One of the best metrics you can use when evaluating the quality of a business is to look at its “Operating Margins.” In other words, how much of every dollar they take in is kept as profit, after paying all their expenses. A business keeping only a penny as profit for every dollar they take in is considered low margin, and risky. Too many things on the expense side of the ledger could increase and thus tip the company from a profitable one, to a money-losing enterprise. If the business can improve its margins to 10 cents on every dollar, they are highly likely to be sustainable long-term. In fact, the average operating margin for all companies in the S&P 500 is about 10 cents. Companies fortunate enough to enjoy margins north of 20 cents are among the most profitable companies in the world …. Think Apple, Microsoft, and Google.
Ranking every company in the S&P in terms of operating margins for the last decade, there is one company that dwarfs all the others. They are sporting operating margins of a mind-blowing 48 cents, making Apple, Microsoft, and Google by comparison, look like lemonade stands. The company to which Bag refers is Visa Corp. Their mafia-like business model is nothing more than skimming a couple of percent off every transaction they process. Two percent might not sound like much, but consider this scenario:
Bag hires a plumber to fix the slab leak in his garage, and the plumber charges $1,000. Bag puts it on his Visa, but by the time the funds hit the plumber’s account - there is only $980 left, as Visa kept 2%. The plumber then pays his dentist $980 for a crown, but after Visa gets their piece, there is only $960 left. The dentist then pays his landscapers $960, but by the time the money hits their account, only $941 is left. It is easy to see where this is going, as each merchant in the chain of transactions gets less and less. Eventually, after enough transactions, the last merchant will get only pennies, while Visa will have almost the entire $1,000. Each merchant in the chain shrugs off the 2% as a cost of doing business. But to Visa Corp, the leverage of 2% compounded over many transactions has made them - by far - the most profitable company in the S&P 500.
Visa Corp is not the only institution leveraging the 2 percent compounded model. The Federal Reserve, since its inception in 1913, has been applying the model in a slightly different manner than Visa. The Fed has designed a system of permanent monetary expansion (dollar printing) with a stated goal of 2% inflation. In an inflationary system, purchasing power is continually lost as prices for everything are intentionally designed to rise at a rate of 2% per year. Again, this might not sound like much, but consider these examples:
In the 1920s, a dozen eggs would run you about 2 cents. Just last week, Bag paid $2.00 for a dozen eggs. That’s a 100-fold increase in price. In 1930 Gold was $20 an ounce, today it is $2,000, again a 100-fold increase. According to Google, the average home in the US in 1930 was $3900; today, it is $388,000 - again, a 100x increase. The eggs, gold, and homes haven’t gone up 100-fold in price because they are more valuable. Much like an inch on a ruler is the same today as it was in 1930, they are still just a dozen eggs, an ounce of gold, and a home. Relative to one another, the price of these things hasn’t changed at all - a home still costs about 190 ounces of gold, and that same ounce of gold will still buy 1000 cartons of eggs. But when evaluated by the debased ever-changing unit of measurement called dollars, where an inch yesterday is no longer an inch today, the cost for things is up 100x.
History repeats….
Economic history is littered with examples of products brought to market that wiped out entire industries. The products were successful because they were cheaper, faster, better - or all three. It was Smartphones that replaced flip phones, which replaced landlines, which replaced the telegraph, which replaced carrier pigeons. In like manner, most long-distance travel today is by airplane. It used to be by auto; before that, it was by train; before that, it was horseback; and before that, it was by foot. You see it everywhere you look. Netflix bankrupted Blockbuster. Amazon is wiping out brick-and-mortar department stores. Uber is eliminating Cab companies. In the marketplace, cheaper, faster, and better - always wins.
All of this begs the question, what exactly does Visa do to justify skimming 2% from all transactions? Since the existing financial system does not allow for immediate settlement between two parties, Visa’s niche is as a trusted 3rd party assuring the seller he will be paid, while allowing the buyer to take immediate possession of the good or service without waiting for payment to clear. In other words, their main products are a centralized ledger and trust. If only a product existed that could improve upon a centralized ledger, eliminate the need for trust, and settle immediately without involving a third wheel in every transaction, Visa would be in bankruptcy court. The truth is, that product is here and goes by the name of Bitcoin.
The Orange Pill ……
Simply put, Bitcoin is cheaper, faster, and better than Visa - and it’s not even close. Bitcoin isn’t just here to replace middlemen like Visa; it is here to replace entire institutions - including banks and the almighty US dollar. Bitcoin will do for money what the Internet did for information. Admittedly, Bag has been very critical of Bitcoin in the past - as evidenced here - because most of our federal government's power comes from the capacity to print money. They are not going to give that up willingly. But then again, Blockbuster did not willingly accept bankruptcy when Netflix came along. Neither did Sears when Amazon showed up. Those companies had no choice, as their legacy systems could not compete with cheaper, faster, and better. Based on the growth rate and adoption curve of Bitcoin, the US Government and its legacy financial system will not have a choice either.
Theoretically, they could try to make Bitcoin illegal. But consider the effects of the North Korea example. They outlawed an information network called the “Internet” for their citizens. Consequently, their populace remains uneducated, impoverished, and isolated from the rest of the world, while countries where the internet is more freely available are flourishing by comparison. Bitcoin, as a monetary network, will be no different. Should the US attempt to outlaw it, Bitcoin will migrate towards more favorable jurisdictions and enrich the citizenry of those countries, while people in the US will be left to suffer in FIAT hell.
Undoubtedly, the government and its corporate cronies will continue to scare people away from Bitcoin by claiming the network is rife with risk and fraud. Talk about the pot calling the kettle black. The fact is the ”decentralized” model of Bitcoin eliminates thievery, as it would require ledgers on millions of computers worldwide to be corrupted simultaneously - an obvious impossibility. In sharp contrast, the “centralized” model of both corporate America and the US government, where all money and information flows through one ledger, requires only one bad actor anywhere along the way for massive fraud to take place. With a decentralized ledger, there are no single points of failure, and consequently, no Madoffs, no Enrons, and no Bankman-Frieds. White collar Fraud will be a thing of the past.
Decentralizing a fixed supply of monetary units is an idea long overdue. Bag understands it is very difficult to see just how revolutionary this is; paradigm shifts are like that. Try envisioning a world where a day’s wage saved today will buy MORE in your retirement, not less. The widespread adoption of Bitcoin as a monetary network will usher in that world by eliminating the ongoing crime against humanity called currency debasement. Any economist worth their salt would tell you prices for ALL goods and services without exception will fall over time thanks to entrepreneurs, technological innovation, and productivity gains. The only reason we don’t see prices falling all around us is because the entities sitting atop the US dollar pyramid scheme (government & banks) continue to drive prices up by increasing the number of dollars in circulation. In effect, they are stealing your time, your productivity, your income, and your savings. Bitcoin will end all of that.
The adoption curve….
Any new technological innovations, no matter how revolutionary, take time to be adopted by the mainstream. The first email was sent in 1971. Based on the number of Email addresses, by 1989, after 18 years with an average annual growth rate of over 100%, only 1% of people were using the Internet. Just a few years later, by the mid-1990s, everyone was using the internet. When you have growth of over 100% per year, 1% market penetration is considered a tipping point at which mainstream adoption is both near and inevitable. The current number of active wallets shows that Bitcoin is closing in on the magical 1% market penetration. Throw in the fact the compounded annual growth rate for Bitcoin (now 15 years old) is greater than that of the Internet, and it is easy to see buying Bitcoin today is like going long the Internet in 1989. It is an absolute no-brainer.
Bitcoin is at war with the traditional financial system. While there are a lot of entrenched two-percenters that will not go down without a fight, Bag is going to side with history and bet on the cheaper, faster, and better monetary network. Bitcoin is here to strip away power from the bankers and politicians who have abused it for centuries and put that power back in the hands of the people. Bag has spent hundreds of hours over the last couple of months trying to thoroughly understand the Bitcoin phenomenon. Once you take the time to research and understand Bitcoin for the transformational technology that it is, there is no going back.
You make sense Bag... but don't you think the FED will just create their own digital currency & have US Gov make Bitcoin and other crypto's illegal? It's one thing when you are talking a product being better, faster, cheaper... The FED is total monetary (and Political) control. They surely aren't going down without going nuclear first, don'tcha think?
> Simply put, Bitcoin is cheaper, faster, and better than Visa - and it’s not even close.
Every Bitcoin transaction requires as much energy as a typical household uses in a month. It continues to exist only because of the massive network subsidies (about 120 USD per transaction pre-halving as a reward for adding a block to the chain). Bitcoin makes absolutely no sense for typical consumer transactions.