Bitcoin: Better Investment Than Startups

Monday I wrote bitcoin gets unfairly compared against the most successful monetary units on the planet: gold and the US Dollar. Instead it should be compared to startup companies because bitcoin is disruptive, not guaranteed to succeed, and it needs high growth or it will die.

 

Currencies vs. Companies

It is somewhat difficult to compare currencies to companies. Companies have a valuation while currencies have a monetary base. Companies have revenue while currencies have a monetary supply. However both have users and an ecosystem around them. Another interesting point, since bitcoin is a currency not a company it has no employees, expenses, or revenue.

 

Quick Stats (Potential Market cap is a back of the napkin calculation used for rough estimates):

 

 

What could propel bitcoin to a $2 trillion (according to Wedbush) plus valuation?

 

Related Article: 3 Secrets To Bitcoin Investment Success

 

1) Stable store of value. Having bitcoin be a stable store of value would be great for people in countries like Argentina, Venezuela, and Zimbabwe where inflation has destroyed family wealth.

2) Banking and financial services for everyone on the planet. Today the banking and financial systems that Americans take for granted are unavailable for about 6 billion people around the world. Bitcoin promises to give these people access to start of the art financial tools at almost no cost.

3) Computer software can directly use bitcoin. Think of the way email enables computers and companies to interact with people. Bitcoin will enable companies to enable software, cars, refrigerators, anything to send and receive money on behalf of people.

4) Primary means of facilitating internet financial transactions. Bitcoin was built for the internet. If bitcoin had existed in the 1990s it would have been built in as the standard way to pay for goods and services online.

5) Primary means of cross-border remittances. Today remittance services take billions of dollars from some of the poorest people on the planet. If bitcoin is successfully accepted around the world those fees would be fractions of a penny per transaction.

 

Bitcoin vs. Startups

When comparing bitcoin to startups two things jump out: risk and reward. Startup investors are expecting their investments to be risky but provide outsized returns to compensate for the risk. When comparing startups to bitcoin the risk profiles are similar, but the rewards for bitcoin investments are much higher if bitcoin is successful. Here are two examples.

 

Related Article: Is Bitcoin Your Chance To Profit Like A VC?

 

Tesla

Tesla is valued at $25 billion while it expects to sell 35,000 cars this year. For comparison Ford, GM, and Toyota have a combined market cap of $306 billion and sold 715 thousand vehicles to americans in March. Similar to bitcoin Tesla’s stock has a lot of expected growth built in to today’s current price. Neither companies market cap / valuation are reasonable based on current usage.

 

The big difference is in potential returns for investors. Someone investing in Tesla is making a bet Tesla becomes a serious player in the auto space. If it grows equal to Toyota’s $180 billion market cap, that is a 700 percent return. Tesla is an evolutionary improvement over existing technologies. Bitcoin on the other hand is a substantially different currency compared to traditional currencies. If it reaches a fraction of it’s potential it would still return to investors %2,500.

 

Investors taking a risk on Tesla should at least be interested in bitcoin due to the much larger comparative upside and similar risk profiles.

 

Twitter

Twitter Weighs in at a $20 billion market cap with 645 million users. WIth about 2.5 billion internet users Twitter can only grab about 4x more eyeballs before everyone on the internet is using them. In addition to the limited growth potential investors are also concerned about Twitters revenue per user.

 

If Twitter does everything right over the next few years investors might be able to get a 10,000% return on their money. However if bitcoin achieves only a fraction of it’s potential, investors can expect a 10,000 percent return in a similar or smaller time frame. If everything goes bitcoins way in the same way it would need to for Twitter to provide a 10x return, the upside is almost unlimited.

 

Related Article: Signs A Bitcoin Tidal Wave Is Forming To Disrupt Business

 

Again investors taking a risk on Twitter should at least be interested in bitcoin due to the much larger comparative upside and similar risk profiles.

 

Bitcoin vs. Payment Companies

The first use case for bitcoin is as a payment network. It is interesting to compare bitcoin to Western Union and Visa since bitcoin is just beginning to compete with these companies.

 

Western Union

How does Western Union with an $8 billion market cap stack up against bitcoin? Western Union has 200 million users and 500,000 locations in 200 countries. Bitcoin has around 5 million users and probably around 100,000 to 200,000 merchants accepting bitcoin.

 

Some claim bitcoin passed Western Union in transaction volume last November. Looking at the massive difference in users that may or may not be true. One of bitcoin’s strengths is the ease and extremely low cost of moving money. This makes it hard to differentiate between transactional volume and people reshuffling accounts. Adding to the confusion are exchanges which let people trade millions of dollars of bitcoin for dollars every day.

 

Since bitcoin doesn’t have nearly the same usage level or locations around the world accepting it, bitcoin has a very different risk profile to Western Union and a very different reward profile. Western Union’s risk is that technologies like bitcoin or companies like Facebook, Chase, Apple, Visa, etc. are innovating in the payments space and may destroy Western Union’s business model.

 

The reward profile for Western Union is that it has been around a long time and predictably pumped out dividends for shareholders.

 

Anyone investing in bitcoin is betting Western Union will not exist in the next 5 years or will be a radically different company. Bitcoin’s primary use case is moving money anywhere in the world as fast as email for a fraction of a cent. It doesn’t seem reasonable Western Union can compete with bitcoin if bitcoin gets the traction it needs to lower it’s volatility.

 

Related Article: PayPal Should Use Bitcoin, Not Compete

 

Visa

Visa is a giant in the payments industry. With 500 million users worldwide and growing Visa is a formidable competitor. Especially in the US Visa is ubiquitous, convenient, and has a huge infrastructure supporting it.

 

From a merchant's perspective bitcoin is great, enabling transactions for no fees, eliminating fraud, and gaining control over dispute mediation. However from a customer perspective Visa still has an attractive value proposition letting customers pay for things later, protecting them in disputes, and providing insurance for some purchases.

 

There are two areas where bitcoin provides significant advantages over Visa: online payments and micropayments. Credit cards weren’t built for the internet and they can’t handle 10 cent payments. Bitcoin is built for the internet. Payments are secure, fast, and almost free. If bitcoin is successful personal payment information data breaches and fraud will be eliminated. Bitcoin’s almost free transaction cost will also enable new business models.

 

Bitcoin may even save journalism. With micropayments customers can pay a fraction of a dollar to read an article. In the future journalists may even be able to crowdsource payments for in depth reporting. Sound farfetched? The Chicago Sun Times trialled a bitcoin paywall before deciding to accept bitcoin for subscriptions this year.

 

The risk reward profile for a Visa investor is much lower risk and much lower reward. Bitcoin is almost a polar opposite with a high risk and high reward. Visa is much better positioned to compete with bitcoin than Western Union. However if bitcoin continues to gain traction Visa will start to hemorrhage market share, especially online.

 

Bottom Line

Bitcoin is a high risk high reward investment. Those seeking a high return by investing in emerging companies should look at bitcoin. Investors in the financial space should be watching bitcoin developments. Bitcoin turn stable companies like Western Union and Visa into troubled companies like Netflix did to Blockbuster?

 

Disclosure: At the time of this writing David Smith had a long bitcoin position.