Bitcoin as the Result of Network Effects
https://www.cnbc.com/2017/11/02/credit-suisse-ceo-banks-staying-away-from-bitcoin-bubble.html
Ever since the price of bitcoin, the most influential digital currency, began to swell, many notable people started to disclose their opinions on the phenomenon. One such person, the chief executive of Credit Suisse, recently deemed bitcoin to be “the very definition of a bubble”, and further stated that those who invest in bitcoin are doing so only to make money. While that might not be entirely true, there are nonetheless likely a considerable amount of people who are investing in the currency for that purpose alone – to make money.
The value of bitcoin depends almost entirely on how many other people are investing in it. As bitcoin accumulates investors, its value goes up. In turn, this drives additional people to invest in the currency as well; if this were not true, the value of bitcoin would have either plateaued or declined. However, as graphs of bitcoin show, the value of the currency has seen a steady and rapid increase.
As the payoff one receives for investing in bitcoin depends upon the total number of investors and upon one’s own evaluation of the currency, the rise in price of bitcoin can be viewed as the result of strong network effects. Each potential investor in bitcoin has some personal evaluation of bitcoin, r(x), and the benefit a person gets from p people investing in bitcoin is f(p). Further, if r(x)f(p) >= a, where a is the actual price, then person x will invest in bitcoin. This structure is identical to that noted in network effects.
If bitcoin can be accurately modeled in this manner, this would suggest that, contrary to what the chief executive of Credit Suisse believes, the value of bitcoin will continue to increase and eventually stabilize at some value a = r(p)f(p), save for something happening that dramatically lowers the number of investors bitcoin has. However, it is more likely the case that a phenomenon as complex and unparalleled as bitcoin cannot be mapped to such a simple model. For now, both current and potential investors and critics can only observe what happens to this unanticipated trend.