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Blockchain allows nearly instant settlement of transactions as it does not require a lengthy process of verification, reconciliation, and clearance. This is, because a single unique version of agreed-upon data is available on a shared (decentralized) ledger between two parties or financial organizations. With Blockchain technology, no third-party (middle-man) or clearing houses are required. As a result, overhead costs in the form of fees that are otherwise paid to clearing houses or trusted third parties, can be eliminated.
A noisy market
Cryptocurrency, in its infancy, driven by competing and sometimes coherent efforts to both establish or destroy this new asset class. Between young, day-trading types who seek to maximize their holdings, to newly established advisors and market-influencers aiming to increase their social media audience, from sophisticated, long-established financial institutions, to governments, opportunists, celebrities, crooks, and investors, there is much in this space to explore. Over 2000 cryptocurrency coins and token, utilized or a 'to be regulated' security, projects aiming to change the world, and well-packages scams, each weighing in a very young market, depending on sentiment, mass-media and regulatory uncertainty.
With a market cap of only about USD100-200 Billion, the asset trading market itself is highly volatile, where single influencing forces (buying/ selling large amounts at once) can rock the entire market. This then, due to high correlation, often effects the entire market.
Network economics
Metcalfe’s law: the value of a network grows exponentially over time with the increasing number of participant. As for Bitcoin, most of the time, this value is reflected in the market price. The increasing adoption rate, through development of fundamental technology, media-presence, and simply, opportunistic trading, has similarities to the model of a viral infection, bacterial growth, or as seen previously, mobile phone proliferation.
Network effects are a phenomenon whereby the value to the user or consumer of a product or service increases as its user base grows.
Forecasts from 'moon'-high prices with 'lambo'-resulting gains, to demonetization of fiat currencies, and doomsday crashes with 'Bitcoin is dead' (355 times in the news and counting, since 2010) are already common, even by established and reputable media channels. The impact of mass/ social media has clearly effects on general sentiment, mass-opinions and much more. Research showed, the number of tweets and Google searches changes first before prices do. We can assume (imperfect assessment), the number of tweets and their sentiment (positive and negative) could influence prices, especially in a young, small and therefore, highly volatile market.
Overall, and over time, price tends toward value. Hence, the general increase of Bitcoin value, thus its price via the network effects:
To be discussed, if that the probability of those extreme media-events (positive and negative), effecting the overall market sentiment, can be the actual driver of prices, or if it has only a very small impact, assuming the number of users ultimately drives the prices.
To be distinguished - network effects through 1) 'store of value' like cryptocurrencies, deflationary, absolute limited in overall supply and trading opportunities, i.e.. Bitcoin to reach USD250k in 2021*, and 2) 'utilization protocols' which opt to drive adoption through technological advancements and positive effects on efficiency and effectiveness of legacy systems, i.e.. Stellar Blockchain protocol to allow fast, secure and low fee transactions with 'Nemoo' Stable Coin to more efficiently facilitate cross-boarder payments.
*Elaborating the USD250k Bitcoin: the more market participants realize the convenience, censorship-resistance, inability to exert market power** (no monopolism, since no single entity can control the network), and advancement over the physical constraints of gold, the more buy and 'hold' Bitcoin. With that, it will become more valuable, which then (already) increases demand, the hash rate (resulting in increasing network security), and, in turn, attracts more 'holders' and developers. Further, resulting in a higher liquidity, reinforcing Bitcoin’s network effect and ultimately promotes price appreciation.
**Elaborating on the diminished market power of digital networks through its permission less character, which leads to substantial increase in the efficiency of those networks, unlocking a great deal of potential economic value. Without market power inefficiencies - ‘the cost of networking’, users and developers of complementary applications are not priced out of the market, leading to more participation and greater network gains.
Long-term growth vs short-term cycles
Long-term growth rate in users (network effect) has considerable effect on the long-term value and therefore direct impact on the price of Bitcoin. The growth of biological organisms like bacteria, and viruses, likely has some application to network economics. Similarities can be observed in the growth in numbers of users, and the market capitalization of i.e.. Facebook and Bitcoin.
Short-term volatility, I explain in detail in my article on funds trying to apply traditional market strategies to crypto-trading and investing, primarily explained by the small size of the market. As smaller a market the easier to influence;
1) direct (manipulation, 'whales' bulk selling/ buying)
12th Apr 2018 — A move of $1200 within an hour
Bitcoin prices deviation from equilibrium value through market-manipulation
2) indirect (sentiment and social-media effect and group-thinking***)
Numbers of online Cryptocurrency Articles (2013-2018). Research has shown positive correlation between the mainstream-media and cryptocurrency prices.
Bitcoin tweet volumes (yellow line) by day, Bitcoin price (blue line)
***Elaborating on social/ mass-media effect: The number of tweets and their sentiment (positive and negative) can influence prices a research shows. The number of tweets changes first before prices do. The number of searches for the keyword Bitcoin spiked and occurred before the actual increase in prices were observed. Perhaps, one drives the other and vice versa. In a highly volatile market, not only 'whales' and institutions (whoever is in, and whoever is not solely OTC) drive the prices, but the masses.
Sources: Cane Island Alternative, Investopia, Clovr, Bloomberg, IWS FinTech