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By: Luuk Soons
One of the main reasons why Bitcoin is almost impossible to catch up with by another new hip crypto project has to do with the fact that Bitcoin has been building a network effect for eleven years. In fact, not one, but a total of about seven different mutually reinforcing network effects. This makes Bitcoin not only extremely secure, but also monetarily predictable and transparent. The monetary properties of Bitcoin belonging to hard money (gold) have grown organically. These are properties that are not simply artificially copied to a new project.
One Network effect is the accumulated power and value that a service acquires as more people use it. With each new user, the service becomes more useful to someone else and attracts other new users who also find the service useful. A phone in itself is not useful to me or to anyone else, but when more and more people use a phone, the phone network becomes larger and more valuable. Facebook is also widely cited as a textbook example of a service with a huge network effect.
Bitcoin cannot be compared to a simple service provided by one party or another. Bitcoin is in principle a protocol, just like the internet. It consists of different components and therefore also different network effects. The Bitcoin protocol has now had an eleven-year history of development with accelerating adoption, which means that we are now dealing with an almost indestructible, extremely secure and decentralized network.
The bitcoin network is also described as the internet of money, which anyone can access without permission and carry out p2p transactions without censorship. The Bitcoin network is an open decentralized money system that is ultimately based on mathematics and works on the basis of mathematics, without third parties such as a bank.
Money is a social technology that is itself based on a network effect. Historically, money has been spontaneously developed and selected by the market on the basis of certain characteristics that suited a particular society. This long process eventually led to precious metals and especially gold being put into use as the ultimate hard money. It was eventually globally accepted and standardized into the gold standard. This happened in the Roman Empire and the British Empire, among others.
Bitcoin imitates the operation of gold In the sense that the bitcoins are absolutely scarce and energy is required to find the bitcoins. In the end, only 21 million bitcoins can be mined. Here we come to an important unique network effect of bitcoin: the development of a bitcoin mining industry.
The bitcoin miners are a specific group of users who are dedicated to updating the Bitcoin transaction book (the Blockchain) distributed to all full users of the network. New transactions are collected and checked in a new block. All Bitcoin miners try to find and deliver the correct block. When a Bitcoin miner has found the correct block, it will be added and updated in the transaction book of all full users. The Bitcoin miner receives a reward in bitcoins.
The more bitcoin miners search for a correct block, the more difficult it becomes to find it, requiring more energy in the form of computing power (electricity). As a result, the network is becoming more and more secure and the Bitcoin is becoming more and more difficult to produce. Bitcoin miners continue to speculate on an ever-higher price. They hope to be able to easily cover the production costs and recoup the investment costs. Part of the profit is also used for new investments.
Here we come to another crucial network effect of Bitcoin: speculation. A spontaneous market has arisen organically, in which not only the miners, but more and more other new users have started using bitcoin to speculate and trade. These are short-term speculators, but also long-term investors. Among other things, they analyze specific market cycles such as the Bitcoin halving cycle, which causes the distribution of new bitcoins to decrease by half every four years and the price to keep rising to higher levels. The associated volatility is attracting more and more new speculators.
Innovative new companies are building the necessary services to further serve these speculators. Thus, new brokers, trading services, and platforms spontaneously emerge all over the world. The enormous profits made in this new sector are, of course, a thorn in the side of the old financial order in particular, which also wants to participate.
This brings us to a different network effect. The financialization of Bitcoin. This includes the launch of derivatives for Bitcoin and other trading products that are also suitable for institutional investors. Bitcoin recognised as a new asset class. This will have far-reaching consequences and therefore also amplify the other network effects, including the adoption of bitcoin as a means of payment. At first, investors see Bitcoin not so much as a means of payment, but as an alternative store of value with a high Sharpe ratio that is not correlated with the traditional securities trading of a bankrupt financial system.
Do you want to know more about the network effects of Bitcoin? Do you want to know why people Buy bitcoin (BTC)? Would you like to learn more about the operation and development of Bitcoin as a new decentralized money system?
Then visit bestebank.org. All of the information in this article is based on information from this knowledge base about the emergence of a new financial order.
Disclaimer: Holland Gold does not provide investment advice and this article should not be read as such. Investing involves risk, and past performance is no guarantee of future results. This article gives the insights of the guest author, they do not have to match those of Holland Gold.
