by Joseph Young
Matthew Goetz, the former vice president of Goldman Sachs, the $95 billion investment bank, believes the network effect of Bitcoin is a vital factor for its long-term growth in terms of increase in market cap, user base, and mainstream adoption.
Since its launch in 2009, bitcoin has consistently secured its position as the leading and most valuable cryptocurrency in the market. While Ethereum, the $29 billion blockchain network structured to operate as a base protocol for decentralized applications, has been the close second over the past three years, it has never come close in surpassing the dominance of bitcoin.
In an interview with Business Insider, Goetz explained the long-term success of Bitcoin relies on its network effect, as it had for the past nine years. Goetz, who recently created BlockTower, a cryptocurrency-focused hedge fund, with Ari Paul, a former portfolio manager for the University of Chicago endowment, compared the presence of Bitcoin in the cryptocurrency market to that of Facebook in the social media industry. While many emerging products, platforms, and applications with better features could challenge Facebook, they will not replace the platform with billions of active users. Goetz noted, “It’s something like Facebook. If someone creates a new Facebook that has slightly better features, say 10 percent better. That’s great, but network effects are strong. So, that new thing isn’t going to kill Facebook.”
Bitcoin’s network effect has recently been demonstrated during its recovery period from the Chinese government’s imposition of a ban on local cryptocurrency trading platforms. Despite the crackdown on Bitcoin trading activities in the region, local news publications including the South China Morning Post have reported that trading activities around Bitcoin are still growing at a stable rate. A Chinese investor named Victor, told SCMP:
“They can’t set rules to stop me from investing in what I want to invest in. They say you are protecting me, but as long as I think this is good, they have no way to intervene. I can do over-the-counter trades, or I’ll go offshore. My wallet is my wallet. I’ve never registered my identification card.”
Many investors and analysts in the cryptocurrency sector have emphasized that the value of bitcoin is based on its security and hash rate. Because of Bitcoin’s immutability and decentralized nature, it has been able to offer a very stable protocol and strong developer base for businesses.
Such characteristics of bitcoin have also been the key factors behind the success of the cryptocurrency as a store of value and a safe haven asset. Consequently, the demand for bitcoin has increased significantly from institutional and casual investors, to a point in which major investment banks have started to consider the possibility of providing liquidity for their clients.
In September, Paul Vigna of The Wall Street Journal reported that source familiar to the digital currency project of Goldman Sachs have revealed the $92 billion investment bank’s plans of launching a bitcoin trading platform in the future.
“Goldman’s effort involves both its currency-trading division and the bank’s strategic investment group, the people said. That suggests the firm believes bitcoin’s future is more as a payment method rather than a store of value, like gold,” wrote Vigna.
But, Goetz and the rest of the BlockTower Capital team believe there is a small chance of a cryptocurrency that is superior to bitcoin at a technical level emerging in the future. As a hedge fund, BlockTower Capital team led by Goetz and Paul is maintaining an open mindset in evaluating and analyzing cryptocurrencies in the market. “Bitcoin is the most entrenched, it has a very stable protocol, it doesn’t change a lot, and it has a very strong developer base, but at the end of the day, it is still software. There is some chance that something an order of magnitude better than bitcoin, technologically, could come along,” said Goetz.
He further emphasized that as seen in many other industries, the first mover advantage does not guarantee the success of cryptocurrencies. Goetz stated that Ethereum already has four competitors, which have emerged in the past two years:
“If you look at other industries across history, there’s a real chance that just because the first mover got out there doesn’t mean that that’s the one that ends up ultimately winning and capturing all the value.”