Metcalfe's law readily explains Bitcoin pricing (and implications for Ada success = must grow total users)


#1

I earlier posted about how the #1 driver of a successful currency is the number of users…and now just found this recent paper that shows the exact same thing in a more mathematical way modeling BitCoin.

Specifically: "This paper demonstrates that bitcoin’s medium- to long-term price follows Metcalfe’s law.

Bitcoin is modeled as a token digital currency, a medium of exchange with no intrinsic value that is transacted within a defined electronic network.
Per Metcalfe’s law, the value of a network is a function of the number of pairs transactions possible, and is proportional to n-squared.
A Gompertz curve is used to model the inflationary effects associated with the creation of new bitcoin. The result is a parsimonious model of supply (number of bitcoins) and demand (number of bitcoin wallets), with the conclusion bitcoin’s price fits Metcalfe’s law exceptionally well."
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3078248

Specifically the model was able to fit 84% of Bitcoin prices by mapping the number of bitcoin wallets.

This is of course intuitive (one person with a phone = phone has no value) vs a phone when millions of people have it has massively different value. The same reason Facebook shot up in value as it’s user base grew, Ebay became dominant even though anyone could make a similar site in a week,etc.

Anyway, this shows, in a more mathematical way, that medium term and longer, the value of Ada as platform/currency will not just be based only on it’s technical prowess, but the total number of users actually using it and the network effect / Metcalfe’s law.


#2

This is a paramount issue debated on the highest levels, great to see it on the forum.

Very interesting to see that according to the graph BTC was overvalued this last December. It resonates with the market fundamentals and with my own personal intuition.

Also interesting is the massive undervalue between 2013-15. So massive in fact that it makes the fit of the Metcalfe Value questionable. If we roughly adjust for these years we’d get an even steeper rate of increase for BTC. Which would make one wonder what exactly makes a network go over n^2 value rate.

(This could have to do with the way the numbers were processed. Calculation for BTC network would be very complex and require much adjusting, or from misunderstanding the selection of the start point for MV)
Just my thoughts from the graph, haven’t read the paper yet.


#3

Hi Rin9s,
Actually the paper went into the 2013 timeframe. Apparently there were many rumours of price manipulation then, and the sudden disconnect between the model and the price in their opinion validates that this 2013 time frame BTC price was under manipulation :slight_smile:

Completely agree. Long and short term, user growth has to be goal #1 for Ada/Cardano. They have many good ideas in progress (i.e. lite wallet with no need to full sync, human readable address, etc) but we should probably start a whole thread to just discuss various ideas that will boost user growth/adoption.