When Satoshi Nakamoto was the first and only one to start mining bitcoin 13 years ago, the digital currency was worth nothing. Today, with millions of users, it is different. The concept of network effect plays a significant role in this. If you’re interested in knowing what will be the future of cryptocurrency click here.
The network effect
You speak of the network effect when each new network user makes the system more valuable and valuable for existing users. The user’s number can thus determine the value of a network or system. So, for example, the telephone, a chat application, or a social media platform: the more users, the more possibilities for sharing or communication.
Network effects occur in various industries, including bitcoin and other forms of money. In part, the value of bitcoin depends on how many people accept the coin as a payment method or see it as a valuable investment. For example, the value of bitcoin will increase when the number of people who use it to save increases. Therefore, the more people accept bitcoin, the more valuable and better the coin is for someone who wants to use it for transactions.
It is also applied to other currencies. The number of people using a currency determines the magnitude of the network effect. Therefore, money that the government imposes has an advantage; there is a ‘lock-in’ effect which means that the adoption of reputable coins has not come naturally, but it is now attractive for others to use the coin.
Bitcoin
Bitcoin can offer a way out as a decentralized alternative to central bank money for many people in the present. After the desertion of gold as the standard currency in 1971, governments have been able to create money. The currencies used in the past often consisted of gold or other scarce precious metals. The indestructibility and scarcity played a role in this. For example, bananas or other foods are a terrible form of money because you can’t keep them for long, and shells are not helpful due to the lack of scarcity.
The most commonly used form of money is gold, as this precious metal is scarce, does not rust or decay, and is relatively easy to share. In the bitcoin world, there is a lot of talk about bitcoin as digital gold. According to them, because of the same scarce characteristics, bitcoin competes with the precious metal for the best savings. Moreover, bitcoin has the advantage that it can be sent almost free of charge and quickly worldwide. On the other hand, moving gold is costly and needs a lot of energy.
Unlike government money, the growth and increasing use of bitcoin has gone organic. Bitcoin is elected through the free market, which is not the case with fiat money. This trust requires a legal basis and government. This centralization is accompanied by possible corruption, as history shows. The adoption of bitcoin is, on the one hand, inhibited by reputable coins with existing network effects. On the other hand, many people in Western countries with a relatively stable currency often do not see the usefulness of bitcoin. In other places in the world, it is the opposite.
The network effect also favors bitcoin because it is the first crypto coin, giving it an edge over other cryptocurrencies. There is very little chance in the future that any new cryptocurrency can take over bitcoin or gain the status of bitcoin. Thanks to its organic growth, bitcoin has gained monetary value. Bitcoin will be recognized as money by more people due to its possible growing value, fundamental properties, and principles through the network effect. In the current system with negative interest rates, growing mountains of debt, and increasing inflation, it is possible that more and more people will look for another store of value to store their wealth. The network effect ensures that bitcoin is a reliable and independent alternative.
“Bitcoin is the first and only truly global currency. That in itself is unique. It is not the currency of America or China or any company, but a global currency that belongs to no one and therefore belongs to all of us. It is a public good, and the benefits are countless: better monetary properties, technologically superior, inherently digital, no intermediaries needed, no abuse of power possible, financial sovereignty, censorship resistance, cross-border, inclusive, open, independent, politically neutral, and accessible 24/7.”
