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Metcalfe’s Law Applied To Bitcoin

Is Bitcoin worthy of your attention? By valuing Bitcoin factoring through Metcalfe’s law, one can assess their development and potential. This law has proven important in understanding the progress of communication technologies. It is possible to evaluate Bitcoin through Metcalfe’s law. By establishing various correlations and ratios, one can delve deep into analyzing cryptocurrencies like Bitcoin.

What Is The Metcalfe’s Law?

Metcalfe’s law is seen as a potential theory to ascertain the value of Bitcoin. 

Originally, Metcalfe’s law stated that telecommunication networks’ value is directly proportional to the square of the number of connected users to the system. Too technical? Let’s understand in simple terms.

Metcalfe’s law implies that a network is more valuable if it has more people/nodes connected to it. A prime example of a ‘valuable’ network is none other than social media. With nearly 57% global population using social media, this network is a valuable one.

Metcalfe’s Law to Evaluate Facebook

A simple example of Metcalfe’s law is the valuation of the social media giant – Facebook. Before going public, Facebook’s valuation was a result of analyzing monthly active users.

Metcalfe’s law establishes the same principle of considering connected users in a system. Here, users are the nodes in the social media network.

Thus, the network effect plays a huge role in evaluating the overall value. In the case of Facebook, the valuation is based on a variant of Metcalfe’s law.

Network Effect

With a decrease in the cost of the Internet, network effects gain a massive boost. Network effects:

  • Facilitate digital business scaling
  • Control market
  • Create a competitive edge

Facebook is an example of a direct network effect. In this case, more users motivate the social media giant to develop better services. Thus, the utility for all users enhances considerably.

Uber is a prime example of the indirect network effect. In this network, the rise in the number of drivers improves the quality of service for passengers.

Network Effect of Bitcoin

Bitcoin’s value depends on a person or institution willing to accept this digital currency as payment. At this time, people view Bitcoin as a potential replacement for gold.

Since its inception in the year 2009, this cryptocurrency has been growing consistently. People are gradually adopting this mode of currency. Thus, with more investors, retailers, and companies adopting Bitcoin, the network effect will certainly have a positive outlook.

The value of Bitcoin increases with an increase in the number of adopters. Hence, it will be fascinating to witness how long Bitcoin takes to supersede established currencies.    

Generalized Metcalfe’s Law and Bitcoin

To apply Metcalfe’s law, consider Bitcoin as a network. By applying Metcalfe’s law, one can determine the long-term value of Bitcoin.

Generalized Metcalfe’s law shows how the value of Bitcoin increases with rising users. It is vital to understand the difference between original and generalized Metcalfe’s law to understand the concept.

As per Metcalfe’s original law, the value of a network = n2

Here, n = number of users.

In the case of cryptocurrencies, the number of blockchain addresses is correlated with the price. Experts suggest that in the case of cryptocurrencies, the Metcalfe coefficient generalizes around 1.69.

Thus, Generalized Metcalfe’s law states that the value of crypto network = n1.69 

Bitcoin’s network value to transaction ratio (NVT) has a well-defined formula based on Metcalfe’s law.

NVT (Bitcoin) = Market cap/Daily volume transmitted through blockchain (in US dollars)

Bitcoin Model Price

Bitcoin’s user base will vary compared to other networks. In this case, Bitcoin’s user base depends on the number of addresses holding Bitcoin.

Hence, implementing Metcalfe’s law in Bitcoin valuation won’t include the exact number of people holding Bitcoin.

The surge in demand for Bitcoin leads to a rise in price. This effect takes place due to the limited number of Bitcoins in the market. Thus, there is an indirect link of the value of Bitcoin to the lack of supply.

Metcalfe’s law in Bitcoin’s case states that growth in the network will lead to a rise in the value. Hence, viewing Bitcoin as a network rather than an asset can ease in establishing its long-term value.

Essential Points Related To Bitcoin

In a nutshell, Metcalfe’s law relates to the number of unique addresses holding Bitcoins. A rise in this number leads to an increase in the Bitcoin network value.

  • For instance, if the annual address growth in the Bitcoin market rises to 25% from 5%, the valuation increases to approximately $118K from $21K. These statistics from the NYDIG explain the crucial contribution of Metcalfe’s law in determining Bitcoin value.  
  • These numbers establish the correlation between value and addresses. The network effect will heavily depend on speculations.
  • Metcalfe’s law can prove beneficial to develop an estimated market cap. The model price and actual price follow a tight curve historically.
  • Nodes on the Bitcoin network have a hard cap of 21 million Bitcoins. Thus, you can view Bitcoin as an asset due to its limited supply.
  • Goldman analysts state that Bitcoin is highly fitting for obeying Metcalfe’s law among all the various assets.

Wrapping Up

Metcalfe’s law won’t be directly applied in the case of Bitcoin. Economists and statisticians have relevant Metcalfe’s coefficient that develops a solid model for Bitcoin valuation.

Due to its finite supply, the value of Bitcoin will rise gradually. An increase in addresses and high market sentiment can boost this cryptocurrency’s value further. Metcalfe’s law isn’t a gold standard in evaluating Bitcoin market value.

Thus, you should always be cautious in this model of valuation. The valuation of Bitcoin will depend on the supply and network of users or addresses. Still, Metcalfe’s law provides a good base for statistical analysis of the Bitcoin market value.

Disclaimer: All information in the site is provided for informational and educational purposes only. We are not a financial advisor. The information in this article is not intended to imply any recommendation or opinion about a financial product and is not a financial product advice. You should obtain independent advice before making any investment decisions.

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