Bitcoin has changed the way millions of people around the world think about money, and many have written about the idea that bitcoin can work as money as long as there is a sort of belief or shared hallucination around the use of the digital asset — sort of how Tinkerbell only exists in the world of Peter Pan if people believe in her.
The relative success of Bitcoin in a digital age has also led people to create analogies between the peer-to-peer digital cash system and social networks. If Bitcoin were a social network, one could say that holding some bitcoin would be the equivalent of having an account on the social media platform, while opening a Lightning Network channel with someone may eventually be the equivalent of “friending” them.
Using the analogy of a social network, the growth of Bitcoin as a store of value and medium of exchange can be tracked more easily and perhaps better understood.
Joining the Bitcoin Social Network
If Bitcoin is viewed as a social network, acquiring some bitcoin is the equivalent of signing up for a new account. Once you have some bitcoin — or even just a Bitcoin address — you are able to interact with this social network by sending and receiving the underlying cryptocurrency used in the system.
In this sense, the bitcoins themselves are similar to likes or upvotes with a built-in mechanism for scarcity; they’ll increase in value as the network itself becomes more popular.
In terms of raw numbers, it’s difficult to track how many Bitcoin network “accounts” exist today because one person can own bitcoin in many different addresses and custodial services, such as exchanges, can hold bitcoin on behalf of millions of users.
According to FundStrat co-founder Tom Lee, one way to measure user growth is through the combination of unique Bitcoin addresses with the average USD-denomination transaction volume per address. Lee has said this method of tracking user growth has shown 94% correlation with the bitcoin price over the past four years.
Additionally, storing value on the Bitcoin network improves the overall security of the system. After all, as the bitcoin price goes up, more computing power is pointed at the network in an attempt to collect block rewards. This means a nefarious actor must purchase or build more computing power to attack the network as the price increases.
A Medium of Exchange Between Friends
If two people are on the same network in terms of choosing a specific asset as a store of value, then they can also transact in that asset because both individuals are fine with storing value in it. For this reason, it is more likely that bitcoin’s use as a medium of exchange will increase as more people do not see an issue with holding some of it as a store of value.
There are a few different issues involved with only using bitcoin as a medium of exchange and instantly converting it into other assets.
For one, exchange fees will add extra costs to using bitcoin as nothing more than a medium of exchange.
Secondly, those who would prefer to store some other asset will be subject to possibly-volatile price swings during the window in which the user is waiting for one or more confirmations on the blockchain. Bitcoin users are generally unwilling to accept some bitcoin without at least one confirmation in situations where some other irreversible asset, such as cash, is being traded for it.
According to applied cryptography consultant and sometimes Bitcoin Core contributor Peter Todd, bitcoin ATM operators have been defrauded by those who took advantage of the acceptance of unconfirmed Bitcoin transactions.