The “network effect” has already been debunked many times indirectly in my other articles, particularly the one where I rebut Max Keiser and go into detail how building upon a protocol does not guarantee success of any individual cryptocurrency.
It seems like this mantra claiming that BitCoin has intrinsic value due to its “network effect” still hasn’t died, despite the plethora of other false claims that have finally subsided (e.g. ability to transact with it quickly like cash, anonymity and aversion to state control, a stable store of value, etc.).
From my previous article that indirectly addresses the “network effect”:
[…] it should be evident to engineers that BitCoin is nothing like a network protocol.
HTTP is a protocol that was standardized to enable different combinations of software products to predictably interact with each other. Simply put, BitCoin is to Google Chrome and Apache as blockchain is to HTTP. There are many different protocols for software to communicate with one another, but the majority use HTTP for transferring Internet content, just as the majority of cryptocurrencies use blockchain to communicate financial transactions.
I’ll concede that BitCoin is like Google Chrome and Apache in that it holds the statistical majority of users at the moment. However, just like how FireFox dropped in popularity from past to present, there is no guarantee BitCoin will maintain its popularity in the future.
I want to add how the “network effect” that supposedly maintains BitCoin’s value works against it.
“Network effect” in a cryptocurrency sense and not in a typical API sense, has a pyramid scheme as its foundation. Without miners, the infinitely growing blockchain will be lost in the ether. To maintain the blockchain and the endless growing ledger of transactions, there needs to be a proportionate growth in computational power. As mining profits shrink due to an oversaturation in the mining market and an exponentially shrinking pool of “coins” to mine, there is smaller incentive to grow that network.
The Ponzi scheme exists not only at the financial level, trying to sell off BitCoins to new suckers who in turn hope to sell the BitCoins off to greater fools, it exists at the technological level too. BitCoin has a major “reverse network effect” waiting in the wings. As soon as the fad dies down, it will exacerbate its current scalability, speed and usability problems. When the network reaches its peak size, the pyramid no longer grows. When the pyramid no longer grows, transactions become more difficult to process as users and miners whose sole purpose was to churn a profit drop from the network. When the network shrinks, transactions become even slower and more cumbersome, and regular users trying to find another willing BitCoin user to transact with becomes more rare. The lower demand for exchanging in BitCoin drops its market value, thus repeating the cycle in a vicious negative feedback loop.
When the blockchain is virtually lost in the ether because there are not enough peers to sync the growing ledger in the decentralized network, thus taking forever to recover the history of transactions and trace the remaining BitCoin balances of its users, BitCoin will be as good as dead.
Perhaps there will be central stores of the blockchain to prevent that from happening, which then kills off yet another touted perceived benefit of cryptocurrencies, that of “decentralization”.
This Ponzi scheme described as the “network effect” will result in a ride down that will be much faster than the ride up.
The fact that I’m still writing articles about the deficiencies of cryptocurrencies means the cheerleaders and marketing folks continue to make a dent in the group psychology fueling this bubble. Its recovery coincided with other markets, as the DOW and S&P have reversed direction as well from their corrected values last week, making me think this recent uptrend was influenced more by central bank and big government talk to keep the speculative bubbles going than any new “breakthroughs” in the crypto world.
I’m growing tired of having to rehash the same logic to the same old arguments. This song is pretty à propos to describe my attitude towards the seemingly endless talk about BitCoin:
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If you still want to try to squeeze in the pyramid at no risk while it still stumbles on (perhaps there is some risk of higher electricity bills), follow my guide to mine Monero.
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