Network Effects undoubtedly help with the expansion of a product or company, and Bitcoin’s is no different. But what is the Bitcoin Network Effect?
First coined by Trace Meyer The Bitcoin Network Effect is broken down into seven stages, and the more each stage is realized, the wider the adoption and the more inevitable Bitcoin becomes.
Network effects were popularized after Robert Metcalfe introduced the concept of Metcalfe’s Law. Metcalfe’s Law states the effect of a network is proportional to the square of the number of connected users of the system (n2).
A typical example of this is the telephone. If I have a telephone, and nobody else does, my phone is useless. But if my friend gets a phone, and then my mum and dad get a phone, all of a sudden the phone is more useful. And obviously the more people that own a phone, the more useful my phone becomes.
The same is used for all networks, such as the Internet, or social media platforms. How useful would Twitter be if you were the only user? The more people that use something like Twitter or telephones, the more substantial the network effect, and the more valuable the product.
The Bitcoin Network Efffect
Bitcoin is no different. The more people that use Bitcoin the bigger and more valuable the network will be. And Bitcoin’s network effect has been divided into seven stages, and as each stage grows the inevitability of Bitcoin becomes more apparent.
What are the seven stages of the Bitcoin Network Effect?
Stage 1: Speculation
Speculation is the act of putting money into a financial product with a high probability of failure.
Many liken it to gambling, but it’s kind of in-between gambling and investing. Speculation is usually a long term “investment”, done with some knowledge of the product, but with a higher probability of failure than investing in an established security.
Bitcoin is a relatively new asset class, and although it’s not as speculative as all altcoins, it’s still regarded as a speculative asset by institutional investors.
The speculation will continue for a while yet and will only dissipate when the world is fully educated on it, and much more money is invested in it, and until then we should carry on seeing volatile price swings.
That said, more people and institutions are discovering Bitcoin, and as we see mainstream media write about it, or television talk about it (good or bad), it shows awareness of Bitcoin is picking up.
Stage 2: Merchant Adoption
With more awareness of Bitcoin it seamlessly leads to the next stage of the Bitcoin network effect: merchant adoption.
There are already thousands of merchants that accept Bitcoin as payment. To name a few: Overstock, Expedia and Microsoft accept payment of Bitcoin through third parties, and many smaller merchants accept it as a direct payment.
Why will merchants go to the trouble of accepting BTC payments when their credit and debit card system works well enough? I hear you ask.
Well, the more people that own Bitcoin, the more merchants will want to move towards it. And the likes of VISA and Mastercard charge about 2.5 per cent on every transaction that they process.
Imagine, every $100 transaction, they charge $2.50 for it. Of course the consumer pays this, but if merchants can make it cheaper for the consumer, they will.
Lightning Network will make BTC payments frictionless, immediate, and cheaper, and by driving down the costs for all merchants, merchant adoption of Bitcoin is inevitable.
Stage 3: Consumer Adoption
Bitcoin hodlers are mostly that at the moment. They hodl because they believe the value of Bitcoin will rise in the future, and if truth be told: spending cash is more accessible than spending BTC in most cases.
Bitcoin’s main use case for now is a store of value, but we are already seeing BTC-back deals for spending your BTC in certain places.
And as merchants start realising how much they can save from not having to pay VISA so much they will entice customers with discounts for paying in BTC.
Purse.io is already offering 15% discount for anything bought with BTC, and as Bitcoin value begins to stabilize in the years to come, more people will start to use it to buy things.
Stage 4: Security
Bitcoin is already the most secure network ever created. The processing power of the Bitcoin network is quite staggering and is rising every year.
At time of writing, the Bitcoin network hashes at 114 quintillion hashes per second (EH/s).
To give you some perspective, the most powerful supercomputer, Summit, is the size of two basketball courts and it can process 148 quadrillion hashes per second. Bitcoin is 114 ‘quintillion’ – that’s three extra zeros in case you were wondering.
Bitcoin is growing every year. We’re seeing millions, if not billions of dollars invested in Bitcoin mining, and all these devices added to the network will drive up the hashrate and secure Bitcoin even more.
Stage 5: Developers
The fifth stage of the bitcoin network effect is development. Contrary to popular belief there is a lot of development going on with Bitcoin.
While Ethereum is the blockchain of choice for most developers (it doesn’t have the full network effect), Bitcoin is still being developed on.
Bitcoin is an open-source protocol, which means anybody can build applications on top of it. There’s already many of the world’s best developers creating an enormous library of applications for Bitcoin users, and as time goes by this will naturally grow.
All the best hardware wallets are designed with Bitcoin in mind, and institutional custodial infrastructure is being built on top of Bitcoin, which will widen the appeal of Bitcoin to those who don’t like the idea of self custody.
We’re already seeing developments such as the Omni Layer – a platform that allows users to create or represent assets such as stocks, commodities and even real estate is built on top of Bitcoin. These assets can be traded on the open market through the Omni decentralized exchange, all done with the security of the Bitcoin network.
Sure Ethereum has the lion’s share of development, but its promise is far from certain. And as time goes by and Bitcoin’s scaling problems are ironed out, whatever success on Ethereum will be able to shift over to Bitcoin to enjoy greater security.
Stage 6: Financialization
Financialization of Bitcoin is everywhere. The whole premise of Bitcoin is finance and it’s available on thousands of exchanges with thousands of different trading pairs with pretty much every fiat currency in the world.
Legacy institutions such as CME, and Nasdaq owner ICE have spent hundreds of millions to offer Bitcoin derivatives and futures markets.
Although we haven’t seen and ETF as yet, there are many ETPs, especially in Europe. The US is lagging in this department, but it won’t want to be left behind, and neither will Asia.
Many fear the financialization of Bitcoin because it’s derivatives and rehypothecated assets that got the global economy into the mess we’re in today, but the thing Bitcoin has going for it that all other financial assets don’t: Bitcoin isn’t built on debt.
Stage 7: World Reserve Currency
The US Dollar is the most dominant reserve currency in the history of global currencies. It’s so dominant, it’s a real problem not only for other countries and corporations who can’t get hold of it, but it’s even a problem for the American government.
What are these governments and corporations going to trade with if they can’t get their hands on dollars? They don’t want Brazilian Real, they don’t want Thai Baht, and they don’t even want the Chinese Yuan.
What about economies strangled by US sanctions? They’re cut off from the SWIFT system, but with Bitcoin they can circumvent that. And if you think governments are staying away from Bitcoin ask why nations like Iran has just given the go ahead for one of the world’s biggest Bitcoin mining farm to be built.
As we know, Bitcoin is decentralized and immutable. Nobody can stop a transaction going through. Anybody can send any amount of value in a matter of minutes, and at little cost.
People don’t need banks anymore, and many are using BTC to send value across the world. And governments don’t even need the SWIFT system.
We’re a long way from Bitcoin being the world’s reserve currency, but it’s already a settlement currency for much of the world.
Wrapping It All Up
The power of a network effect is simply exponential. The more people adopt something, the necessity of it gains traction and the value eventually explodes.
The Bitcoin network effect is already there. All seven stages are growing, and as each stage magnifies, the utility of Bitcoin will grow.
From speculation to world reserve currency, Bitcoin’s network effect not only ensures benefits to the speculators, but it benefits to everyone who uses it.
The Bitcoin network is the most secure and distributed network ever created, and it’s not slowing down. In fact it’s growing and widening, and the bigger its network effect grows, the more inevitable Bitcoin becomes.
Author: Tommy Limpitlaw