Metcalfe s Law, Network Effects and Numbers – the Economic Network Called Bitcoin

Bitcoin is a financial network it began with nothing seven years ago and continues to grow quickly. Its economics are far more fascinating than its technology. The technology isn’t new or cutting edge, but the application of the technology has created a brand-new economic phenomenon, making Bitcoin interesting to observe.

The Bitcoin network is multi-sided, with two categories of individuals, the users and the enablers. The users are merchants, consumers, financiers and speculators, and the enablers are miners, exchanges and designers.

2a

As a financial network, Bitcoin exhibits network impacts, both positive and unfavorable. Network impacts are observable in lots of other networks, such as telephones, fax devices, social media, PC operating systems and airline companies.

A Qualitative View

The varieties of merchants and consumers using Bitcoin may be small at the moment, however the more merchants there are accepting Bitcoin, the more consumers are likely to pay with Bitcoin; and the more consumers use Bitcoin, the most likely merchants are to accept it. This is called a cross-side network effect and it is a favorable one.

There are also same-sided network results, for instance the more investors there are, the more likely the rate of bitcoins to go up, and the more it increases, the more investors are drawn in. The impact can be both positive and negative, as price drops can cause investors to leave. There is a comparable same-sided network impact for speculators.

The enabler individuals depend on the user individuals for positive cross-side network effects. The more the Bitcoin network is utilized, the more rewards there are for exchanges to establish (to allow buying and selling bitcoins), for developers to build apps and platforms such as wallets or micropayment systems, and for miners to compete for block benefits and transaction charges.

2s1The miners are worthwhile of closer examination, as they underpin the whole Bitcoin network and make it work. Validated transactions are immutable, they can’t be altered (unless the network is compromised, but this would require an unfeasibly large amount of computing power and electricity).

Miners make this occur because they get rewarded in bitcoins for their efforts, and bitcoins have value, so miners generate income. The more the network is utilized, the more valuable bitcoins end up being, so the more money miners make, the more they contend, and the more they contend, the more powerful the immutability and trust of the network ends up being.

As you can see, there are numerous sets of self-reinforcing characteristics in the Bitcoin network that connect and make it more powerful and more valuable the more it used.

Your email address will not be published. Required fields are marked *