Are you aware of how much of your money each month goes to Visa and MasterCard? Odds are you’re not. For me, it’s about a thousand euros a year. Probably about the same amount for you. Couldn’t you use that for something better?
Visa and MasterCard have succeeded somewhat in a regulatory capture, preventing people like you and me from seeing how much we actually pay them, and more importantly, preventing us from having a way to avoid paying them. Several countries have laws against credit card fees that come on top of the merchants’ sale price; that means that there’s no way to get a better deal by paying cash or avoiding the credit card companies in another way.
But there are other drivers than you and me. Also, these regulatory captivity laws usually don’t prohibit discounts when paying in a certain manner; only markups.
(Metanote: There was an unplanned break in this post series due to the events at the MtGox exchange; I did not want to polyannically divert attention from the recovery efforts. The rest of the posts continue every other day from now on, barring something equally disruptive, knock on wood.)
This is an article in a series on what Falkvinge identifies as Bitcoin’s four drivers. This is the third article, on merchant trade. The others are unlawful trade, international trade, and investment (coming July 5).
So if you and me aren’t the ones being able to make decisions that drive Bitcoin, who will?
Well, once the transactions are low-friction enough, merchants will. But this requires the merchants escrow mechanism I described earlier. Here’s why:
Credit card companies typically charge between 3 and 5 per cent per transaction. That’s per transaction. On your gross revenue, credit card companies have skimmed some 5% from the top. (Here, it becomes easy to calculate how much you give them. How much do you spend annually? Out of that, how much goes through credit card clearing?) Bank debit cards are about similar. As is, for that matter, banks’ cash handling.
Seeing that the typical operating profit margin is about 5% for a good merchant — that is, revenue minus costs and operating expenses — this means that merchants stand to double their profits by promoting Bitcoin in favor of credit cards and bank debit cards.
There’s a lot of profit to be made here in cutting out the clearinghouse middlemen. I predict small mom-and-pop stores will be the first drivers, out of enthusiasm for the technology, and once it hits usability critical mass, merchant economies of scale (Walmart, Carrefour, MediaMarkt, 株式会社髙島屋, etc.) will move to promote its adoption.
Now, of course, these gains are somewhat short-to-midterm. Competition on a functioning market will ensure that, once adoption is wide enough, profit margins will start to push down towards the five-percent norm again. Interestingly, this will make credit card purchases yet more uninteresting as they will make no profit at all — Bitcoin stands to effectively kill both Visa and MasterCard because of exactly this.
So how much does this driver move into the Bitcoin ecosystem, then?
The current value of the Bitcoin ecosystem is about 100 megabucks. I’ve been speaking about how unlawful trade stands to bring in about 60 gigabucks, and international trade about 600 gigabucks. This third driver is hard to estimate. Let’s estimate that 10% of all credit card trade can convert to Bitcoin trade, given the ridiculously healthy profitability of it from the merchant’s side. I have a hard time finding authoritiative data on credit card transaction volumes — I have only fragmented data, like an old number for transaction volume for the United States alone (1.5 terabucks). But extrapolating this by economy size and inflation, we can estimate that the world total is in the ballpark of 6 terabucks. If merchants were to aggressively pursue this profit driver, and achieved a 10% conversion mid-term, it would mean another 600 gigabucks in the Bitcoin ecosystem, and the full 5-6 terabucks long-term (one or two decades).
Thus, with these drivers so far, we’re looking at a growth from 100 megabucks to about 1.25 terabucks, give or take, in the foreseeable future. That’s an 12,500 multiplier. This doesn’t mean that the value of a single bitcoin will rise by 12,500x in this predicted profit-driven scenario, as market forces are more complex than that, but it gives an indicator of the realistic potential ballpark.
Next and final driver: Investment. Bitcoin has probably been the best investment instrument available anywhere in the past 12 months.