It is often said that money makes the world go round. But have you ever stopped to think about what money really is? In essence, money is just a belief held by a lot of people. It is a collective trance, a shared confidence in the future. And throughout history, this belief has been embodied in different forms of currency.

It is often said that money makes the world go round. But have you ever stopped to think about what money really is? In essence, money is just a belief held by a lot of people. It is a collective trance, a shared confidence in the future. And throughout history, this belief has been embodied in different forms of currency.

For centuries, the world operated under the belief in the power of hierarchy. We, as hierarchical pack animals, found comfort in the stability and understandability of having an alpha King on top. When the King issued a currency and told people to use it, they believed in it. And as long as that belief persisted, the currency worked.

The belief in hierarchical currencies stemmed from a few factors. Firstly, there was the centralization of decision making and authority. People trusted that the King knew what they were doing and would make wise choices for the currency. Secondly, there was the longevity and predictability of the hierarchy. People had faith that the King would remain in power, ensuring the stability of the currency. Thirdly, there was the presence of guns and the ability to enforce behavior through violence. Hierarchies typically had the means to use force if necessary to maintain the belief in their currency. And finally, there was the tax base of the people within the hierarchy. The people believed in the currency because they saw the King using it to collect taxes and conduct transactions.

But then came Bitcoin, and it changed everything. Bitcoin killed the king and replaced it with a network. Decentralized cryptocurrencies like Bitcoin gained our belief for different reasons. Firstly, there is the decentralization aspect. There is no one person or council who can ruin the currency. It is governed by software-encoded rules that are hard to change, increasing predictability. Secondly, there is the ubiquity factor. Bitcoin is accepted in many places, making it more valuable. And thirdly, there is the resiliency. Bitcoin is self-healing and can avoid efforts to damage it.

In short, while hierarchical networks fight with power and rigidity, decentralized networks fight with flexibility and ubiquity. They sneak around. Bitcoin, unlike fiat currencies, isn't constrained by geography or time. It is programmable and can be improved quickly in response to market needs. And most importantly, software-money more easily amplifies the "belief" network effect that gave older forms of currency power, as beliefs spread faster in higher densities in our connected world.

So what does the future hold for Bitcoin? Its future will be determined by its network effects. There are four defensibilities native to the digital age that Bitcoin can leverage: network effects, brand, scale, and embedding. Of these, network effects are the greatest. The network math protects Bitcoin. Even if governments were to ban it, the sheer number of users who believe in its value will ensure its survival.

But Bitcoin also faces challenges. Competing protocols such as Tezos, Solana, Cardano, and Ethereum are emerging, using proof of stake, which is faster and more cost-effective than Bitcoin's proof of work. If Bitcoin cannot adapt and move off proof of work, it may prove fatal.

Furthermore, Bitcoin's network effects can be divided into two forms of marketplace network effects: a speculation or "store of value" marketplace, and a payments marketplace. The value of Bitcoin in the store-of-value marketplace increases with more buyers and sellers, as it increases liquidity. Bitcoin's success in these marketplaces will depend on the strength of its network effects.

To strengthen its network effects, Bitcoin needs developers. In late 2020, Bitcoin had 400 monthly active developers, while Ethereum had 2,300. Developers are a valuable resource that can enhance the network effect of a cryptocurrency. More developers mean more improvements and innovations, attracting more users.

In addition to digital network effects, Bitcoin can also benefit from social network effects. Our tribal networks, our emotional sense of belonging and identity, add value to our lives. Bitcoin, with its worldwide brand and large market cap, has a strong bandwagon effect compared to lesser-known cryptocurrencies. People tend to default towards what's familiar, creating psychological switching costs.

As the network grows, however, challenges arise. It becomes more expensive and slower for miners to validate transactions due to the increasing number of transactions and competition. Bitcoin's value would likely increase if changes were made to alleviate this effect.

Belief was the original force in the Bitcoin network. Bitcoin created and embedded itself into the crypto ecosystem and the world's consciousness. Embedding is crucial for a cryptocurrency to ensure it becomes an integral part of customer operations and the ecosystem, making it difficult to replace.

In conclusion, Bitcoin's future lies in its network effects. As more people believe in its value, the network effect grows stronger. Bitcoin has disrupted the traditional belief in hierarchical currencies and replaced it with a decentralized network. But it must adapt and overcome challenges to maintain its position in the ecosystem. To strengthen its network effects, Bitcoin needs developers, a well-established brand, and the ability to address scalability issues. By leveraging these factors, Bitcoin can secure its future and leave a lasting legacy in the world of finance.

Actionable advice:

1. Stay informed about the developments and advancements in the world of cryptocurrencies, especially Bitcoin. Understanding the technology and its potential will help you make informed decisions.
2. Consider diversifying your investment portfolio to include cryptocurrencies. Bitcoin's strong network effects and potential for growth make it an attractive investment option.
3. Support the development and adoption of Bitcoin by participating in the network. Whether it's by becoming a user, developer, or advocate, your contribution can strengthen the network effect and ensure Bitcoin's future success.