Competitive Strategy in Crypto by Hass McCook (Lifeboat Foundation)

Competitive Strategy & Crypto

– Dealing with Disruption in

the Decentralised Digital

Economy

Competitive 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 POWER OF

BUYERS

BARGAINING POWER OF SUPPLIERS

COLLABORATORS/COMPLIMENTARY

PRODUCTS

RIVALRY WITHIN INDUSTRY

Crypto’s Macroeconomic Context

Currencies

Physical Commodities

Investment Vehicles


HIGH

Crypto’s Macroeconomic Context

Currencies

Physical Commodities

Investment Vehicles

THREAT OF NEW ENTRANTS

LOW


EXTREME


HIGHBARGAINING POWER

OF BUYERS

MEDIUM


HIGH

COLLABORATORS/COMPLIMENTARY PRODUCTS

Crypto Mining’s Microeconomic Context


HIGH

MEDIUM



HIGH

VERY LOW


EXTREMEBARGAINING POWER

OF BUYERS


Perfect Competition & Bitcoin

Market

CharacteristicApplication 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


Market

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


Market

Characteristic

Application 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


LOW



HIGH EXTREMEBARGAINING POWER

OF BUYERS


HIGH


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 Costs Variable 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 Human Capital Material Compliance

Cost/Unit

Units Produced x

PlantHuman Capital

Material Process

PRODUCTIVITY ANALYSIS

Revenue Drivers

Price External Market

FactorsInternal 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 Market 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 x

External Market Factors

Internal Factors

INTERNAL & EXTERNAL FACTORS ANALYSES

Units Sold

Organic Sales

Inorganic Sales

Profitability

FIXED AND VARIABLE COST ANALYSES

Plant Human Capital Material Compliance

Cost/Unit

Units Produced x

+MARKETING ANALYSIS

Promotion

Product / Service

Price

Placement

Customers

Competitors / Collaborators

SuppliersBarriers to

Entry

Substitutes/Complimentors

MARKET ANALYSIS

INORGANIC (M&A) SALES ANALYSIS

Mergers & Acquisitions

Partnering

ORGANIC SALES ANALYSIS

Products / Services

Markets

Placement Productivity

Revenues Costs

PlantHuman Capital

Material 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…

Technology

Competitive Strategy in Crypto by Hass McCook (Lifeboat Foundation)