Bitcoin’s Reliance on Network Effects
To buy or not to buy, that is the question. As Bitcoin increases in value, some question why it is even worth anything. No country uses it as a national currency, and it is not accepted everywhere; so, why does it seem like Bitcoin is the currency of the future? The answer is simple: network effects. A network effect is one in which increasing the number of users increases the value of that network to those that use it. Take a social media site like Facebook or Twitter for example. Those sites are worthless if nobody uses them, but as millions of people join and interact with one another, the sites gain value. This exact intuition explains why society envisions Bitcoin as a stable currency in the future.
Though it started as a small cryptocurrency, mostly used on the dark web, it became a global phenomenon once more people started to buy into it. This did not happen because a couple people in a neighborhood saw it being profitable; it happened because millions of people started to invest in it and became more comfortable using it for other things than making purchases on the dark web.
The chart above displays Bitcoin’s value over the last 7 years. In 2014, a single Bitcoin was worth around $145. Now, one is worth about $50,000. Because more people started to buy into Bitcoin, it increased by about 3450% in 7 years. That staggering growth can be attributed to network effects.
In an article on River Financial’s website, which is a company for buying and selling Bitcoin, they discuss Bitcoin’s future based on network effects. In the article, the author highlights that Bitcoin’s future relies on current buyers compelling more people to join the network. By joining the network, I am referring to people buying and investing in Bitcoin. As the network expands and Bitcoin’s value increases, more people will support the cryptocurrency. The author also points out that Bitcoin has already surpassed the hardest stage in becoming widely accepted; thus, its value should increase over time as its network effect continuously expands.
Some may argue that Bitcoin’s network effects will not always increase its value; however, the same argument can be made for the U.S. dollar. The U.S. dollar is as valuable as the economic activity related to it and how the U.S. is perceived globally. So, the value of the U.S. dollar is also somewhat of a network effect. That being said, Bitcoin is not guaranteed to remain stable forever. If enough people start to believe it is not worth its value, negative network effects could arise and devalue the cryptocurrency. Nevertheless, for the foreseeable future, Bitcoin seems to be on a steady growth track, and it is all because of network effects.
Sources:
https://river.com/learn/bitcoins-network-effect/
https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp