Part 1 of this series explored how VeChain has established the most impressive partnerships of just about any Blockchain project out there and is poised to make a huge entrance into the Chinese market in mid-2018.
Part 2 will investigate how Vechain could work to create value and reduce costs in the Chinese economy and how this will influence the market capitalization of VET at the start of 2019 and beyond.
How Valuable is Trust?
The current market cap of all currencies (as of 14th February 2018) is $400,000,000,000 and is likely, in my opinion, to top $2–3 trillion by the end of this year. A market cap at this level implies value creation, or future discounted value creation, of the same amount. This begs the question, where is all this value coming from?
The primary source of value creation with blockchain technology is as a mechanism for establishing trust between different parties at negligible marginal cost, with The Economist touting Blockchain as The trust machine — this article is referred to several times in VeChain documantation. VeChain will be the ultimate trust machine, providing Blockchain-as-a-service to many of the largest organizations on the planet.
We briefly discussed in part1 how VeChain is likely to extract value or create trust with it’s various partners. Several examples are given in the VeChain Development Plan (none white paper) released in 2015.
These include a 2016 report by PwC, one of VeChain’s main partners, that estimates that food fraud is an estimated $40bn global problem, with other sources suggesting that upto 30% of all alcohol in China is fake. Billions of dollars of trust were lost by the Mengniu Corporation due to the infant milk scandal in 2008.
The government is one of the main benefactors of reducing the cost of trust, with tax evasion estimated to cost trillions of yuan per year. The Development Plan estimates that processes such as commodity inspection by customs officers could improve efficiency by upto 80%. This example is likely to apply to many other areas of government bureaucracy.
Individuals (such as doctors, engineers, graduates and their employers) that require documents to be verified by a notary could access this information information via a public blockchain. Notary no longer required.
Other examples include the car industry, in which owners do not own the user data, causing costs related to information collection and verification for insurance companies and other service providers.
Essentially, any enterprise in the business of establishing trust (such as notaries) or acting as a source of centralized trust (such as banks) will need to adapt quickly or be crushed by the productivity gains of users or competitors adopting blockchain. Similarly, any cryptocurrency/blockchain network that does not create value and have the partnerships to dominate market share of that space will likely go to zero.
Calculating the Market Capitalization of VeChain in China in 2019
[warning: The following train of thought may contain substantial logical fallacies]
It has been observed that the Chinese economy has a fundamentally low level of trust between participants. I believe it reasonable to suggest that the creation of cheap and immutable trust might extract an additional 1.5% of value from that already being created within the economy.
With the GDP of China around $13.5tn in 2019, that would mean the value creation (or profit) from improving trust would be around $200bn for that year. If we then treated Blockchain as a business or industry, and used a profit multiplier of 5, then this would make the current value of the Blockchain technology industry somewhere around $1 trillion.
Looking at VeChain and the partnerships it has established, how much of the pie would you expect this project to scoop up?
Whilst there are some other competitors and Blockchain contenders in China (which will be discussed in part 3), I judge a market share of 30% in 2019 would be reasonable, if not conservative. This would make the value extracted by the VeChain Thor Blockchain to be worth around $300bn.
If we assume companies might be prepared to pay 50 cents on the dollar for these gains, use of the VeChain Thor Blockchain could be estimated to be worth $150bn, with the value represented by the total market capitalization for the coins in circulation. This would indicate a price per VET of $300 (assuming current price of $4 and market cap of $2bn), 75x it’s current price.
This valuation comes several (potentially unrealistic) assumptions:
- The market capitalization of VET is equal to the value created by use of the VeChain Thor Power Blockchain.
In reality, the market capitalization is likely to be primarily based on demand for VET from initial investments by key partners in establishing nodes (Thrudheim Authority Nodes, Mjolnir Nodes, Thunder Nodes, and Strength Nodes), the value created through use of the blockchain by users and service providers, and speculation. Of which speculation will play a considerable part in the early stages. For such a new technology there is no established framework for calculating a realistic market cap.
It could also be the case that if Blockchain based currencies become a primary means of transferring value in China (as oppose to the RMB), then this market capitalization would be many multiples higher.
- Blockchain technology will increase economic efficiency in China by 1.5% per year.
I believe this is an extreme under estimate. Nobody can know for sure but I think 5–15% would be fairer.
- A profit multiplier of 5 to calculate the total value of Blockchain based on the value extracted in a single year.
- Market share of 30% for VET.
- The price companies are prepared to pay per dollar saved by implementing Blockchain.
This doesn’t take into account the significant investments required by companies to implement the technology and adapt their current systems.
Clearly the estimate of VET at $300 by the end of 2018 has a number of limitations. However, I believe the approximations used have some validity in identifying a fair market price.
Comment below if and why you think this is or is not a fair market price and why.
You might be wondering, if VeChain only dominates 30% of the Blockchain industry in China pie, then which other projects will gobble up the remaining 70%? Part 3 will discuss other projects that are ready to explode in 2018.
I am not your financial advisor. This is not financial advice. I hold some VEN/VET but am not affiliated with VeChain in any way. Do your own research.
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