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The Influence of Network Effects on Bitcoin & Other Cryptocurrency

Link to the article.

This article explicitly discusses the importance of network effects in rising technologies, in this case, Bitcoin and other cryptocurrency. As we learned in class, network effects occur as more nodes join the networks, which in turn causes its benefits increase. The articles names two examples, besides the subject of the story itself: VCR technology and social networks. They explain that both of these phenomenons exists on two different ends of the spectrum of how significant networks effects are to the individual technology’s success. On one end is VCR technology, where the VHS eliminated other potential competitors due to network effects. On the other end is social networks, such as Facebook, Instagram, and Twitter, who all coexist peacefully even with network effects. The article then speculates that Bitcoin if more like the latter than the former, as its founders even welcome “neighbors” in the cryptocurrency industry.

This article expands on our discussion in class regarding network effects, specifically on the concept of “lock-in”. The article attributes single-technology takeovers to this, such as their example with VHS. Because a user only needs one VHS player, they must choose between the competitors and stay with this choice. For this reason, VHS was allowed to prosper, since it was the choice with more users. With more users choosing VHS, more stores offered it as an option over its rival, Betamax. Lock-in doesn’t occur on the other end of the spectrum, such as the example with social media. Users do not need to commit to only social media account; Facebook, Twitter, and Instagram all share members of the population. This concept explains why network effects can kill entire products or technologies, while letting others to succeed with their competitors.

The article predicts that Bitcoin doesn’t follow the concept of “lock-in” and I agree. To me, cryptocurrency is similar to the conventions of real currency. Right now, there are hundreds of types of currencies in the world that do not hinder the success of other currencies. They all follow network effects, yet do not compete in the way VCR technology does. Similarly, cryptocurrency can follow this and similarly have multitudes of options, similar to real life currency and social media.

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