Since the Bitcoin ETF was declined by SEC, Bitcoin has risen in price from ~$1200 to ~$1600 (correlation doesn't imply causation!). Not an insignificant increase but bitcoin holders have a reason to be nervous: bitcoin dominance has fallen sharply and is at all time low, hovering just above 50%.

And it's certainly hasn't gone unnoticed by the cryptocurrency media.

• Coindesk
• Cointelegraph
• Btcmanager
• The Merkle
• Live Bitcoin News
• Finance Magnates
• Bitcoins Channel
• Lets talk payments
• Bitcoin.xyz
• Reddit 0
• Reddit 1
• Reddit 2
• Hacker news

The dominance bear trend

Bitcoin dominance is calculated by dividing BTC market cap by the market cap of all cryptocurrencies in percent. Let's have a look at the historical bitcoin dominance charts.

Bitcoin Dominance 2013-2017

Bitcoin Dominance Jan 2017-May 2017

Preface

Understanding network effects is absolutely NOT enough to understand bitcoin dominance metrics. An exhaustive list of concepts should at least include the following topics: complexity theory, chaos theory, game theory, behavioural economics, computer science and cryptography, switching costs, first mover advantages and ever-changing contexts.

Network effects

Network effects are important! Startup and VC industry have a lot of valuable insights for cryptocurrency, they both operate in the hyper-growth, hyper-uncertainty space. Let's use some.

VCs love their portfolio companies to have an unfair advantage. Which is also called a moat. So let's look at what top VCs say about network effects.

Network effects. It’s one of the most important concepts for business in general and especially for tech businesses, as it’s the key dynamic behind many successful software-based companies. Understanding network effects not only helps build better products, but it helps build moats and protect software companies against competitors’ eating away at their margins.

All about Network Effects / Andreessen-Horowitz

We shouldn't take advice by VCs at face value though, right?

Let's proceed. Network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people.

All cryptocurrencies exhibit strong positive network effects (obviously) and bitcoin has the strongest one. Network effects are said to be following Metcalfe's law (not really a law though) where the value of the network increases proportionally to the number of connections squared.

Metcalfe's law is just a model, though. And it's wrong. But it's also useful!

There is an alternative model of value growth quantification in Metcalfe's law proposes a n log n curve instead of n^2.

Network effects are hard

A lot of startups founders in a platform play are intimately acquainted (and not in a good way!) with network effects, which are also called a chicken and egg problem.

The utmost importance of network effects is well known and isn't controversial.

Just have a look at this fine selection of quotes:

Marketplace businesses: they always seem great on paper, but it’s so insanely hard to solve the chicken-or-the egg problem.
Every founder I meet who’s building a marketplace business basically says the same thing: “It’s so much harder than I thought to build a two-sided marketplace.“

by Josh Breinlinger who is a venture partner at Sigma West. Prior to venture capital, he was the 4th employee at oDesk and helped grow the marketplace over 5 years in a variety of leadership roles.

“When you have a two-sided platform, you have to acquire both the customers and the services,” says Harvard Business School’s Thales Teixeira, Lumry Family Associate Professor of Business Administration.
“It’s the classic chicken-and-egg problem,” he says. You can’t have one without the other, but which one do you find first—the customer chicken or the service egg?

by Harvard Business School’s Thales Teixeira, Lumry Family Associate Professor of Business Administration.

Bitcoin's all you can eat chicken-and-egg buffet

We've already established that solving chicken-and-eggs problem is really hard. So why would "altcoins" (such a misnomer, btw) grow their networks and ecosystems so quickly?

Well, ridiculous bitcoin txs fees and congested blocks -> less transactions -> less connections between network users -> less value to the network users. But it's not that simple.

Bitcoin stakeholders were not able to build an unassailable moat that would defend the BTC network value. That's just a fact. Altcoins were supposed to be a "testing bed for new bitcoin features", weren't they?

Yes, it seems that network stakeholders need to cooperate to design and implement strategies to grow the network and compete with chains and tokens offering substitute services. Who would have thought?

Network effects are not a blockchain-god given right of a first mover. They just aren't. Just ask myspace or friendster.

Steem network effects

Steem has a different "set" of network effects: unlike Bitcoin wallets, Steem users form personal connections within the network. It can be rewarding to think about how this changes network topology, switching costs and value generation.