Metcalfe and the future of Bitcoin

With the help of a formula from Robert Metcalfe Tom Lee wants to have found a way to explain the price fluctuations of Bitcoin. He compares Bitcoin with a social network whose value increases with the number of users.

The formula is based on the Metcalfe formula, which states that the value of a network is proportional to the root of the number of network users.

So far Bitcoin was traded at a price above the formula. FundStrat is optimistic in its analysis, but considered a course correction, as it currently appears, to be realistic.

"Using a very simple formula that calculates the value of Bitcoin as a quadratic function of the number of users and the average transaction value, explains 94% of Bitcoin's movements over the last 4 years,"

Tom Lee, co-founder of FundStrat, a financial research initiative in an interview with Business Insiders.

With Metcalfe to 94% accuracy

As an example of Metcalfe's law, a fax machine can be used. If only one person on earth owns one, it would be quite valuable, and above all useless. The faxes that this person would send to himself, would probably even for him only conditional value. However, the more people own a fax machine, the more valuable they become.

This law is perfectly transferable to social networks. Facebook is not necessarily so valuable because it is technically outstanding or innovative. The main value of Facebook is that it uses so many people. Metcalfe's law applies: the value of a network is proportional to the root of the number of users. The value in terms of utility thus increases exponentially with the number of users:

"Doubling the number of users increases the benefits many times over, not just half."

Lee says the law could apply to Bitcoin as well. FundStrat took a closer look at the network and found that the root function of unambiguously assignable addresses as an indicator of users can account for 63% of the bitcoin price fluctuations since 2013.

"From a previous perspective, everything indicates that Bitcoin is very similar to a social network. The more activity takes place, the more the value increases. And in the short term, we think Bitcoin will crack at least the $ 6,000 mark in mid-2018. "

Thereafter, a course correction should take place. He said that in October.

After Metcalfe's law was able to explain only 63% of the fluctuations, they have added the transaction volume as a factor to the already described model. The accuracy increased to 83%

Finally, FundStrat has developed a formula by offsetting the bitcoin price with both the root of the unique addresses and the transaction volume per user. This model actually accounts for 94% of price fluctuations since 2013.

The Metcalfean Law and the Future of Bitcoin

Finally, FundStrat can use this formula to estimate the future value of Bitcoin. You need an estimate of the number of unique addresses (or their root) and an estimate of the transactions per day. Lee concludes:

"Bitcoin's trend is positive in the long run. But in the short term the price seems to be limited, the risk of a price correction seems to be growing. "

The current price fluctuations seem to give Lee right so far.

What's next for Bitcoin?

According to this law, more and more users would have to discover the cryptocurrency in order to increase the price further. Lee points out parallels between bitcoin and gold. He assumes that Bitcoin will be the digital gold of the future generation. With the most cautious estimates, he predicts a price of $ 25,000 per Bitcoin.

Ultimately, the price could be subject to extreme fluctuations. This is the case, for example, when investors discover the cryptocurrency for themselves. Because they can suddenly pump a large amount of money into the circulation, the overall value can briefly swell significantly. That's because they still count as one user in this sense, even though they represent plenty of people. Therefore, it can come after a high price increase again and again to corrections. Whether the future Tom Lee is right, will show up. It remains exciting