I've spent lots of time pondering why Bitcoin's valuation is going up in the face of an ever-increasing number of technically superior options and the continued degradation of the Bitcoin's performance for transactions.
I don't think network effect is the right answer, or at least not from the obvious perspective of the users. Those of us who actually transact with crypto tend to use Bitcoin as a last resort because of the transaction times and fees. A newbie entering the space should learn that very quickly and seek out superior options for transferring value.
The real network effect is on the side of the exchanges. BTC is the universally available trading pair, and many times the only option. So right now, if you want to invest in any other cryptocurrency, you will very likely need to go through Bitcoin to get there.
Someone versed in Econ 101 might say that buying BTC in order to sell it right away for another token should have no net impact on the price of BTC. To counter that, let's look at what happens when I want to invest in token X with USD.
To do so, I most likely need to first buy BTC with USD, driving up the price of USD/BTC. When I go to sell my BTC for token X, the price of X in BTC goes up, or the price of BTC in X goes down. This happens without any immediate effect on the price of BTC in USD.
The ever-increasing price of BTC captures one of the fundamental problems with this space from the perspective of the inventor. It's much easier to get your fiat into crypto than it is to get it out.
This is why I'm a huge fan of Coinbase and GDAX. Being able to trade LTC for USD is great for LTC, and being able to trade ETC for USD makes it relatively easy to get into alts without having to touch Bitcoin itself.
I don't think network effect is the right answer, or at least not from the obvious perspective of the users. Those of us who actually transact with crypto tend to use Bitcoin as a last resort because of the transaction times and fees. A newbie entering the space should learn that very quickly and seek out superior options for transferring value.
The real network effect is on the side of the exchanges. BTC is the universally available trading pair, and many times the only option. So right now, if you want to invest in any other cryptocurrency, you will very likely need to go through Bitcoin to get there.
Someone versed in Econ 101 might say that buying BTC in order to sell it right away for another token should have no net impact on the price of BTC. To counter that, let's look at what happens when I want to invest in token X with USD.
To do so, I most likely need to first buy BTC with USD, driving up the price of USD/BTC. When I go to sell my BTC for token X, the price of X in BTC goes up, or the price of BTC in X goes down. This happens without any immediate effect on the price of BTC in USD.
The ever-increasing price of BTC captures one of the fundamental problems with this space from the perspective of the inventor. It's much easier to get your fiat into crypto than it is to get it out.