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Metcalfe’s Law and Bitcoin Value – A Quick Study

Metcalfe’s Law and Bitcoin Value

Introduction

Metcalfe’s law, which is fundamentally used to measure the value of networks like the internet, social networking, World Wide Web, etc., can also evaluate the value of cryptocurrencies like Bitcoin, Ethereum, etc. Let’s understand Metcalfe’s law and how it can be used to predict the long-term price movements of cryptocurrencies like Bitcoins.

Metcalfe’s law is a theory used in computer networks and telecommunications for representing the value of a network. Originally formulated by Robert Metcalfe in 1980 and later refined by George Gilder, Metcalfe’s law is, however, accredited to Robert Metcalfe. Initially, Metcalfe’s law was used to ascertain the value of devices like telephones, fax machines, etc. Later, Metcalfe’s law was used to evaluate the value of the internet, social networking sites like Facebook, etc. 

So, what is Metcalfe’s law? Based on the Network effects, which was popularized by Robert Metcalfe, Metcalfe’s law states, “A network’s worth is proportional to the square of the number of nodes in that network.” Here, the nodes can be servers, computers, and even users.

Understanding Metcalfe’s Law

To simplify Metcalfe’s law, let’s consider the following example; if a network has 10 nodes, its inherent value would be 100 (10 x 10 = 100). Adding another node increases the value from 100 to 121 while adding yet another node increases the value from 121 to 144 and satisfies Metcalfe’s law.

As stated earlier, Metcalfe’s law was conceptualized when there was no internet while it was majorly used to evaluate the value of network devices. However, over the years, since the advent of the internet, Metcalfe’s law was associated with the internet’s substantial growth.

In conjunction with Bitcoin, the key for estimating the first crypto coin’s value is a measure of people using Bitcoins. Valuing Bitcoins using this method also makes it possible to predict when the price of digital currency would increase or decrease.  

Metcalfe’s Law in Bitcoin

Metcalfe’s law can be applied to Bitcoins based on blockchain technology, which is a network in itself. Applying this law for determining the value of Bitcoin provides an insight into the currency’s long-term value. Nevertheless, Metcalfe’s law does not explain the currency’s short-term price movements.

Metcalfe’s law is based on the impression that a network’s value would grow in proportion with the number of potential connections where all the nodes are interconnected. In connection with Bitcoin, the original Metcalfe’s law accurately indicates how the crypto’s value would increase in terms of the number of users.

Basically, Metcalfe’s law has been applied to successfully evaluate the value of FAANG technology-related stocks and the internet’s generalized use. While originally Metcalfe’s law was used for estimating the worth of network devices, the law was tweaked for other applications, including evaluation of Bitcoin’s value.

How to apply Metcalfe’s Law in Bitcoin?

Rather than using the standard Metcalfe’s law, for Bitcoin, a variant of the law is used where BTCUSD is divided by n log n of the UTXO representing the number of unspent transaction outputs as shown in the chart below where the values are scaled by 106.

Metcalfe UTXO and BTCUSD

As per the chart, you can see that the Metcalfe UTXO showcases the close association of BTCUSD with the Network Value during 2017, while during 2019-2020, Metcalfe UTXO indicates that the value of Bitcoin would be overpriced.

One of Metcalfe’s law parameters, NVT or Network Value to Transaction Ratio, is a popular measure to identify when a digital asset’s value has fallen below or risen above the price compared to the virtual coin’s daily USD transaction volume. To calculate Bitcoin’s NVT, one must divide the Network Value, which is nothing but the market cap, by the USD’s daily transaction volume on the blockchain network.

Conclusion

Metcalfe’s law is still unknown to many, while Bitcoin is just over a decade old. Nevertheless, the former can be used to deduce the rise or the drop in the value of Bitcoin. Although considered a new concept specifically when applied for Bitcoins, Metcalfe’s law provides accurate data on the currency’s long-term price movements, as shown in the above chart.  This article provides an insight into the law and elaborates its application for evaluating the Bitcoin value in terms of its USD transaction volume. Although, If you are willing to trade in Bitcoin and want to make huge money from then you must check out the Immediate Edge. You can check Authentic Immediate Edge Review to know furthermore about this innovative platform.

Carl Newton

Carl Newton is a blockchain analyst and has 4 years of experience in bitcoin exchange. He makes people aware about the importance of cryptocurrency trading. He writes latest news contents for our team.