Saturday, 04 February 2023

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In continuing my PSA on well funded bitcoin startup valuations (reference Imy valuation estimate of Bitpay, a rapidly growing payment processor), I bring a forensic analysis and valuation of Coinbase, likely the 2nd largest money exchanger in the bitcoin business.

 Valuation Case 2- COINBASE

Revenues for Coinbase is calculated based on global monthly transaction size (US$) of the company. Annualizing the transaction resulted in Total transactions for 2014  

As per the information available, Coinbase charges 1% as transaction fee resulting in the revenue of the company.    

Table 3- Revenue Forecast, US$

 
 

2014F

2015F

2016F

 

Annual Transactions*, US$

1,085,488,973

     1,248,312,319

     1,435,559,166

 

Transaction Fee (%)

1.0%

1.0%

1.0%

 

Total Revenue

        10,854,890

    12,483,123

    14,355,592

 

*Growth assumed under moderate scenario

 

As per the news for funding in Coinbase, the valuation of Coinbase ranged between US$140 million – US$1 billion. Based on weighted average (by applying 70% weight to the lower figure in the range), the above valuation is derived at US$398 million. Applying the multiples at which Bitpay and Circle are estimated to have been funded recently (using average revenue multiple of Bitpay and Circle), the valuation based on 2015 and 2016 revenues is as shown below:

Table 4- Relative valuation

Particulars

2015F

2016F

Revenue ($)

    12,483,123

    14,355,592

Multiple Comparable- Bitpay and Circle

16.0x

13.5x

Valuation (US$mn)

                      200.31

                      194.23

 

Of course, we feel that these rapidly growing payment processor companies, although now profitable and expanding their reach like weeds, are barely touching the tip of what the Bitcoin industry will look like just two years into the future. 

Wall street, pay attention!!!

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See also:

  1. Payment Processors, Patents and a Dollop of Healthy Paranoia
  2. Margin Compression Is Coming in the Payment Processing Space As $100 Million Pours Into Startups
  3. Bitcoin Myth Busting 101

 

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Continuing on the margin compression theme originally laid out in Margin Compression Is Coming in the Payment Processing Space As $100 Million Pours Into Startups, I illustrate mathematically how the bit startups in the Bitcoin space will be forced to reach up the foodchain rungs faster than many think.

Valuation of BITPAY, COINBASE and CIRCLE

This is an exercise to arrive at valuation of three of the well-known Bitcoin applications that have recently been in news for funding from investors. Unlike high-level valuations assigned to these companies we analyzed revenues in much deeper detail, segregating value drivers and revenue streams and projecting them for the foreseeable future. This thus has enabled a more granular valuation than the high-level valuation that we see in the news for these companies in their recent funding rounds. 

Valuation Case 1- BITPAY

BITPAY revenue plan is based on monthly subscription model wherein the company charges $30, $300 and custom negotiated rates that are not published, under different subscription plans.  Currently, Bitpay claims ~30,000 subscribers.

For the purpose of calculating revenue from each plan, total subscribers (30,000) have been segregated under each plan based on their probability of occurrence (and put a nominal fee for ad hoc, a la carte and custom services on the higher ends of the range). Multiplying probable subscribers with subscription fee resulted in total revenue for the company. 

Table 1- Revenue Forecast, US$

 

Subscription Plans

2014F

2015F

2016F

 

     Plan 1

         10,260,000

         11,850,300

         13,310,257

 

     Plan 2

            4,320,000

            4,944,240

            5,501,950

 

     Plan 3

         10,260,000

         11,634,840

         12,826,248

 

     Plan 4

            5,400,000

            6,066,900

            6,625,055

 

Total Revenue

         30,240,000

         34,496,280

         38,263,510

 

As per the news for funding in Bitpay, its valuation is estimated at $160 million. If we apply multiple at which Coinbase and Circle are estimated to have been funded recently (using average revenue multiple of Coinbase and Circle), the valuation based on 2015 and 2016 revenues is as shown below:

  Table 2- Relative valuation

Particulars

2015F

2016F

Revenue ($)

         34,496,280

         38,263,510

Multiple Comparable- Coinbase and Circle

29.7x

25.3x

Valuation (US$mn)

                   1,023.47

                      968.13

Now, those of you who pay attention are likely to query, "Looks interesting... A billion dollar company within two years, but why is the valuation actually droppingin the 3rd year?". Well, this brings back to the article "Margin Compression Is Coming in the Payment Processing Space As $100 Million Pours Into Startups". You see, Bitpay and its contemporaries are growing like gangbusters (~6% to 10% per month!), but they are selling service with relatively low barriers to entry, and a lot of capital and competition climbing over the bow.

High competitionin a liquidiy bubble yields low, zero or negative (loss leader) margins. Valuations will follow suit, even as revenues and growth rates continue climb.

Bitpay revenue multiple forecast

If I am correct, then Bitpay (as well as contemporary start-up competitor Circle and Coinbase, in addition to more entrenched competitions Master Card, Visa, American Express and PayPal) will offer plain vanilla payment processing at negative margins in an attempt have it serve as a loss leader to rope merchants (etc.) into high margin, better defensible products and services. Cue...

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Wednesday, 04 June 2014 00:00

Bitcoin Myth Busting 101 Featured

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Yesterday, I did a radio interview with Benzinga. In it I busted myths about Apple, Bitcoin and Coins in general (ABCs). Listen to the interview below and the info sheets afterwards and let me know if you knew this stuff was possible with today's tech - and Apple! 

As for Apple...

And more on http://Ultra-Coin.com...

Why am I so bullish on Bitcoin? Note: this is not an offer to buy or solicitation for securities and is presented for illustrative purposes only.

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As we roll out Veritaseum's UltraCoin ZeroTrust Smart Contracts, I'll be posting much more on "the new way of doing business".

Media Exposure

  1. Reggie Middleton Intro
  2. How Reggie Middleton's Start-up Patented The Future of Global Finance!
  3. Reggie Middleton on Wikipedia
  4. Who is Reggie Middleton?
  5. Bitcoin is not just digital currency. It's Napster for finance.
  6. Reggie Middleton's UltraCoin @ NYC CryptoCurrency Convention
  7. Reggie Middleton Wins CNBC Stock Draft for the 2nd time in a row - with the same stock
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After an interesting discussion with those in my laboratory, I've decided to apply the forensic analysis team from BoomBustBlog to the privately funded companies in the Bitcoin space. See my post from yesterday for much of the reason why.

As clearly predicted yesterday, the better funded of the payment processors will initiate a pricing blood bath they'd likely kill for...

From PayPal's subsite on Mass Payments:

Paypal Mass Pay Site Screenshot

 As you can see, PayPal has already imbued its service with much of the attributes that are being offered by the Bitcoin payment processors. They also have a material advantage as of right now, a massive installed base.

I also cannot emphasize enough how damaging the all too necessary customer service option is to margins. You see, the problem is most service companies don't put enough into customer service and handholding of the customer. From an optimal perspective, this should actually be part of the marketing and sales process, but it's often either non-existent or implemented as an after thought after enough customers start bitching and complaining, or worse yet (and likely most often the case) leaving!

As a company with mature management, it appears as if PayPal is trying to head this off at the pass as it attempts to change consumer behavior and prod them into adopting its new electronic currency payment system...

Paypal Mass Pay Site Support Screenshot

 Now, let's compare PayPal to the newly funded Bitcoin payment processors...

Bitpay

Funding Rounds (3) - $32.50M

- See more at: http://www.crunchbase.com/organization/bitpay#sthash.yvlqpNtr.dpufBitpay prices

An interesting departure from the per transaction/fee model, Bitpay implemented a subscription system which benefits those customers who perform a large quantity of relatively small transactions moreso than those who process large orders.

I calculate Bitpay's most recent $30 million series A round to have been at around 9.2x sales, valuing the company at $160 million. This is a guestimate, of course, since I do not have access to internal numbers.  

Next we have Coinbase...

Funding Rounds (3) - $31.70M

- See more at: http://www.crunchbase.com/organization/coinbase#sthash.CD8IPTp6.dpufCoinbase 

There's also Circle, founded by Mr. Allaire of Coldfusion fame (sold to Adobe Systems).

Funding Rounds (2) - $26M 

- See more at: http://www.crunchbase.com/organization/nfc-direct#sthash.dd0DaxHc.dpuf

Circle has not publicly launched yet but promises to bring a new level of simplicity and user-friendliness to the bitcoin payment ecosystem, concentrating more on a banking paradigm then the technical bent that bitcoin is known to represent. This is all you need ot know about the Circle business model as it relates to this discussion of impending margin compression...

Circle

Free=Margin Compression!

Let's see how this plays out for customers. The most lucrative segments for this industry is the SME (small and medium business enterprises) who process anywhere between 10 and 1,000 transactions per month. Why? Because there are simply more SMEs than there are big companies in the world. Let's see what the two biggest bitcoin processors look like when stacked up against PayPal's Mass Pay product for the SME market...

image019

image027image028image029

Of course, the Bitcoin transactions are likely a loss leader for additional, value added services for many companies in the not too distant future. As a matter of fact, I feel that the payment space will quickly become commoditized by Bitcoin technology - forcing these companies and many more (I'm talking about you Mastercard, Visa and Western Union) to innovate and offer significantly and materially better value for the buck.

Imagine what this competitive landscape will look like when Mastercard, Visa, American Express, Discover and Western Union jump into the fray. Of course, before that a much greater portion of the VC and private equity community will wake up and realize the opportunity in Bitcoin to pour more cash into it than sugar into a Bubble gum machine (emphasis on "Bubble"). The key is to get in early, and get in right. But how does one do that and where will this tale of uber margin compression end?

Well, the research report from which this info is being prepared will be offered to accredited and instituional investors starting next week, at least those who have an interest in UltraCoin. 

My next article on this topic will explicitly illustrate how UltraCoin can assist ALL players (that's right, including PayPal, Bitpay, Circle, Coinbase, Mastercard, Visa, American Express, Discover and Western Union) as well as their direct customers, in climbing up both the food chain and the value proposition ladder - thus rapidly repairing the margin compression damage they are about to bring upon thier business models.

 image014

 

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picsay-1400512647Reggie Middleton discussion UltraCoin at the 2014 FinTech conference at Dechert LLP.Coindesk asks "Do Patent Filings from eBay and Western Union Pose a Threat to Bitcoin?" I feel the question is in and of itself missing the point. To explain this fully, I have to share a little bit about myself, particularly my weaknesses. I'm the type of person who is very knowledgeable about his strengths and his weaknesses, but sometimes I don't see my strength for what it is, and that is tantamount to a weakness in a highly competitive environment.

Case in point, in discussing whether or not competing patents have been filed for smart contract transacion processes by those who seek to be in my space with my contract engineer (a very skilled software architect and IP attorney), I displayed what I considered a healthy level of paranoid concern. I found it hard to believe that no one bothered to patent the most innovative, disruptive and groundbreaking aspect of this new crop of digital currencies - the ability to program them. As those who follow me know, I've spent a lot of resources developing, designing, refining and patenting advanced smart contracts (see How Reggie Middleton's Start-up Patented The Future of Global Finance!). I actually found it highly unlikely that no one had come up with this idea before me. Matt (my contracts engineer) said, "You know, it actually takes an uncanny amount of vision to have seen the scope of this stuff and act upon it, not to mention to have done so 6 months ago. Not many people are like you." Right then and there, it hit me. People really do not see things the way I do! 

Most know me from my prescient calls in banking, finance, real estate and tech (see Who is Reggie Middleton?). I've demonstrated a knack for seeing future trends and determining when things (such as valuations and opportunities) are out of whack. With that being said, the big media interest in Bitcoin combined with the increasing VC interest in Bitcoin companies (reference BitPay Gets $30 Million in Venture Capital Funding) is a very good thing for the industry, but also illustrates shortsigtedness in both the investment community and many practitioners.

The problem with the processors...

When bitcoin is as easy as PayPal to use then it will be on the path to mass adoption, but to assume that’s the most lucrative path to take in bitcoin company private equity investment begs the wrong question. Here’s the strategic landscape as I see it.

Bitcoin is very inexpensive to use as a transfer agent. A transaction may be safely sent without fees if these conditions are met (this is excerpted directly from the Bitcoin Wiki, verbatum):

  1. It is smaller than 1,000 bytes.
  2. All outputs are 0.01 BTC or larger.
  3. Its priority is large enough

Otherwise, the reference implementation will round up the transaction size to the next thousand bytes and add a fee of 0.1 mBTC (0.0001 BTC) per thousand bytes. Note that a typical transaction is 500 bytes, so the typical transaction fee for low-priority transactions is 0.1 mBTC (0.0001 BTC), regardless of the number of bitcoins sent.

Bitcoin as of 5/18/2014 is $444.74m, thus the fee for this transaction is roughly 4 cents, if not outright free. If a processor is transferring $10,000 on behalf of a customer, whether at one time or 100 times throughout the course of a month, the processor’s fee cost would range from $0 to $4, while the processor would likely charge (as of the date of this writing, $0 to $100). The traditional processors such a Visa or Paypal  would charge hundreds (as in up to 50x more!) for the same deal!

That 25x markup on the high end is significant (even for the Bitcoin companies), and ripe for disintermediation itself (that's right, the disintermediaing agents are poised for disintermediaion). Particularly once the UX of Bitcoin evolves, as email and web browsing did, and users realize how easy and cheap it is to jump onto the blockchain and do this stuff themselves.

Even assuming users don’t follow the historical model of those that left proprietary walled gardens (think AOL) and jumped directly into the open World Wide Web themselves, there are no material barriers to entry to enter into the processing business other than potentially a money transmitter license. The only material barrier, hence the business opportunity, is that Bitcoin is cumbersome to use. As the UI/UX polish increases and the amount of competitors in the space increase, the lower the prices charged - hence the margins - will be.

With such low barriers to entry and potentially humongous markups to exploit, what do you think happens next? The wild, untamed hordes of competitors swoop down upon the masses, and we have a concerted race to zero, and likely negative margin as competitors attempt to make processing a loss leader to draw users into the folds of richer, higher margin services!!!

 The race to marginal zero, then negative, does not make a strong business plan. So, what do these companies such as BitPay, Coinbase, etc. do once that point is reached (rather quickly)? They look to value added (high margin) services on top of their low margin, utility-like payment infrastructures.

Enter smart contracts and the true use of programmability in the crypto-currencies. The easiest and the likely first implementation of such will be multi-sig operations which allow multiple parties to share funds without having to worry about trusting and single party in a transaction. Our ZeroTrust Letters of Credit (patent pending) is just such a product. It allows for multiple parties to tranfer payment for simple and complex transactions contingent upon the mutual agreed upon successful execution of said transactions. This is done without the parties having to:

  1. Know each other
  2. Trust each other
  3. Have any form of proximity to each other;

and can be done using micropayments all the way up to multi-million dollar macro payments. The barriers to this business are much higher. For one, it takes more than just programming code. You have to be able to congeal the legal logic of the conventional law in equity contract into code. You have to be able to congeal the business logic into code, and you have to be able to implement it into the blockchain or whatever other underlying transmission mechanism you choose to utilize.

Once the race to negative zero is in full swing, a few of the wiser companies will wake-up and say "Hey, there has to be a better way, and we think we found it!". It is at that point Reggie Middleton's UltraCoin products and assets will shine. It is not hard to foresee that the entrenched companies (Visa, Mastercard, PayPal, Western Union) may enter a bidding war with the new comers armed with material VC warchests (much more than we're seeing with $30 million investments of today - all over the guys who had the foresight to see the next evolutionary step in plain vanilla payments - smart transactions and self-executing digital contracts and transactions.

We're actively looking for financial and intellectual capital. If you, as an accredited investor, are looking for an opportunity in the higher end of the digital currency space, I think we should talk. In addition, if you are a higher level Java/C++ developer willing to take risk, we need to talk. I'm available at reggie at ultra-coin.com.

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image006

This is a FinTech panel I joined yesterday with Barry Silbert (SecondMarket, the company that facilitated trading Facebook's private stock, see also Facebook on SecondMarket) & Katina Stefanova (partner at Bridgewater Capital) on Bitcoin Volatility and the Opportunity/Threat to Money Center banks at the 2014 FinTech Startups Conference.

One interesting question that was asked of the panel, but not captured in this video, was...

Where do you think we are today in terms of the state-of-the-union of cryptocurrencies, in terms of acceptance, stability, and reliability as a form of value retention and value transfer in the economy?

 

Acceptance is increasing.

Stability is increasing.

Reliability as form of value retention asks the wrong question. What we need to do is redefine the concept of currency. The static store of value made plenty of sense with the “dumb” fiat model. Now, with the advent of these new inventions, we can “program” the money and create smart contracts that redefine the concept of value. I query, “Is the value in the currency’s embedded contract, or is the value in the currency itself.” More importantly, where is the line of demarcation between the two.

Example, with a “smart” currency, you can  embed bitcoin with the value qualities of any fiat, asset, or even index, thereby further blurring the line.

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Bloomberg ran a story earlier this week illustrating the human capital flight out of the Wall Street machine and into tech:

At elite universities, fewer MBA and finance candidates are willing to even consider a life of missed weddings, busted romances and deep-into-the-night deal negotiations. The percentage of Harvard Business School graduates entering investment banking, sales or trading dropped to 5 percent last year from 12 percent in 2006, while those entering technology almost tripled to 18 percent during that period.

At the University of Pennsylvania’s Wharton School, the percentage of MBAs entering investment banking dropped to 13.3 percent last year from 26 percent in 2006, while those entering tech more than doubled to 11.1 percent.

 Those of you who have been following finance from the Wall Street/Bay Street/Canary Wharf perspective realize that this is a cyclical occurence. Basically, Wall Street falls out of favor with MBA whiz kids every ten years or so. But!!!! This time is different. This time around, Wall Street et al is about to succumb to the destructive forces of technology that transformed, revolutionized, disintermediated, gutted and absolutely reinvigorated the media, news and retail industries. 

That's right! The Internet Paradigm Shift has finally hit Global Finance... and it's going to hurt, and hurt a lot!

As many know, I've poured my time and resources into a start-up by the name of UltraCoin. Many have been clamoring for white papers and details, and I have been purposely secretive about such. The reason? I needed to entrency protection from my competition - the money center banks. How did I do this? Well...

I patented the future of Global Finance!

patent to the Future of finance big

This video illustrates my presentation to both the mainstream and alternative media as I start my capital raising rounds from venture capitalists and strategic investers alike. Check it out!

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This is my latest appearance on the Max Keiser show, wherein I announced the eminent launching of UltraCoin! Check it out!

BoomBustBTC contractmanage currency risk in Ultracoin while using it to short SamsungUltracoin dektop

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So, I'm off to the races to raise money for UltraCoin, my uber-disruptive startup, and I come across the resistance of certain parties to take common stock. Now, the standard in the professional VC community is to take preferred stock with a stack of anti-dilutive measures, control premiums and liquidation preferences. VCs and their lawyers say this is the only way to do it because it protects them on the downside and allows them to maintain control of their investment and manage dilution on the upside. Basically, they say, it's a hedge. I have some very prominent, very successful and experienced investors coming in andg doing the right thing. The reason is because they "get it". My task is to educate the rest. 

Marc Andreesen characterized VC start-up stock as an out-of-the-money call option on the success of the company. Well, I agree with this in part. The founders common stock is more like an OTC ATM call, or warrant, on the success of the company. The preferred stock, which is what most VCs go for, is more akin to a straddle consisting of an ATM long-dated OTC call paired with a long dated ATM put. This put is not free. It's not even cheap, and it is not as necessary if the deal is properly sourced and underwritten.

Now, I'm not the typical Fintech entrepenuer. I'm a little older than most, I'm probably better at forensic valuation than the vast majority (see Who is Reggie Middleton?), and I'm more than willing to point out when and where I think the establishment is doing something wrong. "Because everyone else is doing it" or "Because that's the way we've always done it" are not acceptible reasons.

Case in point, the preferred stock myth. Let's address the reasons given for demanding preferred stock.

  1. It protects them on the downside - This is true, but venture capital is a very high risk, high return asset class. Its much more additive to the risk/reward proposition to manage downside risk primarily through the investment selection and underwriting process, ex. spend your resources selecting and vetting the best managment team and investment prospect rather than trying to manage downside before you even get a stab at the upside. Think about the groom that puts more time into the pre-nup than he does into finding out what his bride to be is actually about.  
  2. They say, it's a hedge. Well, in the investment world hedges aren't free. They have a real cost and the determination of the effectiveness of any hedge has to take into consideration the cost of said hedge. If it's too expensive then the risks of the hedge may well outweigh the rewards. This is particularly true for investments that go well from a capital appreciation perspective.
  3. It allows them to maintain control of their investment and manage dilution on the upside and downside. The energies, time and resources dedicated to and consumed by the competition to gain and maintain control and proportionate share in a company materially detracts management from running the company as well as pitting multiple factions (equity holding management, common shareholders and founders, Series A, B, C [& X, Y and Z] shareholders and executives) against each other. If there was one uniform, common share class, these factions could be fighting for the betterment of the company as a whole versus the betterment of their own individual positions (often to the detriment of fellow security holders and management and/or the company as a whole).  

These costs and detriments are real. Let's take the case of the very successful example of Facebook's VC funding and eventual IPO. Who do you think made more money in this deal, the founders/original common shareholders or the VCs who chose the preferred/hedged/put-call straddle route?

The True Cost of the VC Control Premium  Here is the spreadsheet that generated the chart. Feel free to play with it yourself. Hopefully, more people will realize the value of going after a strong management team with a strong product amongst a disruptive opportunity. Focus more on the attainment of reward. Proper reward underwriting is its own risk management.

 

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