Bitcoin Killed The King & Now Network Effects Will Determine Its Future: Exploring the Value and Defensibilities of Bitcoin

Bitcoin Killed The King & Now Network Effects Will Determine Its Future: Exploring the Value and Defensibilities of Bitcoin

Introduction:

Money is a collective belief held by a large number of people. It represents a shared confidence in the future. Traditionally, money has been centralized, with a king or central authority issuing and controlling the currency. This belief in centralized currency stems from factors such as centralized decision making, predictability of the hierarchy, enforcement through violence, and tax base. However, Bitcoin disrupted this system by introducing a decentralized network structure, replacing the need for a central authority. In this article, we will delve into the network effects that determine Bitcoin's future and explore its potential value.

Belief Network Effect:

Bitcoin's value is derived from the belief that it holds value. The more people believe in Bitcoin, the more valuable it becomes. This belief network effect grew when the concept of decentralized ledger currency was novel and had little competition. As more people believed in Bitcoin, its value became self-fulfilling. This belief network effect is strengthened by the presence of other cryptocurrencies denominated in Bitcoin, further stabilizing its value.

Protocol Network Effect:

The strength of Bitcoin's network effect is also influenced by its protocol. As more nodes connect to the protocol, the network effect becomes stronger. Changes in the protocol, such as moving from proof of work to proof of stake, can impact the fitness of Bitcoin to survive in the long term. The protocol network effect plays a significant role in determining Bitcoin's position in the ecosystem.

Marketplace Network Effect:

Bitcoin creates two forms of marketplace network effects: a speculation or "store of value" marketplace and a payments marketplace. However, the store-of-value marketplace network effect is weak due to the presence of other layer-1 protocols that can achieve liquidity and the ability to hold different currencies as a store of value. These factors limit the strength of the marketplace network effect for Bitcoin.

Platform Network Effect:

The number of developers actively working on a platform contributes to its network effect. In late 2020, Bitcoin had 400 monthly active developers, while Ethereum had 2,300. The more developers a platform has, the stronger its network effect. The presence of developers enhances the value and functionality of the platform.

Data Network Effects:

Bitcoin creates two data network effects. Firstly, it creates an immutable history of interrelationships within the network, making it hard to replicate by competitors. Secondly, as the chain of blocks grows longer, the level of computation required to hijack the network increases, enhancing security and value for all participants. These social data network effects contribute to the overall value of Bitcoin.

Tribal Network Effects:

Tribal networks provide emotional belonging and identity, as well as useful connections. Bitcoin's tribal effects serve as a powerful defensibility for its network effect. The sense of belonging and loyalty within the Bitcoin community strengthens its overall value.

Bandwagon Network Effects:

Bitcoin benefits from the bandwagon effect due to its worldwide brand and market dominance. As the first and largest cryptocurrency, Bitcoin attracts early adopters and draws more people into the network. The bandwagon effect amplifies Bitcoin's network effect compared to lesser-known cryptocurrencies.

Other Defensibilities:

Apart from network effects, Bitcoin possesses two other defensibilities: embedding and brand. Embedding refers to Bitcoin's integration into exchanges, calculations, and product experiences. The more merchants and governments accept Bitcoin, the stronger its embedding defensibility becomes. Brand negative scale effects occur as the network grows, making it expensive and slower for miners to validate transactions. If the Bitcoin price drops significantly, miners may withdraw support, potentially unraveling the network effect.

Conclusion:

Bitcoin's future and value are determined by its network effects. Understanding and monitoring the health of each network effect provides insights into Bitcoin's potential in the coming years. While Bitcoin has various defensibilities, it also faces external challenges such as faked transactions, responsiveness of the Bitcoin DAO, and government intervention. To ensure Bitcoin's success, it is crucial to address these challenges and leverage its network effects.

Actionable Advice:

1. Foster and strengthen the belief network effect by educating and spreading awareness about Bitcoin's value proposition.
2. Continuously monitor and adapt the protocol to enhance the protocol network effect, ensuring its long-term viability in the ecosystem.
3. Encourage developer participation and support to strengthen the platform network effect, expanding the functionality and value of Bitcoin.

In summary, Bitcoin's network effects will play a crucial role in determining its future. By understanding and leveraging these network effects, Bitcoin can continue to evolve and thrive as a decentralized and valuable digital currency.