Why Is It That VCs Love The Bitcoin Market – Part 1

A Look Into The Bitcoin Ecosystem.

The bitcoins ecosystem as a VC is quite interesting that is not ideological but mercenary seeing the opportunity for Bitcoin disrupting multi-billion-dollar markets whereby doing so is also creating new big markets with three key markets in Bitcoin

Wallets: they hold the bitcoins for you serving some of the checking account functions of a bank

Exchange: where they convert from USD to bitcoins and back

Payments: where they help merchants accept bitcoins for their transactions.

These come as a rule of thumb seeing billion-dollar markets getting excited as these markets get to be a billion dollars in size.  

Wallet

Bitcoin wallet as a piece of software on the computer is free to get that you can use to send or receive bitcoins. This entails storing the Bitcoin private key on the computer risking loss or theft. As by many bitcoins users, it is increasingly turning to hosted wallets holding the money for you and accessing them over the web. In case you have to trust the hosted wallet is sure not to run off with the money, as client wallets are free and hosted wallets have been typically free as well.

For an example let’s assume that one day in the future, the hosted wallets can charge 0.5 percent funds in the account as an annual fee and likely a high estimate if not impossible if the wallets offer enhanced security, insurance against loss, as also perhaps some kind of escrow or other fraud purchase protection. In the wallet market to be worth $1billion, this would imply $1billion/0.5% = $200 billion in bitcoins is needed to be held in hosted wallets. This is sure to mean that the market cap of Bitcoin needs to be at least $200billion as relative to $1.5 billion today. In this situation, Bitcoin would need to appreciate by almost 150x to reach this level. While in the case of Bitcoin, it has gone up by 30x as it isn’t impossible to believe that two more years like that would hopefully get you there.

Exchange

It may be a fact that in a long time and most probably never that Bitcoin becomes the default world currency as with the result of demanding exchange between Bitcoin and fiat currency does not happen for a long time. Charging between 50to100 basis points on each trade are the consumer level exchanges as bigger trades currently pay closer to 10 basis points. Assuming that in future trading commissions run around 25 base points, they get $1billion in market size would need to see $1billion/ 0.25%= $400 billion in annual trading volume. While the exchange volume came around $60 million it, looks like it may get to $ 200million. As you annualize this it gets you to between $720 million -$2.4billion in annual trading volume. This takes you to assume the top end of estimates, trading volumes would need to go up by 200x current levels to hit the market size.  

Within the real economy, the transaction volume transfers of Bitcoin has historically floated within a constant multiple of trading volume as the volume remains roughly linear, transaction volume needs to rise by 200x current levels hitting the target $ 1 billion market size believing given transaction volume has gone up 30x. 

Payments

Being the key driver of both Bitcoin price appreciation and exchange volume has to be the payment volume as people aren’t using Bitcoin to pay merchants for the transaction as then there would be no real economic driver for either price or exchange volume to rise. Driven purely by speculation it would be. Bitcoin with one of the key advantages is that nominally the zero transaction costs being said there are several additional merchant services added on top of transaction processing justifying 25 basis points or more in merchant fees. Today BitPay charges1% or more and to get to$ 1billion in market size it would need to see $1billion /0.25%= $400 billion in annual transaction volume. 

Wrapping Up The Discussion

As transaction volumes were around250 million, it looks like the track for $750 million whereby annualizing gets between $3 billion and $ 9 billion in annual transaction volume. Taking to the top ends estimates it requires an increase in transaction volumes going up by30x, where the comparison point of world GDP is around $ 82 trillion representing about 0.5 percent of world transactions using Bitcoin. The $ 2.5 trillion spent on credit cards per year in the US alone is out of $ 15 trillion in GDP as about 16 percent.