According to a recently released study, MetCalfe’s law applies to Bitcoin (BTC) only in the long term. In the short term, the results are questionable. The authors of the study investigated the statistical properties of some cryptocurrencies with three layers of analysis.
At the same time, the authors used LPPL models to capture the behavior of cryptocurrencies exchange rates during an endogenous bubble. Furthermore, these LPPL models are also used to predict the most probable time of regime switching.
The authors of the study explained about the study:
“We prove, in the medium to long-run, the validity of the Metcalfe’s law (the value of a network is proportional to the square of the number of connected users of the system) for the evaluation of cryptocurrencies; however, in the short-run, the validity of the Metcalfe’s law for Bitcoin is questionable.”
During the last years, the number of Bitcoin addresses has been growing in an upwards trend. Although the growth rate oscillated, it is possible to see that the trend direction has always been positive. Price tends to follow the same trend. Although in the short term MetCalfe’s law does not apply, it does in the long term.
Thus, it is possible to say whether the price of Bitcoin and other virtual currencies is undervalued or overvalued. Eventually, the price of the most popular virtual currencies will reflect the growth of the network. Thus, this will be providing a more objective valuation method for digital assets.
Cryptocurrencies have usually been attacked for not having an objective way of measuring their price. With a genuine growth of fundamentals behind Bitcoin and other digital assets, it is possible to have a better idea of the trend that virtual currencies should follow. This not only provides a more objective valuation but also more predictability.
Bitcoin has been in a bear trend during 2018. Its price fell more than 80% and the community had a very negative sentiment towards this virtual currency. Nonetheless, the fundamentals behind the most popular virtual currency were growing throughout the year. This is something that the price did not reflect but it might be starting to move just now. During the last weeks, Bitcoin has been growing after weeks close to its multi-year lows.