Ben Davenport shows some big flaws in the old argument that Bitcoin or other Cryptocurrencies must be used for transactions or have some other form of utility to sustain price. I’m looking at you Roger.

1/ Here’s the problem with the argument below (usage -> solid base demand). Let’s presume you can easily convert in and out of different coins. Then I really only need to hold a coin as long as required to accomplish its use case. Let’s take the “payments” use case, for example. https://t.co/wcaKD6zIhs — Ben Davenport ?? (@bendavenport) June 24, 2018

2/ According to Visa, their network did $9 trillion in volume in 2016. Let’s forget about how the internals of the Visa network actually work, and instead run a thought experiment as if Visa ran using a payment coin.

3/ When a user wants to make a payment, let’s assume Visa seamlessly converts dollars to Visa-coins, and then converts back to USD when paying the merchant. This payment cycle in the Visa network takes anywhere from 1-3 days. We’ll assume 3.

4/ If annual volume is $9000 billion, then the amount tied up on average over a 3 day period is 9000 / 365 * 3 = $73 billion. Let’s assume 3x for peak shopping days, giving us about $225B market cap of Visa-coin needed. So far, sounds like reasonably decent base demand.

5/ But… who wants a 3 day settlement period? Surely, if you’re going to take Visa’s business in payments, you need to do way better than that. Let’s say an hour for settlement. Now, the amount of payment coin required plummets by a factor of 72 (= 24 * 3).

6/ Thus, with 1 hour settlement, instead of $225B base demand, the payments use case (at the scale of the entire Visa network, mind you), only generates a measly $3 billion of base demand for the coin. Faster settlement only makes it worse.

7/ You could argue that people will actually hold onto some of this coin longer, in order to do future payments, and that’s true. But willingness to hold should be analyzed separately from direct use in transactions.

8/ Willingness to hold a coin is less dependent on its usability for payments, and more dependent on a belief in stability (low volatility) or expected upside which compensates for higher volatility.

9/ The fact is, a HODLer choosing to hold a coin for even 1 month is 720 times as effective at generating base demand as the payments use case in our example. Payments is not the only use case for coins, but if you don’t have major demand sinks in your model… look out. /fin

Great thread from Ben. Store of value can be incredibly important to sustain the price long term.