Bitcoin will eat the long tail in the "Long Tail Theory"

Chapter 0 Introduction

Does Bitcoin have a future? Many people see that it takes up to 10 minutes for Bitcoin payment confirmation, and it is easy to conclude that Bitcoin is not a competitor to third-party payment platforms such as Alipay and WeChat Pay. It is also very clear that Bitcoin is difficult to compete with the country's legal currency in terms of payment functions within a country.

I was also worried that Bitcoin would lose the market in this competitive relationship, and I couldn’t find the logic and evidence to eliminate my worries until I recalled the “Long Tail Theory”.

Chapter 1 The Long Tail Theory

The long tail theory is a set of business theories summarized from the business models of Amazon and Google. Internet platform companies like Amazon plot the sales of all products on sale in descending order into a curve. The most popular products with the highest sales are the head of the curve, and a large number of unpopular products form a long tail, as shown in the following figure:

The market value that this long tail can achieve is completely comparable to the previous head market value. Mainstream market observers believe that the total market value achieved by the long tail will be equal to, if not greater than, the head market.

For example, selling books. The demand for most books on the market is actually very low. The total demand for niche books is very large. Even if only a single-digit number of people buy a book a year, there are a lot of such niche books. Although only a single-digit number of people buy each book, the final sales of all the niche books may exceed the sales of best-selling books.

Books sold in physical stores are basically bestsellers. It is difficult for physical stores to sell books that have only sold in the single digits. Because every time a book is put on the shelf, the bookstore needs to increase the cost, and this marginal cost increase is very obvious. But for online bookstores like Taobao and Amazon, their marginal cost hardly increases with every additional book, or in other words, the marginal cost is zero. In this way, Taobao and Amazon can sell all these unpopular books on their e-commerce platforms. Although each book sells very few copies, it can form a long tail, and the total market value is still very high, and the profit is also very high.

Chapter 2 The Pareto Principle

The 80/20 rule corresponds to the long tail theory: 20% of a company's consumers will bring 80% of the company's revenue. Therefore, the company will focus its main efforts on these 20% of users.

However, the long tail theory requires companies to focus their energy (because the marginal cost is close to zero, the energy spent on serving one user and serving all users is almost the same) on the endless overall users. Each unit user can only bring in a tiny bit of revenue, but the trickles will converge into a river, and the total revenue will be no lower than that of carefully cultivating users under the 80/20 rule.

Under the 80/20 rule, the products produced are concentrated on 20% of the population, while the needs of the other 80% cannot be met. However, under the long tail theory, the market can be tailor-made for these 80% of users.

The most classic example is Google's advertising. Before Google's AdSense, advertising required huge investments, and advertising had to be done on TV and in large sports venues. The cost of this kind of advertising was very high. This made it almost impossible for all small and medium-sized companies to advertise. Just like the advertisement of Melatonin, it was so popular that all Chinese people had to know about Melatonin. But small companies competing with Melatonin were in trouble, as no one knew about it. At that time, advertisers did business under the theory of the 80/20 rule. As long as they took one advertising order like Melatonin in a year, they would be fine. They would ignore other small companies that came to ask for advertising.

But Google's AdSense advertising model is different. Advertisements are no longer out of reach, but extremely cheap. Any small company can buy keywords and place them on blogs, small websites, etc. However, AdSense can serve small and medium-sized enterprises all over the world. The total advertising market value far exceeds the market value of top advertisements such as Melatonin. This is how Google has realized huge commercial profits by taking advantage of the long tail of advertising demand from small and medium-sized enterprises.

Chapter 3 Bitcoin’s payment market lies in the long tail of endless small businesses on the Internet

In 2014 and 2015, there was news every once in a while that someone accepted Bitcoin payments, such as Microsoft, Dell, and Paypal. But in fact, these giant companies accepted Bitcoin, and the number of people who used Bitcoin to consume in these giant companies was actually very small. It is precisely because of this that every time a large company announced that it would accept Bitcoin, some people in the community would say that the price would rise, but the final result did not cause much market fluctuation. I was also very curious at the time, why? One of the reasons should be that the payment systems of these large companies are actually very complete. You can use credit cards or Alipay for large companies. These payment methods are very convenient, fast and safe. There is no need to use Bitcoin to buy things in the malls of these large companies.

When we go shopping at these big companies, we are actually happy to bind our credit cards without worrying about our card information being leaked. The domain names of these big companies are also very famous, so we don’t worry about being on phishing websites, and we don’t have to worry about using credit cards for shopping.

But there is a website, spendbitcoins.com, which counts merchants around the world that accept Bitcoin payments. The homepage of this website shows that more than 100,000 merchants accept Bitcoin payments.

Most of these 100,000 merchants are not well-known merchants. Most people would not dare to bind their credit cards to any one of them because we do not trust these unknown merchants.

We may think that Taobao, Amazon, etc. occupy the majority of the market share in the entire Internet business. However, those small online merchants, some small and unique online items, although the sales volume of a single store is not large, but there are too many of them. There are countless such small merchants around the world. All these merchants constitute a long tail.

It is still difficult for such small businesses to use mainstream payment methods. The first reason is cost. Credit cards charge a handling fee of more than 1%; the second is trust. Users are afraid to use credit cards to pay for unfamiliar online stores.

This long tail is the market share that Bitcoin is occupying, because Bitcoin provides anonymous payment, there is no need to worry about identity leakage, and the payment cost is also low.

The market share of this long tail is not small. According to the long tail theory, it can compete with the market share of the head. Therefore, Bitcoin is not competing with legal currency payment methods on the same dimension. Legal currency payment is at the head of the market curve, while Bitcoin may occupy the long tail.

Chapter 4 Blockchain applications may also occupy the long tail market

Many people are now bragging that blockchain can change the world, but there are really no real applications, let alone killer applications.

Let’s list the areas where blockchain may be applied. These are all logically potential directions and the directions that industry practitioners are working towards:

Clearing and settlement, equity transactions, auditing, notarization

In the field of clearing and settlement, the most famous one is R3. It brings together dozens of banks and large institutions around the world to come up with a way to replace the existing international asset clearing and settlement. But after several years of work, nothing substantial has emerged. Only news is blowing higher and higher.

The most important news in the equity trading direction is Linq, which is being developed by Nasdaq. Nasdaq wants to use blockchain technology to remove the many cumbersome and opaque audit and transaction links of stock IPOs. But it seems that more than two years have passed, and there has been no substantial progress.

There is also an American company that has developed a blockchain called Factom, which aims to write the ownership of property rights into the blockchain to solve some ownership issues such as real estate rights and intellectual property certification. This belongs to the field of auditing and notarization. But in fact, it is not clear what use it has. It is good in concept, but it is useless.

There are also many entrepreneurial teams in China working in these fields. The most famous one is Xiaoyi, which is also working on using blockchain to confirm the ownership of digital assets. It has also raised a lot of money and seems to be ready to do a big job.

Entrepreneurs have spent a lot of manpower, material resources and financial resources to achieve these goals, but the prospects are not clear at present. At least I think they are almost uncompetitive.

"Clearing and settlement, equity trading, auditing, notarization", the technology in these fields is very mature, and the user loyalty is also very high. However, the blockchain technology itself is not so perfect. If you use an imperfect technology to compete in a mature market, it will not be very optimistic.

I personally think that we should explore the long tail of these fields and look for some commercial applications that cannot be covered by current technology. For example, there are countless companies in the world, but few can go public, while many want to go public. These companies that cannot go public are not necessarily poorly managed. On the contrary, the total market value of unlisted companies in the world must be greater than the total market value of all listed companies. The long tail of these unlisted companies is the most important economic activity in the world. However, the current costs of institutions such as Nasdaq and Shanghai Stock Exchange are too high, and the marginal costs are very high, which cannot cover the listing needs of many high-quality small and medium-sized enterprises. The research direction of equity transactions in blockchain should be to serve these small and medium-sized enterprises. Serve these long-tail needs instead of competing with Nasdaq for business.

Chapter 5 Conclusion

The payment function of Bitcoin can be applied to the long-tail part that cannot be covered by the existing legal currency payment. This is a super huge market.

I personally think that it is best for blockchain not to compete with existing mature technologies, but to look for the long tail that these technologies cannot cover. There is a real blue ocean there.