The value of Bitcoin continues to increase exponentially

Bitcoin is continually setting records on its way to the $100,000 target price it will soon reach, as many Bitcoin proponents estimate.

The digital currency that came out of nowhere has a market value of over a trillion dollars and became a global brand within a decade, making it a difficult concept to understand. Socio-technological events such as Bitcoin rarely occur and it is not just about the price but rather about the technology, the unique social concept of the decentralized body behind it, and the speed of its spread. 

It is no wonder, then, that for many years many experts, especially those deeply rooted in the age of the Boomers or the traditional financial world, have returned to the easy and familiar explanation claiming Bitcoin is a bubble.

But Bitcoin, it turns out, is unimpressed by scholarly explanations, as it repeatedly breaks records, both in terms of market capitalization and the number of users. Even the "Chinese-made" bomb from September, in the form of an almost total ban on Bitcoin activity in its territory, did little to stop the momentum. 

Quite an amazing fact considering that only two years ago about 75% of Bitcoin mining was done in China. Now that the US Securities and Exchange Commission (SEC) has approved a public offering of a fund that monitors the contracts on the price of Bitcoin, perhaps the time has come for the masses of Bitcoin sciences to ask themselves whether the failure to understand what is happening is on them.

Bitcoin is a means of exchanging and transferring value and preserving it, based on the most advanced technology that man has today (computers and software). Just as computers and software have changed and taken over almost every area of our world, such as the way air tickets are issued, inventory records and air traffic management, Bitcoin provided an unforeseen development in the world of finance and value transfer. A far cry from the revolutionary financial change that saw gold remain as the basis of the global monetary system until 1971.

Gold In Itself Has No Value

Gold itself has almost no inherent-internal value, unlike for example an apple whose internal value is about 50 calories, or about 3% of the daily caloric intake that a person needs to survive. 

Gold was used as a means of preserving value and a tool for exchanging products and services because there was a widespread social agreement to give the 79th element in the table of elements this status. Or simply, the willingness to use gold coins was nothing more than a collective belief in the future value of those coins.

Although gold is an element of nature, the coins that began to be used around 600 BC are no longer there. Humans are social animals and have been organized for thousands of years in hierarchical societies. Gold came into the world and survived for thousands of years in most of the territories on earth not only because it provided protection from external enemies, but also because it ensured a kind of social order required for the existence of a functioning society.

Money Grows Without Hierarchical Organization

The innovation in Bitcoin is therefore huge. Through technology returns the act of preservation and transfer of value to the world that preceded the era of gold coins. The technological and conceptual ability to carry out such a revolution is not easy to understand. 

The fact that Bitcoin has no hierarchical but rather decentralized organization, "managed" under the protocol and collective will of all network participants is very difficult to digest, particularly for people who have spent all their lives in the hierarchical financial world which has existed for thousands of years.

The idea of a network of users as the source of power, rather than external hierarchical power is at the heart of the idea behind Bitcoin. And this connection of computing power and software with the power of the web is what makes it so special. The network and software are also the ones that allow the Bitcoin network to quickly overcome external vulnerabilities like the draconian orders of the Chinese government. 

In recent decades, a special category of companies has been diagnosed, those whose products have a "network effect". Such an effect occurs when each new user has an impact on the value of the product, in both the hands of existing or future users. The value of a shirt that someone purchased does not change when an anonymous person purchases another shirt from the same manufacturer. 

In a world where there is only one telephone device, the value of the telephone product is zero, only the addition of another user can produce value for the first. Suddenly two people can talk to each other and from now on each additional user increases the value for all the others at an increasing rate. Two telephones can connect two users, but ten devices allow for much more than ten different connections. 

This network effect, of course, also existed before the Internet. But as the Internet has become a staple in most homes, the ability to produce products with a "network effect" has grown significantly.

According to a study by the NAPX investment fund, "the network effect is responsible for more than 70% of the value (market value) generated in the technology industry since 1994" and that companies with a network effect "are worth much more than those without such an effect". 

The network effect also allows for the significant presence and distribution of the product benefiting from the effect. Let’s use Microsoft Office products as an example. In the 1990s there were dozens of programs that dealt with writing and editing documents. Most did not "talk" to each other. Communication difficulties between parties who could not send and share files with each other were significant, but as Microsoft Office products became the global standard, the value of the product, as well as the user base, grew exponentially.

The network effect, therefore, causes widespread availability and distribution of the products on the one hand, while at the same time producing a wall that protects the product from the competition. This is because a new product can not only convince a single customer but rather it needs to find a way to persuade the whole network to move to it. 

The Network Effect Of Money

Money, as a device for transferring or preserving value, has a strong network effect and it grows proportionally to the growth of the network willing to accept the same means of payment. 

In 1970, 16 million households in the United States held a credit card. The number rose to about 30 million in 1990 and now stands at about 160 million. The value of the companies that operate the credit card system is roughly $1 trillion, however, there is an increasing amount of difficulty in introducing new solutions to the market, revolutionary as they may be.

With all due respect to credit cards and their network effect, when it comes to the internet the network effect is several times stronger. Meta, formerly Facebook, had about a million active users in 2004. By 2010 the number had increased to 500 million, in 2015 the number crossed one and a half billion and as of 2021, the number stands at 2.9 billion, almost half of the world's population. Accordingly, the company's income and the value of its shares increased. 

Bitcoin is also a product with a network effect. Currently, the number of participants in the Bitcoin network is about 80 million wallets. What will happen to the product if the number of participants reaches 800 million?

Bitcoin Wallets Network Continues To Grow

In January 2011 there were about ten thousand Bitcoin wallets in the world, this number then increased to 320,000 in January 2013. By January 2017, the number had increased to approximately 11.5 million, and in January 2021, the number had reached approximately 66.2 million. 

As of the end of October 2021, the number was estimated to be around 80 million. At the current rate of growth, the number of users in the Bitcoin network will reach a critical mass of about 400-500 million users in 2025.

In line with the growth rate of the network, the value of the currency increases every four years. From a thousand dollars for Bitcoin at the end of November 2013 to about ten thousand dollars at the end of November 2017, the price increased to around $60,000 at the end of October 2021. 

It remains to be seen whether the network will grow to 500 million wallets in 2025, and if so, be worth in excess of a hundred thousand dollars.