A new study has confirmed MetCalfe’s law applies to bitcoin, but only in the long term. Its validity in the short term is questionable, the study says.
They also look at heard behavior to potentially identify bubbles by analyzing imitative behavior by using the Log-Periodic Power Law (LPPL) model which is apparently used to see whether the price action for Bitcoin follows a log-periodic oscillation model.
After analyzing blockchain data from 2010 to August 2018 in a fairly technical paper, the study authors conclude:
“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.”
As can be seen above, unique bitcoin addressees have been growing with some oscillation but generally in an upwards direction.
The featured image shows more clearly a period of continuous growth in the number of unique addresses in use at any given time, while price was generally sidewaying.
Price then catches up most visibly at the end of 2017, with that usage growth reflected in the charts eventually. So showing that while MetCalfe’s law might not apply in the short term, it does eventually apply.
That would provide a valuation method for bitcoin and other cryptocurrencies through applying mathematical formulas to the relationship.
One might then be able to say that bitcoin’s price is undervalued or overvalued by approximating user numbers and by seeing how that changes.
In the short term, sentiment might be a bigger driver. So even if price is undervalued or overvalued, that might not be reflected.
Eventually however, at least so far in the past, there comes a time when user growth is reflected in price. Giving cryptos a somewhat more objective valuation method.