Network Effect And Crypto Pricing
We have heard it all before. The price of Bitcoin is going to crash. It will head back to zero. Yadda. Yadda. Yadda.
The mistake people seem to make when looking at cryptocurrency is they believe everything is in a bubble. This is derived by looking at other markets, ones that are vastly different from digital assets.
What makes Bitcoin and the like so different? The fact that they are digital is very revealing. This puts them under laws that produce results that are widely varied compared to "normal" markets.
The key here is the exponential nature of growth. In the digital realm, growth can take place at a much more rapid rate and to a far greater degree than in the physical world. Expansions is much faster when dealing with bits as opposed to atoms.
This creates an entirely new environment when it comes to crypto pricing. Markets can move in large chunks and not revert back to the norm. The reason for this? A new norm is established due to the exponential growth.
Does this apply to every cryptocurrency? In theory, yes. However, the reality of the situation is that very few cryptocurrencies are experiencing this at the moment. It does bode well for the long term growth of the industry. For the time being, we can probably narrow this down to Bitcoin and Ethereum.
One of the best barometers we have is the number of wallet addresses. Basically, the more wallets, the greater the number of users. Certainly, as we know with social media, an individual can have more than one account (wallet). Nevertheless, when taken as a whole, we can at least see the trend.
Here is a chart of Bitcoin wallets according to Blockchain.com.
Over the last 3 years, we saw a tripling of the number of wallet addresses. This metric mirrors what we see happening in other areas pertaining to Bitcoin such as total hash rates and volume of money transacted.
At the same time, we see similar results with Ethereum.
Here is the wallet chart from Etherscan.
We can see similar results with Ethereum. The wallet addresses reflect what other metrics are telling us such as developers on chain and number of applications. We also can look at the amount of money locked up in DeFi on Ethereum as another barometer.
In short, both these blockchains qualify as seeing exponential growth. The number of wallets along with other metrics are showing this clearly. Hence, we can conclude the Network Effect is in full force.
Which brings up the question why is the Network Effect so important?
What makes this so powerful is the fact that the users and the owners tend to be one. As more activity occurs, this has a direct impact upon the price action. Since many of the token holders are also users, this starts to compound over time.
Also, since it is in the digital world, the expansion rate can be triple digits, for years. We witnessed this in the social media realm where the likes of Facebook and Twitter spent close to a decade in the high growth category. Adding a user is a lot less costly and easier to maintain than in the physical world.
It is difficult for most people to envision exponential growth. We are conditioned, perhaps biologically, to think in linear terms. This is where we underestimate what is taking place. The impact on an exponential scale, over time, is very profound. It is what makes compound interest so incredibly powerful. Anyone who looked at a simple interest versus compounding chart will know what this looks like.
Ultimately what happens is we see multiple Network Effects taking place. This ends up leading to a Mega-Network Effect. Essentially, a supersized organism begins to form as all the different pieces experience individual exponential growth.
This is also why pricing action will resist reverting back to its linear trend. Instead, it will chart in an upward pattern, creating a new mean with each leg.
The fact that, in most cases, the users are also owners creates a powerful multiplier. It is why Bitcoin HODLers are legendary. They are the ones who hold the coins while also keeping the network running. The early adopters participated in many different ways, including mining and promotion.
Of course, there was incentive since they can be considered to be the "owners" of the network.
We can do the same thing with the entire market cap of cryptocurrency. This chart, from Coingecko.com, shows what it looks like over the past few years.
The tendency is to look at this and expect the pricing to move back to the historic norm. However, as was just explained, two of the tokens, which account for roughly 3/4 of the total market cap are engulfed in the exponential experience. This is not likely to end anytime soon.
Thus, it is safe to say a new norm is being established. For each of these tokens, we are better off looking at the moving average as compared to historic price levels. That will give us a better idea of where things are going.
Does that mean we cannot see serious pullbacks? Of course not. It is always possible that Bitcoin gives back 80% of its market cap. This is normal for this asset class. However, the level that it will pull back to keeps increasing with each passing year.
Overall, the growth rate of cryptocurrency can be foreseen by this concept. If we consider the price action with just two coins going exponential, what will things look like when there are a dozen or more?
Here is where the super organism idea enters. If we look at each token as an individual unit, piece of the entity if you will, and then mirror what happened with BTC and ETH, we can see how larger growth is still ahead. Thus, the latest move on the total market cap chart could end up being small in comparison to where things are going over the next couple of years.
In short, how many cars can you drive? Television can you watch? Homes can you reside in?
With digital, those numbers shoot up a great deal. The same user can participate with multiple chains throughout the day. Different applications can be used and tokens earned. While a family will have, perhaps, two cars, a single individual can have dozens of cryptocurrencies.
This sums up Network Effects and the digital world. We can use multiple applications, benefitting many different areas at the same time.
Ultimately, this shows up in the pricing action. Keep the idea of "fractals" at the forefront of your mind. If we look at each of these in pieces, we can really see how the Network Effect will influence things.
This is a far more powerful concept than people are conditioned to look for. Yet it is happening within the cryptocurrency and blockchain world. For this reason, we can be optimistic where things are going. The next couple years will see explosive growth, most likely in many more chains than just Ethereum and Bitcoin.
It is also a reason why many are betting that a blockchain such as Hive sees much greater levels.
The Network Effect within social media has been profound. It is also evident that there are similar results in the digital financial arena.
Now combine the two and see what can happen.
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