Friday, January 12, 2018

When Others Mine Bitcoin, You Can Make Money on Its Ecosystem

What is a similarity between a Bitcoin day trader or an Etherium miner of the 21st century and a Californian gold digger in the 19th century? 

The answer is that they are both looking for gold—digital or physical. Another similarity is that their exploits will benefit the ecosystem of providers of complementary products or services. During the Gold Rush period, Levi Strauss made money selling jeans to the gold diggers. Jeans were a piece of a gold digger's ecosystem at that time. Today, wallets to store coins or computer chips which solve math problems play the same role as the jeans back then.

Making complementary products can be a way to benefit from someone’s risk-taking. The value of complements frequently rises with the value of the products that they are supporting. 

Take the crypto-wallet Ledger Nano S. This is a USB-like device with a cryptographic protection that allows the owner to store digital currencies off-line without the risk of hackers stealing the funds from an online wallet. 

One could have ordered this product in November 2017 in France for the price of 60 euros. By the end of December 2017, the price was 80 euros and then the Ledger Wallet, the company that makes this device, even stopped shipping until March 2018. It simply ran out of stock. now has these wallets on sale for 400 euros, although Amazon now sells them for 199 euros. By the time you read this post, the price can be different.

Clearly, many people bought a lot of digital gold (silver or "dogcoin") during the bit- and alt-coin trading frenzy over the Christmas break. Fearful of the hacker attacks, the owners of the digital currency started to look for a secure way to store them, and the stock of the Ledger Nano S was gone. If the price of crypto-currencies goes up or down, the maker of the wallet will still make money because people will need to store their more (or less) valuable coins somewhere.

Nvidia is another case in point. Its share price is up over 200% since last year. A large part of this growth can be explained by the market for its graphics processing unit chips, which were used by the “miners” to run the operations that generate the digital currencies. In other words, Nvidia benefited from the fact that people were not using its chips to play video games, they were using the chips to mine digital gold. A perfect parallel to Levi Strauss.

Complements help avoid the pain

In general, the best strategy to piggyback on a new ecosystem is to build a complementary product or service. The complements have to address a user pain point. For example, the Ledger Nano S addresses the pain point related to storing cryptocurrencies. Levi Strauss addressed the pain point of gold diggers who couldn’t find pants sturdy enough to withstand the stress of hard physical labour.

How do you know which pain point to address? Become a core product customer and observe your own pain points. As they’re likely to be shared by other users, it can give you ideas for what the market may need. If you discover multiple pain points, these can be addressed during the product iteration process. The more pain points your product or service addresses, the more likely it is to be taken up by customers.

Beware of creating your own pain points, however. The navigation system of the Ledger Nano S only has a basic LCD screen and two buttons, which makes it painful to enter passwords or security phrases. The company recognised that pain point and has now launched Ledger Blue, an iPad-like device with a touch screen. This creates a nice set of a low-cost product (for price-conscious customers who don’t mind the two buttons) and a differentiated product (for those willing to pay more for ease of input). 

Despite the volatility of the crypto-currencies, there is a non-zero probability that some of them are here to stay. What their price will be in 12 months is anybody’s guess. Could be big, coule be close to zero. But what is more or less certain is that there was a lot of money made last year not on buying and selling digital coins, but rather on the making of complementary products to them.