As we head deeper into a digital world, we are seeing a lot of things changing. Nowhere was there a bigger difference in the valuing of companies that constructed digital platforms. Over the past couple decades, names such as Apple, Facebook, and Google became some of the most valuable companies in the world.
This was coincided with a similar move out of the Chinese firms. Alibaba and Baidu were also able to ascend to the top of the most valuable Chinese companies by doing the same thing.
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Each of these firms relied upon the Network Effect to propel them to such massive heights. As more people started to use the platforms, they values were lifted. Things really took off when users were effectively "locked in" to the services provided.
These entities are massive companies that generate a lot of revenues. They went public some years ago, something that is not possible for many smaller firms. This gives them access to capital markets, a move which further fueled expansion.
The valuations are derived via trading on the different stock exchanges. Here is where people can essentially "vote" on what they think about the companies. Investors are consistently entering and exiting positions, based upon what they think about at the present moment.
Of course, markets are not correct. They will either price something too high or low, yet rarely is it accurate. That is alright since everyone should realize this and establishing accurate value is not of great concern to most investors. They are simply looking at where price is now compared to where it will be going. It is also why there can be differing viewpoints on a particular stock based upon the analysis that one utilizes.
Crypto platforms need not experience the "going public" process. Through the technology, the coin and tokens can be traded as soon as they are released. Of course, the more exchanges they appear on, the greater the activity will likely be.
The networks are completely digital in nature. All they do is online. This make it similar to the Internet companies of 20 years ago which passed on a physical presence. Hence, we see how these are dependent upon Network Effects for their value.
Without things such as land, goodwill, or intellectual property, a different mode of valuation takes place. It all comes down to the users and what they are doing on a network. The greater the activity, the more valuable a project is going to be.
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Cryptocurrency allows us to quantify what the Network Effect is for a blockchain. Each day, the market decides what the price of a token will be. While this also can be askew, the market will at lease engage in price discovery. This is a big difference compared to how the venture capital world operates. Under that scenario we see a lot of guesswork in terms of valuation, especially when it comes to more capital raises.
The tendency is to focus upon price exclusively. Many feel this is the metric which denotes the value of a project. Sadly, this is not the case. Many find out that projects which people are optimistic about today can often lack staying power. In the technology realm, development is crucial. Even when companies have a large user base, they still need to keep people engaged. Failure to do so will send them the way of Blockbuster.
Facebook is probably the epitome of this concept. Consider the different nuances to that ecosystem and how it came about.
The company started with its flagship site. From there it started to increase the offerings by including little games that kept the users engaged. Millions of invites were sent out for their farm game, as a way to keep people online.
Since Facebook has select appeal, i.e. generational, the company went out and purchased Instagram. This added an entire new layer to the ecosystem. Now they were able to target (and retain) the Millennials, a rather large group themselves.
Couple that with their chat application and they had a broad part of the social media system covered.
They were not done though. Another purchase took place with Oculus. This positioned the company where it could potentially leverage the future of VR technology. It is a move that looks like it is paying off.
Of course, they kept adding to the platform with the addition of things like a marketplace. This allowed for Facebook users to engage in commercial activities, once again while remaining on the platform.
Is it any wonder the company is one of the most valuable in the world?
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Ethereum is starting to capture this same idea. That chain has a lot of development on it for obvious reasons. This, in turn, attracts more developers which puts it on an upward feedback loop. Of course, the transaction fees make it difficult for many applications to operate, putting users in a bad position. We will have to see how long this takes to resolve and the impact it has.
Nevertheless, it is also not a great secret why the price of Ethereum keeps moving up. Choose most any metric and we see it increasing with regards to that blockchain. The number of wallets are consistently growing. We are seeing more TVL with its DeFi. In the NFT realm, more applications keep showing up. The ecosystem is expanding at an exponential rate.
Thus we see a massive explosion in the Network Effects that chain is enjoying. This results in massive value creation, attracting in even more money. It is something that every chain is looking to duplicate.
We also see how it is all captured in the price of the token. While it is not 100% accurate in terms of the valuation, it is foolish to argue with the market. Nevertheless, the general trend is in place. We see the metrics on Ethereum expanding in an upward direction, a move that is followed by the price.
This is a case where hype, for the most part, is taken out of the equation. With markets there is always that to a degree yet, here, we can see how the metrics are telling us what is going on. The price is simply aligning with that. We can surmise that is not the case with most projects out there.
In the end, cryptocurrency is ideal for quantifying the Network Effect that is taking place on a platform. This is something that was not the case for most projects over the years. Outside the big ones which were able to go public, access to capital markets was basically non-existent.
With cryptocurrency, we see the situation is opened to all. This will result in a major difference down the road as more projects succeed.
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