Explain me like I'm an economist - Bitcoin Cash Series - Part 1
"Economists are the worst, because as an economist you learn a lot of things about how it is (he economy) but not about how it could be. Economy is a relatively new field of study and it has probably more assumptions then indisputable truths. Most don't realize but it's actually about the study of human behavior and it came from the earlier term of "political economy" that went out of use. What also people don't realize is that though inflation, in low quantities, is a very good property for the states and one of the ultimate goals of central banks and their monetary policy, and also the economists they employ, that is not necessarily true for the rest of people. They could be chill'in instead, spending more time with the family, but, instead, plenty of them are worried to invest and reinvest. to try to beat inflation. If there were no inflation to beat, probably climate change would be an easier problem to tackle. "Why such a rush, be here with the kids a little longer, they like the sun and the garden, some things don't grow on trees.. but you know what it does? That's right food, and those fruits are good to pick, they just needed a little waiting."1 In this sense, why should we use their money when there alternatives. What's so good about inflation again? To provide for a strong economy,a healthy economy. For whom? The ones to whom the money belongs." (1) person with a garden This is the first published from a series of ' Explain me like I'm (..) ', about Bitcoin Cash. Non comprehensive study of what is bitcoin cash, explained to several imaginary groups of people. Thanks for reading
So I’m definitely new to Bitcoin, but in just the last week or so I’ve seen the value go from like $7500 to $9200. I’m definitely no economist or anything like that but isn’t this like, bubble 101? Can anyone please explain why I should keep holding?
The future of Bitcoin First I will formulate a "rule of thumb" for how I think the network effect behaves under competition, and then I'll explain...:
If a protocol is technologically better suited to fulfill the requirements of the users, it will take the leading role
Friction could prevent a change in the market share if the advantage is not sufficient
If protocols are technologically too similar to provide advantages vis-a-vis each other, a lagging one won't overtake the leading one (path dependence)
State interference can count as technological advantage
Multihoming (using of more than one standard simultaneously) is only possible to a certain extent, and can't affect the fundamental issues long term
The example Patrik uses are P2P protocols. Let's take a look at the history of the leaders (I'm approximating):
1999-2001: Napster. First mover advantage.
2001-2004: Kazzaa (FastTrack protocol). Won over Napster because Napster shut down.
2004-2007: eDonkey. I think it won because it was less centralised and Kazzaa was hostile against third party clients.
2007+ BitTorrent. I think it won because it is less centralised, and open source. BitTorrent is the only one that actually gained wider industry acceptance (e.g. Blizzard downloader uses it).
There is nothing unusual here. All this is perfectly reasonable in hindsight. Purists might argue that Napster shut down because it lost a trial and that's not an endogenous failure, but clearly if a leader wants to keep its leading position, it needs to be able to resists the law, i.e. the resistance, or lack of it, is an endogenous property. We can also note that the newer leaders were increasingly less centralised and more resistant to legal action: while Napster was shut down with a single lawsuit, BitTorrent has several unrelated trackers, and also DHT, so a shutdown of one company has little effect on all users. Furthermore, as the old leaders do not provide an technological advantage against Bittorrent, they are unlikely to take leading position again. What would take a leading position is something with a significant technological advantage over BitTorrent. At the moment there is no visible challenger. We could say that the technology matured... Now, how do we apply that to Bitcoin? The various altchains are, in my opinion, too similar to Bitcoin . None of them provides a meaningful technological superiourity. Therefore, I expect Bitcoin to remain the leader [OP: emphasis mine]. If something challenges Bitcoin, it would be something with meaningful technological superiourity. Furthermore, the relevant factor that approximates "market share" isn't really the market capitalisation. Rather, it's liquidity. Even if one of the cryptocurrencies bubbles up and overtakes, unit per unit, the price of Bitcoin, it still won't overtake Bitcoin unless it also overtakes its liquidity. And that takes much longer to build up than just one bubble. Furthermore, while people might multihome different cryptocurrencies (i.e. to use them in parallel, the costs are relatively low, so it's not a big problem), in the end they still use one standard for economic calculation. Nowadays this is typically their national fiat money. Even if then every cryptocurrency user would multihome, as their industry sector moves from fiat to cryptocurrency, they would choose one of them to do economic calculation, and then there would be a convergence on this level, and this would play out as the network effect... Competition under the network effect does not behave erratically, even if the people involved might. While switches in the leading position can occur, they are, within reasonable limits, predictable. More precisely, we can reasonably predict what won't happen. Altchains are unlikely to displace Bitcoin, due to path dependence.
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