Blockchain / Bitcoin / Other Crypto Valuation

Today, I will not delve into any complex financial models in hopes of creating a new crypto valuation model, rather I will spend time on assessing the simplistic value of the many functions that blockchain solves today or hopes to solve in the future.

I want to walk through the value-adds of blockchain technology and its byproducts: cryptocurrencies and cryptoassets (cryptos). With that in mind, what does blockchain stand to disrupt/improve in the current economic/social environment of today?

⦁ Improved transactions (speed and validation)

⦁ Reduction to the cost of services

⦁ Blockchain as a Currency (will be included in my next blog)

⦁ Blockchain as an Asset (will be included in my next blog)

By pinpointing these benefits, we can now begin to hypothesize the value of the aforementioned blockchain functions and cryptos.

Valuation Methodology (Overly Simplistic)

Many professionals claim that Bitcoin and other cryptos have no intrinsic value, as they are not like traditional investments that have a cash flow stream. While this is true, except in the case of cryptos like NEO that pay a "dividend", these critics fail to see the value of the aforementioned functions, listed in the previous section. For that reason, I will try to dispel those zero-value pleas.

For reasons of simplicity, let's create a simplistic model absent of obfuscation by way of complicated equations and jargon. 

Given this, valuations will only be hypothesized in terms of present value (PV).

Improved Transactions

Simply put, powering a digital world with the adoption of blockchain, the following banking fees have the potential to be drastically reduced or even eliminated:

ATM Withdrawal Fees

• In a digital world, handling non-digital fiat currency becomes impractical. For that reason, one could assume that the ATM fee income could be drastically reduced or even eliminated.
  
• According to Bank Call Reports, JPMorgan Chase, Bank of America and Wells Fargo earned more than $1.1 billion in 2016 from ATM fees.
  https://en.wikipedia.org/wiki/ATM_usage_fees
  
• Annual PV = $1.1 BN (only includes top three U.S. banks)

Interchange Fees

• In today's world the largest credit card companies (American Express, Discover, MasterCard, Visa, etc...) charge a ~2% fee to process credit card transactions.
  
• In 2016, these fees amounted to ~$42.4 billion.
  https://www.fool.com/credit-cards/2017/04/13/this-is-how-credit-card-companies-hauled-in-163-bi.aspx
  https://en.wikipedia.org/wiki/Interchange_fee
  
• Disclaimer - Today's cryptos do not eliminate the concept of interchange fees; however, newer blockchains do offer the hope of having fees that are an extremely small fraction of the fees that today's companies charge for processing transactions. There will always be a need to charge a fee to process a transaction, but the fee could be reduced via blockchain efficiencies.
  
• Annual PV = $42.4 BN

Reduction to the cost of services

Settlement Costs

• Given the promise of being able to make and settle transactions nearly instantaneously, as opposed to the traditional 2-3 day clearing patterns seen in today's environment, one could assume that if financial transactions are only processed using blockchain technology, then the fees associated with clearing/settling processes would could also be drastically reduced, as individual companies will no longer be responsible for settling each transaction.
  
• Please view the article below, if you are unfamiliar or want to learn more about how money currently moves around the globe.
  https://gendal.me/2013/11/24/a-simple-explanation-of-how-money-moves-around-the-banking-system/
  
• Annual PV = I couldn't find any exact numbers for how much financial institutions spend on software systems and employees, but you can only imagine that this is not cheap. As well, it should be noted that every company partaking in a transaction has to have some kind of record keeping and quality control framework around their transaction logs. This not only comes in as an expense of hiring a department of employees to manage these datasets, but one should also bake into the price the cost that companies pay auditors to ensure that their data is correct. Globally, these costs could easily amount to tens of billions of dollars annually.

Data Security Costs

• According to Gartner, for 2017, companies were projected to spend ~$84.4 billion on  cybersecurity. That expense number is set to increase significantly in the years to come.
  https://techcrunch.com/2017/08/16/global-cybersecurity-sending-to-grow-7-to-86-4bn-in-2017-says-gartner/
  
• Cool! Why does that matter?
  
• For seasoned blockchain enthusiasts, you can skip this next part. For newbies like myself (I am a forever noob), let's read on.
  
• It matters because most people understand blockchain as big wallet that stores dollar values in each wallet. I want you to continue to think about that concept, but now instead of dollars I want you to imagine other types of data like files and other accounting records. When we think about it this way, we can begin to see the security power that blockchain could potentially offer.
  
• With that in mind, using a fully encrypted blockchain, businesses could participate and validate other businesses' data and avoid the costs that they spend each year on IT security staff and software.
  
• Annual PV = $84.4 BN

Present Value of the Aforementioned Blockchain Functions

• Represented annually, the hypothesized value comes to $137.9 BN (if we use a hypothetical value of $10 BN for Settlement Costs).
  
• Let's extrapolate that further and say blockchain technology is utilized for the next 15 years. Using a meager multiple of 15, we come to a valuation of $2,068.5 Billion or $2.0685 Trillion.
  
• So...maybe we have a bit of a ways to go before we're officially in a bubble.
  
• BTW...the VCR lasted 40 years
  https://arstechnica.com/gadgets/2016/07/vcr-vhs-production-ends/

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I look forward to writing my next blog on evaluating cryptos as a currency and as an asset.

All the best,
Jeff-Boyardee