We all know about the Network Effect, sometimes referred to as Metcalfe’s Law. It is the concept that as something becomes more adopted and integrated into a system it’s value grows at an exponential rate (rather than linear). The network effect is one of the success factors of a cryptocurrency. And the network effect of Bitcoin is growing rapidly every single year, progressively making it more and more unstoppable.
The concept of the network effect is relatively new, and we’ve seen numerous examples in the past century, from the telephone, fax machine, email, Internet and most recently, Facebook. The more people that have telephones, the more valuable a telecommunications network or corporation becomes. Similarly, the more people who use the Internet adds exponential value to the Internet. As well, the more users on Facebook (or other social media platforms such as Snapchat, Instagram, Twitter, etc) then the value of those social networks increases exponentially.
Regarding the network effect of Bitcoin, Trace Mayer proposed Seven Network Effects of Bitcoin or rather 7 areas where the adoption of Bitcoin is growing rapidly, which is turning into a significant network effect.
The Network Effect of Bitcoin
- Merchant Adoption
- Consumer Adoption
- Developer Mindshare
- Adoption as a World Reserve Currency
Speculation and the Bitcoin Network Effect
Speculation – the art and science of betting on an asset to increase or decrease in value. Not exactly true investing, especially when done in the short term.
Bitcoin (and all cryptocurrencies for that matter) are totally new asset classes, with true digital scarcity. This means that no one has valued such technology before and the whole world is still learning and discovering more and more about this asset class, particularly Bitcoin.
With a large amount of speculation Bitcoin’s price will be wildly volatile. However, Bitcoin is gaining more and more awareness/media attention worldwide, which simply means that more people are starting to value Bitcoin. This growing network of people learning about Bitcoin places more money into the speculative market for Bitcoin.
As speculation drives volatility, more people become aware of Bitcoin and increase its value.
There is a whole industry developing around Bitcoin storage, either self-storage with cold hardware wallets or institutional and cryptocurrency exchange storage.
Merchant Adoption and the Bitcoin Network Effect
As Bitcoin (and other cryptocurrencies) gain increased awareness and higher price values merchants will begin to accept Bitcoin as payment. This is less expensive than using credit card companies, especially with scaling solutions such as the Lightning Network.
One of the main reasons that merchants will start to accept Bitcoin is because consumers will be holding Bitcoin. This may sound too simple or you may not believe that statement. However, in a capitalist society (aka our society) merchants want to transfer your money into their bank accounts. Therefore, if enough people hold enough Bitcoin then merchants will begin accepting Bitcoin as payment.
In fact, there are many merchants who already accept Bitcoin as payments (tens of thousands of merchants), typically with payment providers such as BitPay.
Consumer Adoption and the Bitcoin Network Effect
Holders of Bitcoin will spend Bitcoin for a number of reasons. Often merchants will pass on discounts to customers paying with Bitcoin since merchants save on credit card fees.
Additionally, consumers may have been holding Bitcoin for a while, and it’s gone up in price, so they want to cash in on some of those gains. Say they put in $1000 USD into Bitcoin in January 2019 (~0.31 BTC). Today that same 0.31 BTC is worth ~$3,300 USD. So some consumers may want to spend some of that growth in value.
Security and the Bitcoin Network Effect
The processing power that the Bitcoin Network commands is astronomically high. At the time of writing this article, the Bitcoin hash-rate is roughly 80,000,000 Terahashes (or 80 Exa-hashes). This is an unfathomably high hash-rate. Humans are not good at comprehending large numbers like these, but to put that into perspective, it is roughly 10s of thousands of times the processing power than the 500 supercomputers in existence today.
It is not easy to start up a valuable blockchain/cryptocurrency. Anyone can start a cryptocurrency, but to make the network secure and decentralized is terribly difficult. Any large company such as Microsoft, IBM, Google, Amazon, Facebook etc can easily squash a small cryptocurrency network that does not command the processing power of a Network like Bitcoin.
With that said, the larger and stronger the security of the Bitcoin network, the more likely people are to trust and use it. Which then means that more nodes are likely to join the most popular blockchain network, creating a positive feedback loop of security and network effect.
Developer Mindshare and the Bitcoin Network Effect
Regarding building Dapps (decentralized applications), wallet apps, scaling solutions etc, why build them on small, vulnerable, lesser-known cryptocurrency networks?
As the Bitcoin network gains in security, useage and adoption it will attract more and more high-quality software developers and computer engineers, etc. This will lead to greater value of the Bitcoin network as the Dapps and apps running on it are used by a growing number of users, creating a positive feedback loop of value and adoption – the Bitcoin network effect.
Financialization and the Bitcoin Network Effect
The whole premise of Bitcoin and other cryptocurrencies is the concept of digital scarcity and programmable money/value. You can issue fiat stable coins, stocks and bonds, financial contracts and so much more as tokens on a cryptocurrency network.
Bitcoin is one of the most ideal networks for this owing to its security and already large network effect. However, Ethereum and XRP are close contenders for financial derivative products.
Bitcoin and cryptocurrencies will allow the digitalization of finance.
Adoption as a World Reserve Currency and the Bitcoin Network Effect
This network effect hasn’t really had much traction yet. It is the idea of Bitcoin replacing the USD as the world reserve currency. This would mean that instead of settling large international transactions with USD, it would be settled in BTC. Currently, international trade is completed in USD.
I think that Bitcoin has a long way to go before it is used as the world reserve currency, however, I think that on its current trajectory it could be there within 15 – 30 years.
In order for Bitcoin to be used as a world reserve currency, it would need to have a significantly larger market cap, we’re talking in the $50 Trillion range (or more). Additionally, it would have to have many different financial products based on it such as bonds, or stock certificates issued on its blockchain.
The reason for these pre-requisites is that Bitcoin will need to be well integrated into the international financial system, and it must be a household name. You need to be able to open a Bitcoin bank account at your national bank before governments settle a debt in Bitcoin.
However, I believe that Bitcoin’s network effect will continue to grow at an exponential rate and it will eventually be the world’s reserve currency.
Click here to review What is Cryptocurrency.
Video Summary of Trace Mayer on The Seven Network Effects of Bitcoin
Markshire Crypto Conclusion – Why Bitcoin is More and More Unstoppable, The Bitcoin Network Effect
Suffice to say that Trace Mayer is correct. His 2015 commentary on the seven network effects of Bitcoin are true and growing. Just as with the Internet, there were several different protocols that existed, but TCP/IP is the protocol that was most widely adopted and used (and back then it was not even the “best” protocol in existence, but it was the most widely adopted).
Bitcoin may not be the fastest or easiest to program on. But it is the most valuable, the most widely adopted, the most secure network and has one of the largest developer networks out there.
Bitcoin is becoming a real, truly valuable decentralized, open, censorship-resistant, neutral, distributed value network.
While most news on Bitcoin software development, corporate and government involvements in it is under the radar of mainstream media outlets, if you simply google around for information you’ll find a very busy, bustling, and growing environment around Bitcoin and a handful of other cryptocurrencies (particularly Ethereum and XRP). This further strengthens Trace Mayers four-year-old prediction and exposition on the Bitcoin network effect.
As Bitcoin speculation, development, merchant adoption and hash-rate continue to grow, the network effect will amplify the value of Bitcoin over 1000-fold (yes even from this price range).
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