Network Effects will be what Launches Cryptocurrencies into the Mainstream.

Last year was the year of the cryptocurrencies. Bitcoin entered 2017 with a value of around $900, by December it was trading around the $19,000 mark. Other cryptocurrencies such as Ethereum and Litecoin also saw a similar surge in value. Despite this impressive growth however, cryptocurrencies for the most part still remain an obsession for techies and a popular investment for amateur investors.

This raises a couple of interesting questions: when will cryptocurrencies become an integral part of everyone’s day-to-day life? And how will they bridge this gap between niche obsession to the mainstream?

The short answer? Network effects.

Sometimes referred to as demand-side economies of scale, network effects is the concept that the value of a particular technology to individual users will increase as the number of users of that technology increases.

To better illustrate this, let’s consider the pivotal role network effects played with social networks.

Back in the mid 2000s, as Web 2.0 was coming of age, numerous social networks were popping up: MySpace, Friendster, and Facebook to name some of the popular ones at the time.

During this time the only people using these sites were teens desperate to grow their friend list and young techies intrigued by the future of the social web.

For everyone else, the idea of creating a profile on one of these networks held little appeal. They may have only known one or two casual acquaintances who had a profile. Hardly enough to make use of the sites as a tool to communicate with friends or to stay in touch with family.

However, as social networks grew and more users started signing up, the value of creating an account started to increase.

When once only your teenage nephews and nieces were on Facebook, all of a sudden your siblings had created accounts, your coworkers too. This now made social networks a much more viable means of communicating and staying in touch with friends and family.

Whether you wanted an easier way to chat with your friend overseas who now had Facebook, wanted to keep up with the latest gossip or just simply didn’t want to be left behind in the social revolution, you decided to join too.

Your decision to join, whether you realised it or not, in turn increased the value proposition of Facebook to everyone else around you. All of a sudden your friends on Facebook had one more person to chat with, and all of your offline friends had yet another reason to sign up.

This snowballing effect is what network effects is in a nutshell.

One of the key reasons why Facebook succeeded where MySpace and others failed was its greater ability to attract new users and therefore better leverage network effects. This also helps explain why Google+ was a flop: its interface and features may well have been better than Facebook, but if there’s nobody using it, there’s little incentive to join.

So how does all of this apply to cryptocurrencies? Well cryptocurrencies today are where social networks were ten years. Only a relatively small number of people have cryptocurrencies and fewer places yet accept them.

Crucially though, cryptocurrencies are ripe for the snowballing nature of network effects to launch them into the mainstream.

Currently the relatively small number of people actively using cryptocurrencies doesn’t make them an overly viable means of transferring value in transactions. But as more people begin to realise the benefits of being able to process transactions in an easier, more secure manner and without middlemen taking their portion, more people will join up.

And as more realise these benefits, not only will they start using cryptocurrencies themselves, but they’ll also start to demand that other people deal with them solely through cryptocurrencies to avoid fees and the possibility of fraud. Once again, the number of users will continue to grow. All of a sudden the number of people using cryptocurrencies will begin to rival some of the world’s most commonly traded fiat currencies.

Just like with social media, network effects will have transformed cryptocurrency from a niche obsession to a mainstream commodity.

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