Saturday, November 09, 2013

Valuing Bitcoin

Joe Weisenthal presents this … uhm, interesting slide that tries to impute a price for Bitcoin based on the market value of Western Union and PayPal, as well as the monetary base of Turkey or 5% of gold.

The best arguments for the long-term viability of Bitcoin that I have seen revolve around its usefulness for making payments. If Bitcoin becomes a popular way to make instant payments, rather than as an investments, then the value of Bitcoin will mainly derive from the fact that you need Bitcoin to make Bitcoin payments.

Western Union processed $71 billion in transactions in 2012.* If you assume that each bitcoin can, in practice, be used once per day for payments (allowing some for “investment” purposes and the need to keep some around in case you need to make payments), you need only $195 million in Bitcoin to make payments. So a bitcoin would only be worth about $16 to be as big as Western Union.

ACH, which processes most small-value payments in the US, handled $36.9 trillion in 2012. If Bitcoin payments become as big as, say, 5% of ACH, we would have a price per bitcoin of about $1,700.

The key assumption here is probably the velocity of circulation of Bitcoin. Perhaps a commenter who makes frequent Bitcoin payments can give us a better estimate. You could imagine a scenario where payment consumers hardly need to keep any bitcoins around, so each bitcoin can turn over dozens of times a day.

* It is probably more in 2013, but then again there are probably more than 11.9 million bitcoins around today.


  1. Anonymous1:33 PM

    Gold is the "primary global store of value" now?

    It's not clear that Bitcoin will ever be truly competitive as a method for making instant transactions. It's not instantaneous, it doesn't have negligible transaction fees, there's a tradeoff between fast and cheap that's only going to get worse as mining gets less lucrative, and it's pretty difficult to get actual currency into and out of Bitcoin. It's also not apparent that the USP feature of "decentralized currency" has any relevance to its potential value as a tool for easy quick transactions.

  2. I think the evidence given is in itself indicative of why BitCoin won't do as well as they claim. Western Union started more than 150 years ago, while PayPal started less than 20 years ago, yet PayPal is at roughly double the value. What this tells you is that the payments market is highly competitive and newcomers can and do outstrip established players.

    There will be more crypto-currencies and they will compete with one another, thus driving the prices down. Having said that, no one wants to be sitting with a crypto-currency when there are only three or four other users so starting a new network in this way is not a trivial thing to do... but it can be done. PayPal did it to Western Union, and Bitcoin is doing it to PayPal.

    Finally, it also comes down to the governments of the world and how hard they want to crack down on something that eats into their ability to print new money. Very difficult to predict what they are going to do and when. It appears that the Chinese government is actually encouraging citizens to buy Bitcoin, but no one knows why.

  3. We don't even need new cryptocurrency technology: there is nothing stopping anybody from duplicating bitcoin into citcoin, ditcoin, etc. As soon as it is done once, and the new entrant mines the easy coins, there would be a rush to duplicate those efforts and a huge crash in coin values as numerous valueless currencies proliferate.

    I'd guess that this is bound to happen if velocity keeps increasing: we would reach a limit to velocity that will create a need for more coins.

  4. A recent Chicago Fed Letter ( suggests that the maximum velocity of a bitcoin is once per hour; it also suggests that the maximum number of bitcoins will be permanently capped at about 21 million, which suggests some additional issues to consider. ("And that's not to mention the aerial photography"--"Alice's Restaurant" reference to other difficulties...)

  5. Incidentally, one additional issue about payment channels such as Western Union or PayPal or ACH is that they have not tried to create new media for payment; they use existing currencies. I suspect that lowers their cost of doing business and also makes entry into the payment-processing business easier.


    That's about 250k btc/day. We know that something like 1-2 million bitcoins have been lost. So assuming 9.6 million btc stock transacting 250k btc/day, giving a velocity around once / 38 days.