How Bitcoin’s supremacy keeps getting cemented
Bitcoin’s network effects make the cryptocurrency the most valuable digital money network in the world. Why this trend is further cementing Bitcoin’s monopoly position.
Network effects are a powerful phenomenon. Here’s an example: Suppose there were only four phones in the world. The number of possible connections by Bitcoin Code between these 4 phones is exactly 6. If you increase the number of phones to, say, 10, 45 connections would already be possible. If we increase this number tenfold again, 4,950 connections would be possible. You can see: Network effects harness the power of exponential growth. In other words: the value of a network consisting of different nodes does not increase proportionally with the number of its users, but exponentially.
The exponential growth of networks.
Social networks like Facebook and Instagram in particular build their business model on the sheer power of network effects.
Bitcoin is not very different. The value of the cryptocurrency is measured above all by the degree of its acceptance – which in turn is measured by the number of its users. After all, who benefits from money that no one accepts? This is one of the reasons why the community always keeps an eye on bitcoin adoption. With digital money, the more users, the better.
Monopolies can be replaced, but …
That’s all well and good. But what’s to stop altcoins like Ethereum (ETH), Cardano (ADA) and co. from overtaking Bitcoin? ETH enthusiasts never tire of emphasising the advantages the cryptocurrency has over Bitcoin. But it is not enough to knock Bitcoin off its throne
Monopolists who take advantage of network effects can hardly be driven away from their dominant position. The magic word is „social consensus“. Because cryptocurrencies like Bitcoin are open-source projects; everyone has the right to make a copy of the blockchain, change a screw or two and fork the network, as they say in crypto-speak.
Social consensus is crucial
What cannot be forked, however, is the social layer of the protocol. In other words: If you want to knock Bitcoin off its throne, you have to convince a critical part of the network participants that the respective altcoin is worth investing their savings in. Because at its core, Bitcoin is still a store of value, and people are rightly picky about that. So it is not enough to offer incremental improvements to the platform. In order for more than 100 million BTC users to turn the corner, the respective altcoin must offer truly groundbreaking improvements, or Bitcoin experiences an existential software bug – but that’s another story.
Of course, such a scenario is not entirely out of the question. Facebook, for example, managed to oust MySpace from pole position at the time. However, this was mainly due to the early availability of a mobile Facebook app for smartphones, which attracted a huge number of new users to the system. And this is the crux of the matter: network monopolists can certainly be displaced. But only if the competitor not only brings incremental advantages, but beats the competition by far. A new coat of paint is not enough. Users must have radically better added value to be persuaded to jump ship.
Bitcoin’s market power is huge
Bitcoin, with just over a trillion US dollars in market capitalisation (USD), occupies around 60 per cent of the total crypto market capitalisation. The hash rate, i.e. the accumulated mining power in the network, is setting new all-time highs almost weekly. Meanwhile, Bitcoin forks have been languishing at a constantly low level for months.