By Robert Ross, Total Wealth Research, 2024-06-25
I've long been fascinated by the concept of economic moats.
In my early investing days, I was obsessed with Warren Buffett and his investing process… which emphasizes the importance of investing in companies with durable competitive advantages.
An economic moat is a durable competitive advantage or “edge” that allows a company to maintain its market share and profitability over a long period.
These moats can come from various factors, such as brand loyalty, cost advantages and regulatory protection. They help companies fend off competitors and sustain long-term growth.
But the moat I see as most valuable right now is the “network effect.”
The network effect occurs when each new user of a product or service makes a product more valuable for existing users.
Classic examples include telephone networks and social media platforms.
- With telephones, the value of owning a phone increases as more people get connected, allowing more communication possibilities.
- Similarly, on social media platforms, each additional user enhances the experience for others by contributing content, interactions, and network expansion.
In the modern age, companies like Meta Platforms (META) have seen their share prices surge over 1,200% thanks to the power of their network effects.
Meta Platforms
The same story can be told for Visa (V). The stock is up 1,600% thanks to the network effect enjoyed by the world's largest credit card network…
Visa
Like all moats, network effects are a barrier to entry for competitors. New entrants find it challenging to attract users away from a well-established, interconnected network. This dynamic not only enhances the value for users but also strengthens the market position of the product or service.
All the examples I've mentioned so far relate to stocks…. but crypto has network effects as well.
And the returns are even more explosive.
The Bitcoin Effect
The most powerful network effect in crypto is the Bitcoin (BTC) network.
Since its inception, Bitcoin has grown from a niche digital asset to a global phenomenon. This has been largely driven by its robust network effect.
You see, each new participant in the Bitcoin network – whether an investor, miner or developer – adds value to the ecosystem.
For instance, just like the more people who use a telephone makes the telephone more valuable, the most users who use Bitcoin the more secure the network becomes.
Bitcoin's blockchain relies on a decentralized network of miners to validate transactions and maintain security. As more miners participate, the computational power securing the network increases, making it more resilient against attacks. This heightened security attracts more users, further reinforcing the network's strength.
Bitcoin's liquidity also benefits from its extensive user base. High liquidity means that large transactions can occur with minimal expense, making Bitcoin more attractive to institutional investors. More buy-in from big players boosts overall market depth and stability… which leads to even more adoption.
And just like Visa and Meta, this growing network effect has led to much higher prices.
But the exponential growth of the Bitcoin network has plenty of room to run.
Steady Numbers
Bitcoin's network effect has led to huge growth in its blockchain metrics. Key indicators have shown steady upward trends, such as…
- The number of active addresses
- Transaction volume
- Network hash rate.
Blockchain transcations
According to data from Blockchain.com, the number of unique addresses used on the Bitcoin network has steadily increased. That means there's growing user engagement and adoption.
Addresses BTC
Similarly, the network's hash rate, a measure of computational power dedicated to securing the blockchain, has reached all-time highs.
Bitcoin hash rate
This growth is a testament to the increasing number of miners and the substantial investments being made in Bitcoin's infrastructure.
Welcome to the Exponential Age
Given the strength of Bitcoin's network effect, it's not surprising that my target price for the crypto in this bull cycle is $165,000.
However, that number only scratches the surface of the coin's long-term potential. As network effects continue to drive exponential growth, the ultimate value of Bitcoin could be much higher.
While it sounds crazy, some respected research firms expect we are still in the early stages of this exponential growth. That includes Fidelity, which predicts one Bitcoin will be worth $1 billion by 2038.
Even more conservative estimates suggest Bitcoin could reach between $176,000 and $225,000 in the next few years. Increased institutional adoption and more Bitcoin ETFs will lead the charge.
I'm sticking to my $165,000 call for this cycle. That's more than a double from here. But my long-term view has Bitcoin's market cap at least matching gold's. That would mean the crypto could be worth $690,000.
While Bitcoin is my largest individual portfolio position, I have a handful of altcoins in our Crypto Boom Portfolio that could trounce Bitcoin's performance if that forecast comes to fruition.
You can learn more about these “next gen” crypto plays here.
And if my thinking changes, you'll be the first to know.
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