Hashers United Las Vegas (Oct '14) - Competitive Strategy & Crypto

Competitive Strategy & Crypto – Dealing with Disruption in the Decentralised Digital EconomyCompetitive Strategy within the digital currency mining industry (using Bitcoin as an illustrative example)

Hass McCookHashers United – Las Vegas, October 2014

Analysing Markets – The Porter’s Six Forces

Porter, M., 1980. Competitive Strategy. 1st ed. New York: Free Press.

THREAT OF NEW

ENTRANTS

THREAT OF SUBSTITUTE PRODUCTS

BARGAINING POW ER OF BUYERS

BARGAINING POW ER OF SUPPLIERS

COLLABORATORS/COM PLIM ENTARY

PRODUCTS

RIVALRY W ITHIN INDUSTRY

Crypto’s Macroeconomic Context

Currencies

Physical Com m odities

Investm ent Vehicles

RIVALRY W ITHIN INDUSTRYHIGH

Crypto’s Macroeconomic Context

Currencies

Physical Com m odities

Investm ent Vehicles

THREAT OF NEW ENTRANTSLOW

THREAT OF SUBSTITUTE PRODUCTSEXTREM E


HIGHBARGAINING POW ER

OF BUYERS

M EDIUM


COLLABORATORS/COM PLIM ENTARY PRODUCTS

Crypto Mining’s Microeconomic Context


M EDIUM

THREAT OF NEW ENTRANTS


HIGH

VERY LOW


EXTREM EBARGAINING POW ER

OF BUYERS


Perfect Competition & BitcoinMarket

Characteristic

Application to Bitcoin (short-to-medium-term: 0 – 3 years)

Application to Bitcoin (long-term: 3 years+)

All market participants are “price takers”

“Temporary price makers” dump/buy vast amounts of coins on an exchange, causing dramatic instantaneous negative/positive price movement, respectively. Once done however, market power and future effects are proportionately permanently reduced.

As bitcoins become less concentrated due to

inherent scarcity, the gross majority of all

market participants will become price takers

Homogeneous Products

All bitcoins are homogenous and identical for the gross majority of practical intents and purposes, and will always be.

No barriers of entry and exit

No onerous barriers to entry or exit can by created by incumbents to restrict competition due to Bitcoin’s open-source and global nature,

and impracticality of unified global regulation or licencing requirements, and this will always be the case

Property Rights

The Blockchain ensures that there is no doubt about ownership of Bitcoins and their owner’s rights, and this will always be the case


CharacteristicApplication to Bitcoin (short-to-medium-

term: 0 – 3 years)Application to Bitcoin (long-term: 3 years+)

A Large number of buyers and

sellers

There is currently only a relatively small number of buyers and sellers compared to traditional markets, however, this number

is increasing exponentially in an analogous way to other network-effect based

disruptive technologies

Large number of different types of buyers and sellers

(investors, merchants, exchanges, remittance,

etc.)

Zero transaction

costs

Transactions are theoretically free – but free transactions are subject to the

possibility of delays. Fees are not set by the market, and are voluntary based on

desired transaction speed.

Transaction costs will be near zero

Perfect Factor Mobility

Factors of production (Location, Labour & Capital) are almost perfectly mobile,

allowing for adjustments to changing market conditions

Factors of production are perfectly mobile in

the long term

Non-increasing returns to

scale

Non-increasing returns to scale when an individual miner or pool of miners approach 50% of network power. Huge disincentives to

exceed 50% of network hashing power.

Non-increasing returns to scale


CharacteristicApplication to Bitcoin (short-to-

medium-term: 0 – 3 years)Application to Bitcoin (long-

term: 3 years+)

Profit Maximisation

Miners will sell at the intersection of Marginal Cost and Marginal Revenue, except during positive/negative hype cycles, where sales strategy differs wildly across the industry

Miners will sell at the intersection of Marginal Cost and

Marginal Revenue

Perfect Information

In the short term, “Price Makers” prevent the overall market from

having access to perfect information, as they can

individually influence market price.

Due to the open-source nature of Bitcoin, in the long term, all consumers and producers are

assumed to have perfect knowledge of price, utility, quality and

mining methods.

No externalities

The only externalities are emissions due to proportion of network using fossil-fuel to

provide electricity for mining, and waste produced by obsolete

mining equipment.

Externalities trending to zero due to decentralised low-emission electricity (Solar, Fuel Cell), and improvements in recycling

Bitcoin Mining’s Microeconomic Context

HIGH

THREAT OF NEW ENTRANTS

LOW



HIGH EXTREM EBARGAINING POW ER

OF BUYERS



Mining – The Organisational Context:

Crypto and the Comprehensive Company Analysis Framework

Profit – Simple Answers to Complex Questions

Question: How can we be profitable? Answer: Make sure our revenues are greater than our costs

Question: How can we be MORE profitable? Answer: Increase our revenues and decrease our costs

Question: How can we increase our revenues? Answer: Make more sales and/or charge more money for our

products Question: How can we reduce our costs?

Answer: Sweat our assets more, and screw down our suppliers Question: How can we capture the most market

share? Answer: Do things better and cheaper than our competitors

can

It gets a lot more complicated in

practice!

Cost Drivers

Fixed & Variable CostsVariable Costs Fixed Costs

Plant – “Upkeep” Hardware, Cooling

Plant – Mining Hardware, Rent of premises

Human Capital – Operations & Maintenance Crew

Human Capital – Executive Salaries, Training, Recruitment, Sales & Marketing

Material – Electricity (mining), Wiring & Sundries, Rack space

Material – Electricity (premises)

Compliance/Process – Quality Auditing, Planned/Unplanned Maintenace

Compliance – Insurance, Security, Taxes, Interest Payments

Fixed Costs+Variable

Costs

FIXED AND VARIABLE COST ANALYSES

Plant Hum an Capital M aterial Com pliance

Cost/Unit

Units Produced x

Plant Hum an Capital

M aterial Process

PRODUCTIVITY ANALYSIS

Revenue Drivers

Price External Market Factors Internal Factors

Prevailing Market Price Brand Strength

Customer Type & Willingness/Capacity to Pay

Relationships with Customers

Competitor Pricing

Differentiated / Diverse Product Offering

Utility of Complimentary Products

Cost to Produce

5 (6) Forces S.W.O.T / B.W.O.T

Price

External M arket Factors

Internal Factors

INTERNAL & EXTERNAL FACTORS ANALYSES

Sales VolumeOrganic Sales Inorganic Sales

The 4Ps – Price, Placement, Promotion, Product

Key Partnerships with Collaborators

Ability of development team to consistently deliver high quality products

Mergers & Acquisitions

Ability of Marketing Team to successfully execute sales & marketing strategy

“Synergy” /s

Ability of Customer Service Team to Comprehensively Satisfy Customers

Units Sold

Organic Sales

Inorganic Sales

Fixed Costs+Variable

CostsPrice xExternal M arket Factors

Internal Factors

INTERNAL & EXTERNAL FACTORS ANALYSES

Units Sold

Organic Sales

Inorganic Sales

Profitability

FIXED AND VARIABLE COST ANALYSES

Plant Hum an Capital M aterial Com pliance

Cost/Unit

Units Produced x

+M ARKETING ANALYSIS

Promotion

Product / ServicePrice

Placem ent

Custom ers

Com petitors / Collaborators

SuppliersBarriers to Entry

Substitutes/Com plim entors

M ARKET ANALYSIS

INORGANIC (M &A) SALES ANALYSIS

M ergers & Acquisitions Partnering

ORGANIC SALES ANALYSISProducts / Services M arkets

Placem ent Productivity

Revenues Costs

Plant Hum an Capital

M aterial Process

PRODUCTIVITY ANALYSIS

Short-to-Medium Term Trends (0 – 3 Years) Majority of Start-ups will fail. It’s not enough to

just be young, bright, a very early adopter, and have a good idea; implementation, execution, funding and adoption are critical.

Further Price Discovery in the face of currency inflation & hype cycles

Regulatory Landscape will become clearer, with several discrete jurisdictions (both hostile and accommodating) coming into existence. Operations will obviously gravitate to the accommodating jurisdictions.

Product Development will continue at existing pace, leading to heightened usability and discovery of new use cases

Vertical & Horizontal Integration will start being witnessed much more frequently. A good example would be a company that has an ASIC manufacturing division, a cloud-mining service, a brokerage/exchange service, processes payments on the network, and provides “usability” services such as managed online wallets and physical wallets

Long Term Trends (3+ Years) – The Rule of 3 Bruce Henderson, Founder of Boston Consulting

Group, suggested that in a competitive market place, there is a natural tendency for the market to be dominated by three or four players – known as “The Rule of Three” (Henderson, 1976).

This hypothesis was tested and supported by Sheth and Sisodia, who observed the evolution of roughly 200 competitive markets (Sheth & Sisodia, 2002).

So what should we expect from The Bitcoin Market…?

Long-term Trends (3+ years) – c. 2018 State of Perfect/Monopolistic Competition consisting of

3 to 4 “Super-Integrated” companies, plus a very large amount of differentiated niche providers. 80% of mining will be done by these 3 or 4 fiercely competing companies, with the other 20% being done by the public.

Further Price Discovery in the face of currency inflation & hype cycles. Supply at start of 2018 will be about 16.5 million BTC

More even distribution of Bitcoin (depending on increased adoption from new ecosystem participants) making more people in the ecosystem “price-takers”. Some “whales” will still exist.

Product Development, to continue, leading to heightened usability and discovery of new use cases

Long-term Trends (10+ years) – c. 2024 State of Perfect/Monopolistic Competition consisting of

3 to 4 “Super-Integrated” companies, plus a very large amount of differentiated niche providers. 80% of mining will be done by these 3 or 4 fiercely competing companies, with the other 20% being done by the public. Depending on price/cost of the asset, the Super-Integrated Companies may even branch out into electricity provision (solar, fuel cell, off-the-grid systems) in the 10+ year horizon.

More consistent pricing in the face of currency inflation & hype cycles. Supply at start of 2024 will be about 19.7 million BTC

More even distribution of Bitcoin (depending on increased adoption from new ecosystem participants) making more people in the ecosystem “price-takers”. Some “whales” will still exist.

Product Development, to continue, leading to heightened usability and discovery of new use cases

Conclusion When ignoring “Price” as the main key success indicator, there is little doubt about the future of math-based digital currencies such as Bitcoin. They will be perpetually useful and result in the least economic waste and externalities possible, due to the forces of near perfect competition.

There is nothing really new about crypto-currencies in the context of competitive strategy and disruption. This also applies to the basic underlying economics of crypto as an asset, currency or payment system.

The truly unique and ground-breaking difference is the concept of the Blockchain, which inherently prevents the gravitation of markets towards monopoly, duopoly, or oligopoly, and drastically reduces the likelihood of the use of corruption, collusion or force to crowd out new market entrants.

Questions, Feedback, and Constructive Criticism…

Hashers United Las Vegas (Oct '14) - Competitive Strategy & Crypto

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