Every revolution has its constitutive event, signifying that it is now officially recognized as more than just a fad or hipster gig. With the birth of the internet, it was imho Yahoo! IPO. A ‘Portal’ that was founded in 1994 and went public less than 2 years later (having only 49 employees at the time) at a market value of almost $1 billion (when annual sales were merely $1.3 million). In post-bubble internet (so-called ‘Web2.0′) it was imho MySpace acquisition by News Corporation in 2003 for $0.6 billion. At the time, MySpace was only 2y/o. With Mobile app it was imho Instagram’s acquisition by facebook for $1 billion, less than 2 years after it was founded, and having merely 13 employees.
These deals signified to the man in the street that the revolution is real and here to stay. Real [professional] institutional money poured in. Real talents were recruited. Real publicity, and a real economy and industry that started to flourish around these ventures.
With the evolving Bitcoin revolution the first potential candidate that pops into my mind as a venture than can spark the media headlines with a ‘billion dollar IPO’ or acquisition is Mt.Gox. This will undoubtedly open-up the market, making crypto-currency mainstream and positioned as a legit industry. I was intrigued to find-out how far Mt.Gox is down the road of such a valuation in spite of the turmoil it has gone through in the past month. So I tried to independently evaluate it…
My conclusion – if it had gone public or got acquired, Mt.Gox would already enjoy NOW a valuation of USD ~$1 billion.
Mt.Gox valuation methodology:
Disruptive start-ups that challenge industries often get acquired or go public after ~2 years at valuations of approximately ~$1bl, while at the same time having meaningless or no revenues at all. Many examples exist, such as – Yahoo!, Instagram, MySpace, ICQ, hotmail, skype, Netscape, twitter, kazaa, etc.
The general tendency in such cases is to dismiss ‘revenues’ as a base for the company’s value, and to focus on the growing user-base which is the engine believed to drive value and revenues in the long-run. A valuation of an account can later be extracted from similar industries (i.e. gaming, Forex, online trading, Binary Options, and so forth).
Mt.Gox was generous enough to provide some numbers of its growing user-base, stating that-
“Last year, Mt.Gox saw an average of 9,000 to 10,000 new accounts created every month. This number doubled in January, tripled in February, and sextupled in March. In this month alone (March), over 57,000 new accounts were created!”
This alone means that Mt.Gox has accumulated more than ~200,000 trading accounts.
In order to estimate an account’s worth, I looked into similar, yet more mature markets as online gaming (Casino, Poker…), Forex, and Binary Options. Established service providers in these markets typically see a Lifetime-Value of an account ranging from $600 up to several thousands of USD, hence are willing to pay hundreds of Dollars as affiliation fees per account. In gaming it typically resides around ~$600 per account. In Binary Options and Forex it ranges from $1-$1.5 thousands. The accounts in these markets are of speculators, gamblers, traders and those seaking thrill that pour money into their account, trade, play, gamble, sometimes lose and sometimes win… Mt.Gox is an exchange, just like online trading, Forex and Binary Options exchanges, and appeals to similar audience.
This alone, provides Mt.Gox a valuation of $0.2 billion (i.e. $1,000 per account X 200,000 current accounts), without even taking into account the growth rate and having an already proven revenue generating business model.
In March 2013, Mt.Gox signed-up ~60,000 new accounts (quote: “…75k new account created for the first few days of April!”). If we conservatively assume that Mt.Gox continues signing accounts at this rate with growth of merely an additional 10,000 accounts above the previous month (i.e. in April it has already long surpassed this), Mt.Gox is expected to reach ~150,000 new accounts per month by year-end, which adds-up to an accumulated user-base of ~1.2 million accounts. That is a factor of X6 what I estimated its current user-base, and will hence grow its year-end Future Value to $1.2 billion (i.e. $1,000 X 1.2 million future accounts by year-end).
Applying a discount to this valuation (i.e. due to applying Systematic/ Unsystematic risk, discounting the value to its Net Present Value, etc.), would bring Mt.Gox current valuation to USD ~$1 billion.
Even conservative economists that would arguably value something ONLY based on its discounted future earnings have to admit that even today, Mt.Gox has a valid revenue generating business model. Mt.Gox reported over $121 million trading volume last month, and with a trade commission of 0.60%, it generates revenues of almost ~$1 million per month from trading alone. For the sake of simplification I will focus hereafter ONLY on the 0.6% trade commission, and ignore the 1% withdrawal fees that Mt.Gox charges., which means it potentially has additional earnings of 1/100 of the cash it holds in all those accounts.
Even if we assume that bitcoin price will remain as it is now for the remaining year, yet Mt.Gox will continue ramping-up accounts (i.e. extra 10,000 per month on top of previous month growth), it would mean that by year-end, Mt.Gox will have monthly revenues of ~$4.4million per month from trade commission alone. That’s ~$52 million annually from trading (i.e. withdrawal fees not taken into account). If bitcoin also appreciates in value back to the ~$200 per BTC levels, revenues from trading alone will exceed $100 million per annum easily. That is a Market Cap of X10 the revenues, which is very reasonable for a high-growth company that is [still] the undisputed leader in its field.
In conclusion – It might take a while, and some new entrant exchange might even bypass Mt.Gox as the new leader, but the future headline is already carved in stone and waiting for the constitutive event “Mt.Gox goes public [acquired] for $1 Billion!!!”
Ending note: this valuation was done independently, without having Mt.Gox open-up its books to my observation, nor did I get any inside data or assessments. It is indented to provide a ball-park and, and to an extent some thought material as to where we might be heading. I know there will be many people dismissing the whole ability to assess Mt.Gox value, probably saying that the valuation is not grounded, too simplistic, too broad, should be done via a Discounted Cash-Flow (DCF) method, and so forth. Some will say that Mt.Gox is worthless due to its poor coding, difficulties to ramp-up accounts or resistance to DDoS attacks, etc. While I tend to agree with all such criticism, I believe the valuation still holds water and provides a ball-park.
These are my 0.02 BTC…