Renowned asset management firm Grayscale has recently released an analysis on the cryptocurrency market, predicting “uncommon returns” as crypto assets continue to grow, based on a phenomenon known as the “network effect.”
The central concept behind the network effect lies in the idea that the value of any network, regardless of its type, depends on the number of users it has. A simple example of this is the telephone: on its own, it has no economic value, but becomes invaluable when there are other phones to connect to.
The addition of each new participant in a network initially has a substantial effect on the total value of the network. However, this effect does not occur linearly, but rather in accordance with mathematical principles.
Grayscale emphasizes that assets tied to the value of a network, such as social media stocks or blockchain tokens, have the potential to generate “uncommon returns” during periods of significant network growth.
The asset management firm highlights that blockchain-based networks have a unique network effect, with profound implications for cryptocurrency investors. According to Grayscale, if network adoption continues to grow, they can produce extraordinary returns for those who invest.
Currently, cryptocurrency networks have a comparatively low number of users compared to social media giants. However, Grayscale argues that we are approaching a point where cryptocurrency networks will reach a “critical mass” of participants, which will drive their value.
As indicated by Grayscale, market capitalization increases directly in proportion to the number of users.
This means that as the number of network participants approaches approximately 650,000, cryptocurrency networks including Bitcoin (BTC), Ethereum (ETH), Polygon (MATIC), Binance Coin (BNB), Tron (TRX), and others, already show remarkable growth.
Grayscale considers this number as an estimate of the “critical mass” needed for a blockchain to experience non-linear network effects.
The company points out that while the adoption of cryptocurrency networks has steadily grown, the number of users is still considerably low compared to major social media platforms.
For example, Ethereum has 6.1 million monthly active users, while Meta’s social networks like Facebook and Instagram boast an impressive 3.74 billion users.
However, Grayscale highlights that if Ethereum and other cryptocurrency networks achieve widespread adoption, the potential number of new users will be significant, benefiting investors.
However, Grayscale’s analysis comes with some important caveats. First and foremost, the company warns that network congestion can neutralize the positive effects of the network effect.
In the case of the Ethereum network, increased activity has resulted in higher costs for users in the form of gas fees. Therefore, scalability solutions such as rollups are vital for the project’s future.