Can we think of Cryptocurrencies as Social Networks?
- Nov 21, 2021
- 3 min read
This article does not intend to give any financial advice.
“Bitcoin is an absolutely scarce Mathematical commodity that interacts with human’s global unconscious”- Max Keiser
Humans are social creatures. In modern society none of us can survive without the other (A nightmare for all the introverts out there I know). And the finance industry is built on this very premise.
There are a lot of things that we do which only make sense if others do it as well. We can only play cricket if others play it too, else who would bowl ‘and’ bat! We can only use Whatsapp because others use it too. We can only use PayTM if the local shopkeepers accept payments through it. We can only use Gold if others use it too, else it's as good as a rock. We can only use INR because everyone else in India does, else paying for potatoes with EUR would make little sense.
All of these above instances require the participation of the parties involved, amongst each other. Interestingly, we can think of these activities as networks of participants. All of the participants form the nodes in these networks and their interactions can be thought of as the lines joining these nodes.
Metcalfe’s Law says that a network’s value is proportional to the square of the number of nodes in the network, which is like saying that a network’s value is proportional to the number of lines joining the nodes which are equal to n*(n-1)/2 lines for n nodes. What this means is that doubling the number of participants in a network would quadruple its value giving its value a convex character in growth. This is a relative valuation method wherein we can determine the value of a network relative to its historical value or relative to its peer’s value.
Apparently a missing link in this idea is that not every person is equal (quite sadly so). We need to assign weightages to all the nodes and then value the joining lines. We can think of the weightages as the total no. of social media followers and the real world actually agrees with this characteristic. Take this instance from 2018 when Kylie Jenner’s discontent on Snapchat’s update sent its price tumbling down by 6%. The same effect on Cryptocurrency prices is apparent from Elon Musk’s tweets. Financial instruments other than these may be modelled in a similar manner.
Now that we have seen how Cryptocurrencies can be modelled as Social Networks, there seems to be a Network Effect at play here. An article in Wikipedia states,
”Cryptocurrencies such as Bitcoin, also feature network effects. The more users that join the network, the more valuable and secure it becomes. This method creates an incentive for users to join so that when the network and community grows, a network effect occurs, making it more likely that new people will also join. Bitcoin provides its users with financial value through the network effect which may lead to more investors due to the appeal of financial gain.”
Based on this logic, regardless of whether this asset provides real utility or not, one thing is certain- eventually this self-fulfilling prophecy must come to an end deeming the growth in its value stagnant. Since at any point in time there are only finitely many people living on this Earth or at least that at large the Earth can sustain only finitely many humans. Imagine being the last person on Earth to get access to Cryptocurrencies just for the sake of appreciation in its value. If you know that the network is as secure as it’s ever going to be, there’s no financial incentive for you to buy this asset. But there still may be some real utility left.
Most of these arguments are only idealistic, the real world can be much more complex. With all the Metaverse transition playing out, this theory must eventually make more sense. I believe this idea needs further investigation for which I lack the mathematical and conceptual knowledge. If the reader has any interest or insight in such structures, let's connect. The more the merrier right?
By- Jitesh Bohra
LinkedIn- Jitesh Bohra
Comments