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Author Topic: "Bitcoin only has speculative value". Are you sure?  (Read 3642 times)
oda.krell (OP)
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June 05, 2014, 10:37:08 AM
Last edit: July 05, 2014, 01:40:59 PM by oda.krell
 #1

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 expensive

When 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 mess

There'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 #1

So 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 #2

What 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 bitcoin


Here'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).

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June 05, 2014, 10:45:43 AM
 #2

very nice but you forgot one thing... what are the rates the customer gets?
a merchant needs to have that priced in as well

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June 05, 2014, 10:47:23 AM
 #3

For fair comparison it's worth factoring in the bitcoin network running costs:

https://blockchain.info/charts/cost-per-transaction

The question is, can and will the bitcoin network scale to the volume and value of transactions such that this cost becomes negligible?

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June 05, 2014, 10:50:14 AM
 #4

Agreed with the main message, Bitpay is actually the strongest fundamental I know of. But as others said it needs to scale and it isn't proven yet. Bitpay may also have some hidden costs or risks (some sorts of fraud or attacks that are only possible with Bitcoin) that they have just been lucky to avoid so far.
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June 05, 2014, 10:51:08 AM
 #5

very nice but you forgot one thing... what are the rates the customer gets?
a merchant needs to have that priced in as well

You mean, the cost of acquiring bitcoins for the customer? Or "handing through" the cheaper costs to the customer in the form of a rebate?


The former is a good question, but doesn't really matter to the business owner: if his/her operating costs are lower, he/she's happy.

Which brings us to the latter: if people are reluctant to make use of the new, more efficient payment system, businesses have a simple option - pass through some of the reduced costs to the customer in the form of rebates. As long as the rebate is lower than the saved costs, it's still profitable for them to do so, and if the rebate is high enough, it will attract additional customers that look for the lowest price of an item.

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June 05, 2014, 10:56:23 AM
 #6

ok as an extreme example I want to buy a $100 item;
bitcoin average says 1btc = 500
so I would need to pay .2 btc + miner fees
however according to the ticker the merchant uses (the bitpay api)
I would have to pay .3 so now my item is way more expensive than paying with paypal or visa which won't cost me anything

in other words it does matter to the merchant he won't sell me as I would be looking for an other merchant with better rates for me as a customer

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June 05, 2014, 10:56:52 AM
 #7

Agreed with the main message, Bitpay is actually the strongest fundamental I know of. But as others said it needs to scale and it isn't proven yet. Bitpay may also have some hidden costs or risks that they have just been lucky to avoid so far.

Agreed as well.

Bitpay is arguably one of the strongest fundamental we have.

And 'will the network scale?' is the biggest open question right now.

I'm betting it will. The need for proof-of-work and confirmation time are in some sense an overhead when compared to centralized systems, but not to the point where I see the decentralized system, when coded and run by some pretty competent engineers, incapable to scale to the size of the centralized system.

Reminds me a bit of the old 'commercial' vs 'open source' software debate. Consumer market aside, there are areas (servers) where OSS is simply the de facto standard. In other words: it scaled well. I can absolutely see the same thing happening for Bitcoin.

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June 05, 2014, 10:57:59 AM
 #8

For fair comparison it's worth factoring in the bitcoin network running costs:
No, it isn't. The network is being run on a volunteer basis, and the people doing so are profiting from it.

Look inside yourself, and you will see that you are the bubble.
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June 05, 2014, 10:59:39 AM
 #9

Bitcoin will scale when tx increases... if we don't bitcoin dies

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June 05, 2014, 11:01:05 AM
 #10

Agreed with the main message, Bitpay is actually the strongest fundamental I know of. But as others said it needs to scale and it isn't proven yet. Bitpay may also have some hidden costs or risks that they have just been lucky to avoid so far.

Agreed as well.

Bitpay is arguably one of the strongest fundamental we have.

And 'will the network scale?' is the biggest open question right now.

I'm betting it will. The need for proof-of-work and confirmation time are in some sense an overhead when compared to centralized systems, but not to the point where I see the decentralized system, when coded and run by some pretty competent engineers, incapable to scale to the size of the centralized system.

Reminds me a bit of the old 'commercial' vs 'open source' software debate. Consumer market aside, there are areas (servers) where OSS is simply the de facto standard. In other words: it scaled well. I can absolutely see the same thing happening for Bitcoin.
I know that BitPay is bigger, but why isn't CoinBase such a big fundamental?  Does BitPay provide a better service?
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June 05, 2014, 11:01:19 AM
 #11

Bitpay is the ideal chasm filler

oda.krell (OP)
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June 05, 2014, 11:03:52 AM
 #12

ok as an extreme example I want to buy a $100 item;
bitcoin average says 1btc = 500
so I would need to pay .2 btc + miner fees
however according to the ticker the merchant uses (the bitpay api)
I would have to pay .3 so now my item is way more expensive than paying with paypal or visa which won't cost me anything

in other words it does matter to the merchant he won't sell me as I would be looking for an other merchant with better rates for me as a customer

Okay, got it now.

Bitpay's current exchange rate: 644.7

Bitstamp, median price of previous hour: 645.7

Less than 1% apart (actually, 0.15%). Possible that they price it such that they make a (small) profit on it, but you'd have to time your own buys/sells and following transactions pretty well to beat them.

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June 05, 2014, 11:05:25 AM
 #13

For fair comparison it's worth factoring in the bitcoin network running costs:
No, it isn't. The network is being run on a volunteer basis, and the people doing so are profiting from it.

You could apply that same argument about paypal.
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June 05, 2014, 11:05:55 AM
 #14

I know that BitPay is bigger, but why isn't CoinBase such a big fundamental?  Does BitPay provide a better service?

I don't know. Because I read about Bitpay this morning?

I don't have any shares in them so:


Yay for Coinbase as well! They're at least as good as Bitpay (probably? tell me, please.)

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June 05, 2014, 11:08:03 AM
 #15

I have built a few sites for clients in the past that use bitpay and the price gap was an issue because of high priced items they sold (mainly metals and jewels) margins were tight in the market and the offset disrupted the prices quite a bit

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June 05, 2014, 11:11:20 AM
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A big difference between BitPay and PayPal or Visa is BitPay isn't required to provide a chargeback service. It's my understanding this is a legal requirement for the companies that do provide it, and I find it hard to believe BitPay won't be faced with the same requirement as soon as legislators catch up. What will happen to pricing then?

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June 05, 2014, 11:12:52 AM
 #17

I have built a few sites for clients in the past that use bitpay and the price gap was an issue because of high priced items they sold (mainly metals and jewels) margins were tight in the market and the offset disrupted the prices quite a bit

I see. Something to watch out for then, I guess.

Wonder if there's a site that tracks historic Bitpay rates vs. market rates.

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June 05, 2014, 11:15:30 AM
 #18

I'm not sure because back then gox had quite few $ on stamp
and since gox was #1 that's what a lot users looked at.

Luckily things have changed and we now use bitcoinaverage like services

I have built a few sites for clients in the past that use bitpay and the price gap was an issue because of high priced items they sold (mainly metals and jewels) margins were tight in the market and the offset disrupted the prices quite a bit

I see. Something to watch out for then, I guess.

Wonder if there's a site that tracks historic Bitpay rates vs. market rates.

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June 05, 2014, 11:15:39 AM
 #19

I think paypal fees are actually closer to 5% for small (several dollar) sales, as far as I remember having to deal with them several years ago. Because there's percentage + fixed fee.

Other than that, definitely bitcoin is the money for the internet, no doubt about that. Any other system will pale in comparison just because they all have to use ugly kludges to operate on the internet (apart from paypal, which spends it's 5% having to fight all kinds of scammers, chargebackers, etc - main reason they are still after all those years hardly cover 1/3rd of the world).

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June 05, 2014, 11:19:37 AM
 #20

A big difference between BitPay and PayPal or Visa is BitPay isn't required to provide a chargeback service. It's my understanding this is a legal requirement for the companies that do provide it, and I find it hard to believe BitPay won't be faced with the same requirement as soon as legislators catch up. What will happen to pricing then?

What is interesting about that, is that in terms of avoiding chargebacks it makes using bit pay less attractive than just using bitcoin itself.

I'm not saying send BTC blind (course you can if you want) but in a hazy-trust situation use the mechanism(s) present in the BTC protocol (e.g. multi signed transactions/escrow etc). I don't know where we are in terms of easy to use public implementations of such things, but I understand those things are possible?

One step further away from fiat...

"A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution" - Satoshi Nakamoto
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