The cryptocurrency network effect and why 'we're still early'
Updated: Jan 7
On 3rd January 2022 it was 13 years since the first genesis block of Bitcoin was mined by the infamous Satoshi Nakamoto. The cryptocurrency poster child has become a teenager. Over more than a decade the narrative backing the leading cryptocurrency has changed several times from being digital cash, to a cheap peer to peer transactions network, and in recent years it has firmly planted itself as a censorship resistant digital gold and a genuine hedge
against out of control fiat currency inflation around the world. The overall cryptocurrency space has evolved and is slowly starting to mature. Although the past year has seen the space exploded, I will explain why the cryptocurrency network effect has only just begun and why the often over used phrase 'we're still early' is to some extent very true.
The value of a telecommunications network is proportional to the square of the number of connected users of the system (n2) - Metcalfe's Law
What is a network effect?
Metcalfe's Law characterises many of the network effects of communication technologies and networks such as the internet, social media networking and now most recently cryptocurrency and blockchain technology.
A network effect happens when the number of people using a product or service increases, which also increases the value of the product/service. In recent years with the rapid increase in social media, this is the perfect example of a network effect. The more users that a social media platform has gained, the more valuable it has become. The value of Facebook is testament to this.
How does a network effect work?
As a consequence of the network effect it has the ability to increase the value of a product, whether the quality of the product improves or not. If a competitor enters the space with a better product, it may be hard for them to compete because they don't have the established network effect that a larger, established competitor does.
Take Instagram, it is a platform used by millions of people for sharing photos and different informational posts. Its value is derived because so many people use it. If there were only 10 users there wouldn't be an inherent value because their friends or their favourite actor wouldn't be on the platform. There simply isn't much use for a social media app if there are no people to interact with. This is why large social media platforms grow faster, and stay bigger than the rest. The more users a social media platform has, the more it makes sense