Metcalfe's Law Applied to Bitcoin

Metcalfe's Law is an equation that can be applied to the 'network effect' and that the more users a given network has, the more this network is worth.

There are applications of Metcalfe's Law in many technology companies. For instance, the value of Facebook is immense because at time of writing this article there are 2.07 billion users and a market capitalization of roughly 502 billion dollars.

The important consideration here is what is the value of communicating globally peer-to-peer. There is not a known objective value of this for a multitude of reasons. First, the number of individuals on the planet fluctuates on a moment to moment basis. Second, individuals may join a network for a multitude of factors one may be due to fear of missing out or (FOMO) in that individuals who are not apart of this network may feel relegated to the outskirts of this giant community which exists on Facebook.

I want to make the argument that while communication is obviously important, the use case for Facebook is extremely variable. For instance, it may be used to stay in contact with friends from around the world, to reconnect, to date, to 'meme' etc. Because of this the objective worth of the network is difficult to infer.

Even with advertising revenue considered, advertising has been undergoing a radical transition over the past 2 decades and is going to experience further disruption and many others going forward. It is difficult to assume what marketing and advertising will experience over the coming years as Bitcoin is setting a new precedent in that, limited or no advertising can accumulate an enormous amount of attention, wealth and users. Thus the idea of sound money may pour over into sound/quality products and eventually the best ‘stuff’ will need no advertisement and it will become evident through grass roots.

Facebook has penetrated between a quarter and a third of the world's population. Money has penetrated (in one form or another) the entire globe. Money is many different things in many places, it may be livestock in some places in the world, it may be fiat based money in others, in a very small percent of the population, Bitcoin is indeed 'money' and a growing amount of individuals believe this will or at least may be money including but not limited to the CEO of one of the largest banks in the world Lloyd Blankfein of Goldman Sachs. As he puts it,

"Maybe in the new world, something gets backed by consensus ... If we went into the future and Bitcoins were successful, I would be able to explain how it's a natural evolution of money."

One of the best parts about the Bitcoin system is that it inverts the current system (predominantly fiat based) and flips the system on its head. Many of the first people that got involved in Bitcoin include, cypherpunks, libertarians, technologists, computer scientists, economists and some ‘lucky’ right-place-right-time individuals.

Bitcoin’s success doesn’t depend on the whole world using Bitcoin. Indeed the whole world does not use Bitcoin, just like most of the world does not use Facebook. However, the use case for everyday individuals for money is larger than the use case of Facebook.

Dunbar's number. 150. 150 is the number of people in which we can have any sort of meaningful connection with at a given time. I don’t have any interest in having the maximum 5000 friends on Facebook and neither do most people I would imagine. Even if this was achievable I don’t believe that this would be an effective use of this service but I do like the ability to connect with any individual on the planet. Unlike facebook, I would I would like to have the ability to transact with as many individuals on the planet. Got the best sourdough bread in my neighbourhood? Make the best shoes? Have the best product? I give my attention and money to the best of what I have access to. Including the best form of money, Bitcoin.

Because of Dunbar's number, at scale, this limits in some regards the network effect of Facebook. The value of a global communications company may be valued in the trillions. But money is objectively valued at tens and even hundreds of trillions when accounting for stocks, fiat money, etc. The potential to ‘make money’ for better or worse has been the way in which the Bitcoin ecosystem has grown and continue to grow organically. Men lie, women lie, Bitcoin does not.

When it comes to money, the number of individuals that are involved already in most individuals lives is immense. For example, take a cellphone, you are able to have a cell phone in your pocket because of the cooperation of a large amount of individuals transferring goods and services amongst one another in rapid and extreme fast succession.

Let’s go back slightly in history. Let’s go back perhaps a few hundred years when gold was used as money. I don’t mean owning gold in your gold money ETF or GoldMoney account. I’m talking about walking around and storing coins, chunks and bars around. Say I want my home built, I will pay my workers in coins perhaps and then they will take those coins and buy supplies. To a great degree, this is ‘slow money’ or ‘snail money’. The cash fiat system of today is markedly different because we trust and have faith in our banks & governments. We collectively agree that they deserve our trust and that trust may just be on the basis that most people believe in this system. This trust is intersubjective, in that most people believe this to be the case and that is why it presently works.

What happens if people stop believing in the system or decide to believe in a better system? What would take individuals to stop believing in the system? A stock market crash of 40%? A multi-year depression? A war? I’m not saying these are answers but I am saying that there is an answer it is just a black swan What tips the scales may be a small event that pulls on the heart-strings of a nation, but what is most likely is an event where a great deal of individuals basic physiological needs are not met (food, shelter, water).

Once an event like this happens, it has to hit home. For individuals to decide to switch to a superior system, it may take a combination of individuals which are hungry, that are cold and lacking basic necessities.

While this may sound drastic or somewhat of a doomsday scenario, this is the reality for tens of millions of individuals around the world presently. What happens if this is billions at once. Or tens of millions affected in succession. People don’t change unless there is an incentive to do so and that incentive for many has to hit close to home for individuals to alter their paradigm.

Well the great depression historically answered that question. Since Bitcoin came around, it is very different because for the first time we have an better alternative to the system. This better alternative is sound money but one of the lesser talked about features is how fast one can settle and transfer between individuals.

For instance, now I have the option to order a car service through my phone (not uber) and the rate to which I pay my driver goes directly to the driver instead of 25% to uber and 75% to the driver. Thus eliminating the need for a middleman at least a middle man that has reaped tens of billions in profits. Uber creates a deal between three people and the largest winner in the transaction is clear. What if there is an alternative application that only takes 1% and eventually 0%. This may be coming and with rootstock, the possibility may exist as a second-layer solution on top of Bitcoin.

Estimates of Bitcoin adoption is around 1% at present. And if this increase to 2 percent this doesn’t double the value of Bitcoin, it exponentially grows from this increase. The more users, the more valuable the network will become.

The reality is, is that Bitcoin can be a lot of things. Worth nothing? Yes (highly unlikely) Worth $1,000,000 per coin? Yes (likely? Depending on who you ask).

A nudge in paradigm is currently happening right now, across humanity.

As Yuval Noah Harari put it

“In order to change an existing image order, we must first believe in an alternative imagined order”

Check.

“In practice, the power of human cooperation networks depends on a delicate balance between truth and fiction. If you distort reality too much, it will weaken you, and you will not be able to compete against more clear-sighted rivals.”

What is more clear-sighted? Fiat money or Bitcoin?

What will be the more persuasive system in the next decade/century? Central banks or Bitcoin?

The odds are is that it is binary and ‘both’ is not an option long term. From a technological standpoint the fundamentals are only getting stronger in one system. Which system?

To answer this question, it involves painsteaking time and research and the best heuristic of this would be to have skin in the game. Once one has skin in the game, your paradigm may shift towards a new intersubjective reality.