Bitcoin network effect analysis

 Bitcoin network effect analysis

This article explores how bitcoin derives its value from its network effect, why this network effect is difficult to displace competitors, and what risks should be considered so that investors can continue to assess the state of the network.

This is not a short-term analysis, but a long-term fundamental analysis of the protocol. In the short term, Bitcoin can move significantly up or down depending on sentiment and general macroeconomic factors.

Examples of network effects

Before I dive into the details of bitcoin, we can highlight a few examples of different networks.

Phone: one-way network

One of the earliest examples of network effects was the telephone. A single telephone is useless, but as more and more telephones began to appear, the telephone became one of the most important inventions of its era.

And we can deduce mathematically why the telephone network becomes more valuable squared the more people use it, and not just linearly more valuable.

If there are two telephones or nodes on the network, there is only one possible connection between them. If there are three phones (A, B, and C), there are three possible connections (A to B, A to C, and B to C). If there are four phones, there are six possible connections. If we go to ten phones, there are 45 possible connections. With 100 telephones, there are 4950 possible connections.

Payment networks: two-way network

Some networks are bi-directional, which means that there are two very different types of nodes on the network. A node of type a wants to connect to a node of type b, but usually does not want to connect to a node of another type a.

An example of a two-way network would be buyers and sellers. For example, eBay (EBAY) has skyrocketed in value by bringing a critical mass of buyers and sellers to its online platform. An ad network like Google Adsense is similar; there are websites that want to make money from ads and there are advertisers that want to advertise on popular websites and the marketplace they can come from has exponential value in finding the perfect match, be it human choice or algorithm ...

The equation for a two-way network is also exponential. The number of possible connections in a network is equal to the number of nodes on one side multiplied by the number of nodes on the other side.

If you have 2 sellers and 4 buyers, there are 8 possible relationships between buyers and sellers. If you have 3 sellers and 3 buyers, there are 9 possible connections. If you have 10 sellers and 20 buyers, you have 200 possible connections. Where c represents the number of connections, a represents the number of nodes on one side, and b represents the number of nodes on the other side, the equation for the number of possible connections 

 Bitcoin network effect analysis