I wrote in the Forum that the South Korean government is entering a makosa party with Bitcoin: it wants to tax cryptocurrency trading while technically regulating it through cessation of anonymous accounts, and closure of virtual coin exchanges (as necessary). This will possibly usher order, at least in South Korea, in the whole cryptocurrency nexus. I noted the move as beneficial to Bitcoin because an optimal government intervention would likely help the legitimacy of the currency. However, my point is ironic since once governments around the world begin to regulate the digital currency, the most important feature of Bitcoin [out of government control] would be gone. Sure, things evolve in life; it is very possible the fans of Bitcoin and other cryptocurrencies would fall in line.

There is good news for Bitcoin: governments are getting interested in the cryptocurrency. That is the best thing for Bitcoin, ever. The government of South Korea has noted that it would impose new curbs on cryptocurrency trading. And regulators will now have the power to close virtual coin exchanges if needed. It does not stop there: government will monitor and track accounts, banning opening of anonymous cryptocurrency accounts . To even make it better, government has a tax structure for all cryptocurrency trading

Yes, Bitcoin was invented to provide a new means of exchange that runs outside government in a world where the purveyors are living under governments. That absolute lack of legality that comes from government has been the weakest element of the cryptocurrency. But as governments begin to regulate it, the acceptability will strengthen over time. While it is already in some leading bourses like Chicago, the absolute lack of legality means some institutional investors cannot put money in Bitcoin. Nonetheless, the more governments recognize and accept Bitcoin, it will experience a “negative effect” on the trading value: price will stabilize (not growing, uncorrelated) and Bitcoin will begin to behave like typical global currencies. For most, that would be a bad thing, even though it may be good!

Here are some ways government regulations could affect Bitcoin:

• Defeat of the Original Purpose: Government regulations will defeat the purpose why the currency existed in the first place. Sure, a government intervention will bring many new players into the cryptocurrency world but it would also stabilize the value of the currency. When that happens, Bitcoin would track typical currencies like US dollars, Euro and Pounds Sterling.
• Core Advocates may exit: With regulation, Bitcoin value will stabilize. Some people may lose interest as the value will not be growing. Most are not there for 2% quarterly appreciation; they want double digit growths.
• Stringent Rules: As government moves in, buying and selling Bitcoin would be harmonized. Channels would be streamlined and new trading classes could be created. Brokers could decide which investor categories can buy Bitcoin without guidance. The possibility may be that retail investors earning a certain wage level may be excluded [think of the Startup Act which prevents non-qualified investors to buy equities in startups in U.S.]. Government will put these rules to protect the small guy [it reasons] which unfortunately hikes the frictions for trading cryptocurrency.

Marijuana Equilibrium Principle

Bitcoin has many intrinsic similarities with Marijuana on scarcity, illegality and “highness” for owners. Marijuana is scarce especially when non-obviously legal; Bitcoin has that feature. People that take them go into the Mars as they become “high”; buying a coin at $120 and seeing it jump to $20,000 few years later must be a high experience. Just as for Marijuana, the law is here and there on Bitcoin.

But that was before American states began work [unbelievable that someone can legalize goof]. Yes, marijuana was legalized in some states in U.S. for medicinal purposes. There were obvious effects and those affected the equilibrium points of marijuana in many ways.

Before most U.S. states legalized marijuana, most “actors” found it largely easier to acquire; it was even cheaper even though the buying/selling was riskier. But after the regulation, government imposed stringent conditions [doctor prescription] making it more difficult to acquire, despite the larger supply pool since it became a legal business. For the actors in goof, there was more supply but getting it was harder because any player must meet a doctor first. The dynamics created a new price equilibrium, and made marijuana to behave like a typical elastic product with push and pull mechanisms where price has marginal impact on demand.

This could happen in Bitcoin, post-regulations. We would have more Bitcoin exchanges but the conditions to acquire the coins would become more stringent. Also, just as the price of marijuana has normalized wherever it is legalized, Bitcoin price will mimic that trajectory. It will attain an equilibrium point and then stabilize there. Just like that, it will track the behavior of typical currencies like U.S. dollars and Euro.

All Together

In summary, the end goal is that once governments begin to regulate Bitcoin, it would be price-normalized. With that, it joins other currencies and the game is over. The growth will be predictable, taking out speculators. That will make it less appealing to some people even though it would attract new classes of players. While South Korea will not drive this game, it can serve as a live experiment into the future. The world is waiting for U.S. to take action and once it does, that will become the golden regulation guiding Bitcoin and other cryptocurrencies. I believe no matter what happens, the Marijuana Equilibrium Principle will follow Bitcoin once it is regulated. Yes, by looking at what happened to marijuana (yes, goof), one can predict Bitcoin, post-regulation.

NB: I am building a cryptocurrency investment thesis for a client and needs a framework. In my firm, we are studying marijuana business to see how we can provide long-term guidance to my client.

In a piece, I noted that Nigerian techies and firms are using American hosting companies even for the top level .ng and .com.ng domains. Besides the ease of using the U.S. hosting services, another main factor was cost: the foreign hosting firms are largely cheaper compared to the local alternatives.

Nigerian techies really love America. According to Hub8, 72% of our hosted sites are domiciled in U.S. Those sites include the .ng and .com.ng. It is really unfortunate that we cannot keep anything in Nigeria.  Government has been campaigning, promoting  .ng and .com.ng domains. But as soon as the users acquire them, they put them in hosting providers in U.S. Honestly, I do not see how that will change in coming years because even most of the local hosting firms are resellers of American hosting companies: it is tough to run a 24/7 business when there is no electricity.

In the LinkedIn community, some commenters noted that power may not necessarily be the main factor. The reasoning was that power is a factor local hosting companies can adjust for and price into their products. They explained that our telecom companies like MTN, Airtel, and Glo are independently generating power for their businesses, and are doing just fine. In other words, if MTN uses generators to run its business, hosting companies can simply do that, since that has not severely hurt MTN.

Unfortunately, that thinking is flawed. It is flawed because the products sold by MTN and other telcos are not internet products; they are digital non-internet products. Yes, they are bounded and constrained by national geography. If you are in Nigeria, you cannot buy your cell phone number from U.S.-based Verizon or AT&T. The implication is that MTN and Glo are never in direct competition with Verizon and AT&T because Nigerians cannot have the opportunity to shop for phone numbers across the national boundaries. That means, even if MTN and Glo should include the cost of independent power generation in their pricing, you have no alternative than to pay for it [the telcos have made it clear that Nigerians could save if they have reliable grid supply across Nigeria].

Contrast that localized positioning to web hosting. Web hosting product is an Internet product which means the competition is global and unbounded by geography. A Nigerian user can buy hosting from a U.S. company unrestricted. So, if someone begins a web hosting business in Nigeria with 24/7 generator and adds the power cost to the hosting pricing, that person will struggle because if the price is higher compared to what American competitors offer, Nigerians can easily shop across the border. This is one of the biggest challenges of Internet products: they are unbounded by geography and that makes competition global.

Pricing Dangote Web Services

I will explain this pricing relationship with Dangote Cement (which exists) and Dangote Web Services (which does not). The core thing here is geography. Dangote Cement is sold in Nigeria and it is a dominant brand. Even though the relative price of a bag of Dangote Cement may be higher than one sold in German, it is irrelevant as no one is going to shop for a bag of cement in Germany while in Nigeria. Dangote Cement generates its own power to make its cement, and that pushes its price higher [I assume if the power comes from the grid, the product may be cheaper]. We all buy the cement at the price Dangote Group sells because there are few alternatives. The German cement may have been cheaper but that is irrelevant because of distribution cost. This Dangote Cement is like MTN which also generates its own power and have the capacity to increase price to cover the extra expenses.

But consider a scenario where we have Dangote Web Services (DWS), and Dangote Group wants to use the same 24/7 independent power station to run the servers which are located in Nigeria. It can do that, but it will struggle if it wants to add the extra power expenses in its pricing. Unlike cement which is not an internet product, the DWS is an internet product and can be bought across national boundaries with practically limited friction. So, DWS will struggle on pricing when compared with foreign competitors because the electricity expenses have increased its cost. In that case, Nigerians will go for the U.S. hosting competitors since the pricing is better. This scenario is what is happening between the local hosting firms and their counterparts in U.S., and the very reason Nigerians choose overwhelmingly foreign hosting services.

All Together

The Dangote Cement vs. Dangote Web Services scenario as explained is what is happening in the market. MTN and Glo are not offering internet services and that limits the scope of the global competition against them. The mobile numbers they assign to customers are localized and no one outside Nigerian can challenge them competitively. That gives them the leverage to recoup all expenses including power. But for local web hosting companies, the boundary advantage collapses, providing an opportunity for Nigerians to shop globally. In that case, they look for places with better pricing, i.e. not suffering from “expensive electricity”.

So, Dangote Cement will thrive in Nigeria but Dangote Web Services under global competition will struggle because Nigerians can easily find alternatives on the web unbounded by geography. Indeed, internet products compete globally; a challenge for local entrepreneurs creating and selling them. That explains while .ng and .com.ng are bought from (government approved) local domain sellers but hosted outside the country.

Cisco lived on a hangover for years. It wanted to sustain its highly lucrative hardware selling model into a world where “software is eating” everything. Under John Chambers, its former long-tenured CEO, the company kept the high-margin hardware party going for extended period even when the world had moved on. Mr. Chambers had a big challenge which caused the stasis: cannibalize a lucrative hardware business to participate in an emerging, and largely low-margin software one. He chose the hardware business and Cisco, over time, lost its bearing, running six quarters of declining sales.

Amazon had helped to unleash a double whammy through cloud computing for typical Cisco customers and commoditization of most server hardware. As that happened, the race trajectory was to the gross margin bottom: many companies like Facebook and Google were using off-the-shelf components to build their datacenters. Generic network equipment manufacturers like Taiwanese Quanta and Winstron brutally wounded Cisco business model with cheaper alternatives that did the work. Usually, after the generic builders have delivered, most of the companies use in-house networking software to put them to use. Over time, Cisco was totally cut-off with its premium (expensive) solutions.

Just like that, most datacenters do not rely on premium networking gears. From HP to IBM to Cisco, that transition affected many things: the cash-cow collapsed. Specifically for Cisco, it went into lost quarters where revenue declined. Mr. Chambers started to react, restructuring the business, but he was slow. Then Mr Chambers left.

Under a new leadership, a new strategy is evolving in Cisco. It is a total redesign for the pioneering networking gear company. Today, instead of focusing on the hardware element of the datacenter equipment for handling corporate networks, Cisco has gone into software. That was what it has resisted for years. It was a hangover just the same way Microsoft was slow to mobile to protect Windows. A transition from desktop to mobile was a threat to Windows and Microsoft wanted that not to happen or be delayed. Unfortunately to Microsoft, Apple and Google (through Android) did not get the memo: mobile happened without Microsoft. Cisco had the same issue: managing network was moving to software and it stood there protecting the margins on hardware.

The tech giant debuted software on … designed to make it easier for corporate customers to manage and monitor their networks. In addition to the new software, the company also introduced new data center switches with custom-made chips that are intended to make operating the software more efficient.

Customers that buy the new equipment must pay a subscription to access many of the new software features, marking a big departure for Cisco from its longtime business strategy. In the past, Cisco sold hardware that came with most services pre-installed and that customers had to pay for whether they wanted that software or not.

The new software by subscription underscores Cisco’s efforts to deal with declines in its legacy business of selling equipment for managing Internet and telecommunications networks. Businesses are increasingly buying computing resources on-demand from companies like Amazon and Microsoft instead of buying traditional data center hardware, which has hurt Cisco because of its dependence on selling data center gear.