Bitcoin's revenue multiple

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Bitcoin is a sleeping giant.

This feels weird to write because of how much coverage there has been of the nascent asset, but hear me out. There are two components to Bitcoin — (1) the digital asset that can be held by investors and (2) the transaction settlement network that is run by miners.

Almost all of the press coverage to date has been focused on the digital asset, with very little attention being paid to the transaction settlement network. The network has quietly grown into one of the most interesting stories across technology and finance though.

Traditional networks, such as Facebook, Twitter, Visa and Mastercard, are run by centralized companies that capture revenues on a single set of financials. By looking at the financial performance of the centralized entity, investors can quickly evaluate the health of the business, while assigning a revenue multiple to arrive at a valuation.

In the decentralized world, there are thousands (or millions) of separate people/entities that coordinate resources in a unique way to run a network. For example, just like Visa and Mastercard are running a transaction settlement network, thousands of Bitcoin miners around the world are working together to run a transaction settlement network too. The revenue and financial performance of each miner is captured by thousands of different sets of financials, which makes it incredibly hard to evaluate or arrive at valuations.

Diar, a cryptocurrency research firm, has published new data that shows Bitcoin miners were paid a total of $5.8 billion in revenue in 2018 for running the Bitcoin transaction network. While it it would be difficult to get the full P&L statements for so many different mining operations, we are still able to take this top line revenue figure and put it into context.

As you can see from the numbers above, the Bitcoin network is currently sitting in the middle of the pack when it comes to revenue multiples for some of the largest networks in the world. Additionally, Bitcoin’s revenue multiple is actually lower than both Visa and Mastercard — the two transaction settlement networks that are most commonly compared to Bitcoin.

This doesn’t necessarily mean that Bitcoin should be valued by a revenue multiple, but it is a single data point that adds context around the current performance and value of the transaction settlement layer. Additionally, a counter argument would be that much of miners’ revenue in 2018 came during Q1 and today those running the network are being paid much less.

This is a fair argument. As of yesterday, miners made $6.95 million in daily revenue, which would put them on a $2.5 billion annual run rate. Keeping the current market cap constant, this puts Bitcoin’s revenue multiple at 25x. While higher than any of the other networks, it is still reasonable given the fast growth rate and historical premiums given to early companies/networks in an attempt to price in untapped potential.

Bitcoin, the transaction settlement network, did over $410 billion in on-chain transaction volume in 2018 and is likely to continue with $3+ billion in daily transaction volume in 2019. Rather than being fanatically focused on the exchange price of Bitcoin as a digital currency, more people should be paying attention to the sleeping giant — the transaction network.

Today, it is 1/4th the market cap of Mastercard and 1/6th of Visa, but it wouldn’t surprise me if Bitcoin surpasses both within the next 36 months. The legacy networks were built for a world that we no longer live in and the decentralized network is built for the future.

I know which one I’m betting on :)


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