Bitcoin Isn’t Gold; It’s All About the Network Effect

At ByteTree, we see Bitcoin as a network which is subject to the laws of the network effect. Busy networks are extremely valuable, while quiet networks are worthless. Just like gold, or indeed any other asset, investment inflows will drive the price higher in the short-term, but that alone will not sustain it over the longer-term. For Bitcoin to create long-term value, the network must grow. The recent rally has been spectacular, but the trouble with flows is that they eventually cool.

Source: ByteTree. Trading View Bitcoin USD past quarter.

The Bitcoin Network cools

Source: ByteTree. Bitcoin total transaction value over a rolling week, block by block, past quarter.

Fees turn down

Source: ByteTree. Bitcoin total fees (RHS) and average fees (LHS) over a rolling week, block by block, past quarter.

Transactions reject high fees

Source: ByteTree. Bitcoin Transaction Count (RHS) over a rolling week, block by block, past quarter.

A typical day on the blockchain

Source: ByteTree. Bitcoin transaction value block by block past 24 hours as at 09:00 UST 9 Dec 2020.

Institutional flows wane

As I highlighted last week, institutional investment flows have been incredible. They have amassed over 600,000 BTC, which has contributed to the excitement. Yet it is not the 600k BTC leaving the grid that creates the long-term value; it is the associated sustained increase in network activity that goes with it. In other words, while the funds have been net buyers of BTC, it is the trading activity around them that creates network value.

Institutional buying

Source: Bloomberg. Funds as described shares outstanding rebased to 100 as of 10th September 2020.

Speculative activity may start to cool

Source: ByteTree. Large transaction value as a percentage of all transaction value since March 2020.

The voting and the weighing machine

Source: Bloomberg. Gold ETF holdings (in million ounces) deviation from 200-day moving average versus the Morris Gold Fair Value premium/discount model since 2016.

New Bitcoin fans

One of the world’s greatest financial historians, Niall Ferguson, gave an excellent interview on the Money Maze Podcast


Narratives can be fun, but they can also be dangerous, especially when they are wrong. Currently, the most deafening narrative revolves around limited supply. That’s great as we’d all rather have limited supply than endless supply. But the bottom line is that it is network activity that creates long-term value in Bitcoin. That means a new user is more likely to attract others, and so it goes on. In contrast, the investment flows come and go. For the price of Bitcoin to rise, the underlying network must grow. That means more active investors, liquidity, applications, acceptance and above all, users. Be sure, the internet is good at this.

Applied data for digital asset investors. ByteTree provides real-time data, fundamentals, technical and deep blockchain market analysis for Bitcoin, and more.

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