Yesterday the crypto currency Bitcoin surpassed the $10,000 mark and this means that the currency has now become widely accepted amongst the mainstream fraternity of investors. With several hedge funds and billionaires scrambling to get on board the ladder, the price has ssen a steady climb from $8000 at the beginning of the month to $10500 at the end of November. Many commentators and financial analysts are comparing this trend to the rise of the internet in 1994.
Investors and analysts alike will spend the day discussing whether the bitcoin price is a “speculative bubble” or finally approaching its fair value, but one fact is undeniable: Bitcoin is becoming mainstream.
Welcome to 1994
As BlockTower Capital executive Ari Paul wrote in a recent Forbes op-ed, Bitcoin — both as a protocol and an asset — is at roughly the same level of development and adoption as the internet was in 1994.
Less than one percent of the world’s population is currently using bitcoin, but that number has swelled this year due to the network effect and services offering an improved user experience, much as mass internet adoption first began in 1994 — when the number of websites “exploded” to 2,738 from 130 the previous year.
That was also the year the Today Show broadcast its famous “What Is the Internet, Anyway?” segment, which — thanks to the internet — has been preserved for posterity.
Those few thousand websites provided the average consumer with his or her first true incentive to obtain internet access, which for most people was sending an email to the growing number of friends, colleagues, and relatives with a network-connected computer. Innovation brought countless more use cases over the years — use cases that arguably eclipse email in importance — but they never could never have materialized without those first mainstream users finding a reason to join the network.
Similarly, bitcoin has long dazzled users with the promise of future development, but this year it has proven that it can function as a “Swiss bank in your pocket,” the first turnkey use case to resonate with the broader mainstream public. Indeed, we have already seen its utility as a store of value — and to some extent, an uncensorable medium of exchange — in hyperinflated economies such as Venezuela and Zimbabwe.
The mainstreamization of bitcoin is not without its downsides.There are many retail investors who, unfortunately, have or will invest a large percentage of their net worth in bitcoin without a proper understanding of the technology and markets or a clear investment strategy.
It’s fair to say that a large percentage of current cryptocurrency investors — perhaps the majority by this point — have never experienced a true bear cycle, and many speculative investors are not prepared to weather one. These are the investors who buy at all-time highs, panic sell at the first sign of trouble, erase the value of their investments, and — too often — their life savings.
This behavior is not isolated to cryptocurrency, nor should it be blamed on the asset itself; the same phenomenon occurred during the “Great Recession” just prior to the turn of the last decade. Investors who sold at the bottom of the crash lost nearly everything, while those who let the crisis run its course saw the overall market rebound to pre-crash levels in a relatively short amount of time.
The Role of the Network Effect
While speculation is inextricably linked to the current bitcoin price surge, critics who deride the market as a bubble ignore that the value of the network itself gains value and utility as more users are onboarded into the ecosystem — even if those users entered the network as mere speculators.
As with the internet or any network, Bitcoin is only useful if other people are connected to the network, so the network must overcome the classic “chicken and egg” problem to achieve critical mass. However, unlike the internet, the Bitcoin protocol is monetized, such that users become part-owners of the network’s resources. This, over an extended period, allows us to observe the network effect unfold in real time.
This is one reason Tulipmania and Beanie Baby comparisons are fundamentally absurd. Critics who fixate on the bitcoin price’s dramatic upswell miss what is occurring behind the scenes: the wheels of bitcoin mainstreamization have begun to turn, and the network effect has begun to quicken its pace.