Building Products & The Importance of Focus: Bitcoin Killed The King & Now Network Effects Will Determine Its Future

Building Products & The Importance of Focus: Bitcoin Killed The King & Now Network Effects Will Determine Its Future

In the world of product management, focus is key to success. Product managers who stick with one idea for an extended period of time are the ones who see their ideas come to fruition. This is also true for founders who are asked to build and develop one idea for an unreasonable amount of time. Venture capitalists who fund these ideas seek conviction and focus, as they understand that building great products requires dedication and perseverance.

On the other hand, the rise of Bitcoin has challenged the traditional notion of currency and the power dynamics that come with it. Money, at its core, is simply a belief held by a large group of people. It is a collective trance, a shared confidence in the future. Historically, this belief has been tied to a hierarchical structure with an alpha King at the top. When the King issued a currency, people believed in it because of the centralization of decision-making and authority, the longevity and predictability of the hierarchy, the ability to enforce behavior through violence, and the tax base of the people within the hierarchy.

However, Bitcoin has disrupted this system by replacing the King with a decentralized network. Decentralized cryptocurrencies, like Bitcoin, instill belief in people because of their decentralized nature, software-encoded rules that are hard to change, ubiquity in acceptance, and resiliency to external threats. Unlike fiat currencies, Bitcoin is not constrained by geography or time, and its programmability allows for quick improvements in response to market needs. Moreover, the belief network effect of Bitcoin is amplified in today's connected world, where beliefs spread faster and more densely.

The future of Bitcoin lies in its network effects. There are four defensibilities native to the digital age that Bitcoin can leverage: network effects, brand, scale, and embedding. Network effects, in particular, are the most powerful. It is too late for governments to stop Bitcoin, as the network math protects it. Even if certain governments were to ban Bitcoin, owners of fiat currencies would likely still embrace it to stay updated with the evolution of money. Over time, the network gravity of Bitcoin will prevail, as beliefs become more valuable the more people believe.

In terms of network effects, Bitcoin can be divided into two marketplaces: the store of value marketplace and the payments marketplace. The value of Bitcoin in the store of value marketplace increases with more buyers and sellers, as it enhances liquidity. Additionally, the number of developers working on a platform strengthens its network effect. Bitcoin had 400 monthly active developers in late 2020, while Ethereum had 2,300. Developers are a valuable resource, and the more of them working on a platform, the stronger its network effect becomes.

Beyond digital network effects, there are also social network effects that contribute to the value of a product. People add value to each other by influencing them to think or feel differently, enhancing each other's experiences. Our tribal networks add value to our lives by providing a sense of belonging and identity, as well as facilitating useful connections. In the case of Bitcoin, its worldwide brand and market cap give it a strong bandwagon effect. People tend to be risk-averse and are more likely to stick with familiar brands, creating psychological switching costs.

However, as the network grows, there are challenges that arise. It becomes more expensive and slower for miners to validate transactions due to the increasing number of transactions and the competition among miners. The Bitcoin network would benefit from changes made by the DAO (Decentralized Autonomous Organization) to alleviate these effects.

Ultimately, belief was the original force behind the Bitcoin network. Bitcoin has created its place in the crypto ecosystem and has become embedded in the world's consciousness. Embedding a product directly into customer operations or other ecosystem players heightens switching costs and solidifies its position in the market.

To conclude, focus is crucial in building successful products, as observed in the world of product management. Bitcoin has disrupted traditional currency systems by replacing hierarchical structures with a decentralized network. Its future lies in its network effects, including the power of belief. Leveraging network effects, brand, scale, and embedding will be key to Bitcoin's success. As the network grows, challenges will arise, but with the right adjustments, Bitcoin can continue to thrive in the evolving world of cryptocurrencies.

Actionable Advice:

1. Embrace the power of focus in product management. Stick with one idea for an extended period of time to see it through.
2. Understand the importance of network effects in the success of a product or currency. Leverage network effects, brand, scale, and embedding to create value and belief.
3. Stay adaptable and responsive to market needs. Use software to quickly improve and enhance your product based on user feedback and changing trends.