Cullen Roche decided to dig a little deeper to understand the basic reasons of the attractiveness of Bitcoin for the most users. It is hard to disagree that it is surprising that a coin has gained so much appeal during the past year. The measurement unit of success was definitely the price; even some spontaneous and unpredictable drops did not sustain progress and development. The adherence and loyalty of numerous supporters and believers across all continents allowed the price to go up again and even match the value of the most common precious metal – gold.
The idea of cryptocurrencies that are not supported by any government or financial institution – a power people believe to be constant and durable – is doubted by many newcomers expressing the wish to understand the basics of the Bitcoin or other alternative currencies. Many present activists and enthusiasts struggle to provide reasonable explanations, but have the feeling that a premise definitely exists.
Professor Hal Ronald Varian from the University of California, Berkeley was able to determine the reasons of this dedication and support. His topic of interest was not only cryptographic currencies, but also fiat examples. His aim was to determine why fiat money has a value in environments aggressive towards the currency or money type. He has found examples in the history of the development of the humankind, when people were able to reject currencies that even were backed up by gold reserves, power, products and experience. It means that there is some other reason or quality that seems important to masses of people. The resulting theory and fact was named “network effect” by the scientist. Expressing the term in simple words it receives the following definition – people accept some matter as money or payment method or exchange value in cases they are sure other individuals of the group accept it and recognize as legitimate. It means the process is not vertical, but horizontal as merchants, customers and manufacturers are supposed to be on the same level. No power from outside, standing above like the authorities or financial institutions, is capable to create pressure or impact on this decision.
The example to support the idea was also chosen. After the war in Iraq the UN offered Saddam Hussein to create a new currency to cover all his expenditures. He started to emit the so called “Saddam Dinars” and voiced the necessity to replace all previous money items towards new. The citizens of the country partly rejected the initiative and continued to operate with dinars that were not backed up by the government, but were accepted by the society. The uncontrolled emission of the new fiat currency has hyperinflated herself in the end.
The impact of the “network effect” was decisive. The customers and merchants agreed on using a particular matter of exchange and it was unimportant for them whether some power was supporting and protecting the chosen value. This determining reason also speaks in favor of the Bitcoin and similar currencies – the main background are the people, who have recognized the advantages and are willing to educate others. It also might mean that new users and the widening of the network will not only stabilize the price, but also stimulate its natural growth. It would be really useful if more economic and finance scientists would make researches on the cryptocurrencies – the topic is not even started, but is very promising in many aspects!
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