Network effects on Bitcoin, and the cryptocurrency market
Article: https://www.aier.org/blog/how-important-are-bitcoin%E2%80%99s-network-effects
Most people are familiar with network effects whether they know it or not. Most people who remember what Google+ is intuitively know that it failed not because it was a worse service than Facebook, but because it never got enough active users to get off the ground. The article discusses network effects and competition in relation to crypto currencies, specifically Bitcoin. The article presupposes that most people are under the assumption that one cryptocurrency will come out on top, and then challenges that assumption. The article discusses two precedents: VHS vs. Betamax, and the current social media market. VHS vs Betamax is a clear cut example of network effects making VHS, a strictly inferior product, come out on top. Branding made it popular, and the cost of buying a player for either format was high enough to make it unlikely for both to succeed. Facebook, on the other hand, also became dominant due to network effects, but this did not exclude Instagram and Twitter from entering the market, because they are supplementary. The writer of the article suggests cryptocurrencies growth is more likely to be like the social media precedent rather than VHS and Betamax.
I think it is an interesting take, but it feels like it’s addressing the wrong issue. Bitcoin already has brand awareness and quite a bit of success. If cryptocurrency takes off Bitcoin is likely going to be the biggest, or only option. I think the real determiner in whether it is going to be a market with one option or multiple options is government intervention. A government made cryptocurrency would dominate the market, or any regulation could make or break cryptocurrency altogether.
In class we discussed network effects, and it is obviously prevalent all over the market. It is interesting to see the article discuss the effects of network effects on competition rather than just one the sole product.