, it simply assumes that Bitcoin succeeds in the one field where it arguably already gained a foothold: payment processing, and that it does so without becoming the largest processor (like Visa), but simply occupies a mid-sized niche (like Paypal).
