You Were Rational to be Skeptical of Bitcoin
Through my earlier publications, I explained the history and function of money, what problems Bitcoin solves and why it makes sense to buy bitcoin even from a traditional finance perspective. Even so, many people are still skeptical of bitcoin, for reasons which I covered in this article. To increase Bitcoin’s adoption, I believe it is important help people rationalize their fear and skepticism, which, in all fairness, have some grounds to it.
As a new technology, Bitcoin had to overcome real challenges to reach its current status. The early stages of any technology are often filled with uncertainty. Many inventions and companies fail daily, so it's natural to be skeptical of something like Bitcoin. There are 3 challenges that Bitcoin had to overcome and continue to overcome:
Achieving Network Effect
Maintaining Bitcoin’s Decentralized Nature
Keeping the Bitcoin Network Secure
1. Achieving Network Effect
Bitcoin is software—open-source software, to be precise. The challenge with open-source software is not just that anyone can copy it, but that it requires a large number of users for it to gain real value. A network effect happens when a product becomes more valuable as more people use it. For example, Facebook is only useful if many people are on it—without its large user base, it wouldn’t be as engaging or valuable. Uber, a ride-hailing app, is only useful if there are enough drivers and riders who want to use the app. While any programmer can replicate their software, it’s much more difficult to replicate or surpass the number of users.
Even for powerful players and large companies, the advantages of having a strong network effect is hard to overcome. For example, Google tried to launch their own social network service called Google+ in 2011. However, even with their immense capital, near monopoly in search and advertising, Google+ only reached a peak of several hundred million users, never had very high engagement, and was eventually shut down in 2019. They were never close to the number of users that Facebook had which was reported to be over 2 billion users in 2019. Facebook had achieved sufficient network effect for it to withstand the immense competition.
When Bitcoin first launched, only niche, technical folks were adopting, mining and transacting in bitcoin. The growth was organic, as there were no central entities to advertise and promote Bitcoin. Over time, more users joined, strengthening the network. With more participants, Bitcoin's security and decentralization improved, making it harder to attack or manipulate.
Today, Bitcoin's network continues to grow. By 2023, the number of wallets holding more than 1 bitcoin (worth over $50,000 in September 2024) surpassed one million and continues to increase, showing a rising number of serious adopters. On the technical side, Bitcoin core developer Luke Dashjr estimates that there are over 68,000 node operators, helping maintain the network’s decentralized and secure function. In comparison, Ethereum, the second most popular cryptocurrency, has roughly 6,000 nodes, with no significant growth in recent years.
The power of an open-source tool with a strong network effect cannot be ignored. The Internet is an open-source system, yet it remains one of the most important inventions in our society. Similarly, without widespread adoption, Bitcoin’s value would be much less than it is today.
2. Maintaining Bitcoin’s Decentralized Nature
Bitcoin’s core value is its scarcity. In my previous article, I explained why scarcity is critical to good money. Bitcoin’s value is largely derived from its fixed supply of 21 million coins.
However, because Bitcoin is purely software, this limited supply of 21 million coins can technically be changed. However, Bitcoin’s incentive design and governance model make it practically impossible to be changed at this point. River Financial goes through this in more detail, but here is a simplified version of the story:
Bitcoin’s governance model means that for any major changes to be made the Bitcoin (such as changing the supply), a majority of node operators would have to accept the change.
However, Bitcoin’s value as a store of value comes from its limited supply of 21 million coins
In other words, the incentive is designed to avoid a supply increase, because this results in inflation of the Bitcoin supply which decreases Bitcoin’s value
There is simply no benefit for most of the node operators, who presumably want to protect their own investment and maintain Bitcoin’s unique value proposition, to increase the Bitcoin supply.
Hence, most of the node operators would not support this change.
This is also why achieving sufficient network effect is importance as mentioned above. The image below depicts how distributed the Bitcoin nodes are globally.
While many other cryptocurrencies have emerged to attempt to “improve” upon Bitcoin, none of them are truly decentralized in the way Bitcoin is. Other cryptocurrencies, like Ethereum, have made major changes to their monetary policy, including supply adjustments, which shows that they are not as decentralized as Bitcoin. Ethereum’s ability to make such changes, despite potential negative effects on some participants, reveals that its governance is more centralized.
In fact, it is a lot harder to implement any changes to the Bitcoin network than to its sufficiently decentralized nature. The 2017 Block Size War demonstrated this. During this conflict, there were debates over whether to increasing Bitcoin’s block size (which would allow the network to process more transactions at one time). However, the proposed change would have undermined Bitcoin’s security and was rejected by majority of the nodes and not implemented.
Lyn Alden summarizes the uniqueness of Bitcoin well in her article here:
In addition to network effects and associated liquidity, the focus on security and decentralization is largely what makes Bitcoin different from other cryptocurrency networks. It sacrifices performance in almost every other category: speed, throughput, and programmability, in order to be as simple, streamlined, secure, robust, and decentralized as possible. Its design maximizes for those traits above all else.
Hence the saying in the industry: “Bitcoin, not crypto”. No other cryptocurrency has achieved Bitcoin’s success for good reasons. We will cover the major differences between Bitcoin and other cryptocurrencies in a separate article.
3. Keeping the Bitcoin Network Secure
Bitcoin’s success hinges on two properties: its decentralized nature (which aligns everyone’s incentives such as assuring its limited supply) and its network security.
Recently, we have seen how even the most robust, established entities can be subject to software or technical errors. The recent Microsoft outage impaired businesses’ ability to operate, even flights to be delayed or cancelled all over the world. There are many more of such examples affecting some of the largest companies in the world.
Similarly, any major technical gaps in the Bitcoin software may result in malicious actors exploiting these failures to extract value or impair the existing operation of Bitcoin. Amazingly, while the Bitcoin network has faced some technical issues since its inception in 2009 (summarized here), none of them threatened the robustness and reliability of the Bitcoin network. In fact, Bitcoin been functional for 100% of the time since 2013; likely better than any major financial institutions. Furthermore, the network is operational 24 hours a day, 7 days a week.
Today, there is immense incentive to attack Bitcoin’s network—it holds over a trillion dollars in value as of 2024. However, the more the network remains up and running, the more secure and robust the network. It becomes practically difficult to attack the network because it is prohibitively expensive and difficult to coordinate such an attack. This is explained in depth in another article here.
Closing Thoughts
In conclusion, you were rational to be skeptical of Bitcoin. Given the uncertainty that surrounds any new technology, it makes perfect sense to question whether Bitcoin would succeed. However, Bitcoin has demonstrated that it is not just a one-off trend but a resilient and secure system.
Skepticism is a natural response to something unfamiliar, but as Bitcoin continues to proof its resilience and value, it’s clear that those initial fears are becoming less and less justified.
Disclaimer: The information provided in this publication is for informational purposes only and does not constitute financial advice. Readers are encouraged to do their own research and consult with a licensed financial advisor before making any investment decisions.