Metcalfes Law - Bitcoin Fair Price
Metcalfe's Law has been successfully used to value a variety of network effect technologies and businesses, including Facebook and Tencent.
Applying Metcalfe's Law to Bitcoin, using "Daily Active Addresses" (DAA) as the "n" value, yields interesting results.
Historically, Bitcoin has tracked the Metcalfe Law Fair Price reasonably well. A number of studies have been performed over recent years which validate this and have used various derivations of Metcalfe’s Law. Note: this indicator sticks to the original Metcalf’s Law.
Prior to 2018, every time Bitcoin was above the Metcalfe’s Law fair price (calculated using a default “A” of 0.5 here), a bubble had formed, and price quickly reverted back down to the mean.
Nonetheless, since February 2018, Metcalfe's Law Fair Price has remained below the actual Bitcoin price, suggesting Bitcoin is currently overvalued.
There may be a few reasons for this:
1. Possibility A: Bitcoin may still be extremely overvalued. Since the December 2017 peak, Bitcoin has only reverted to the Metcalfe’s Law Fair Price briefly during the December 2018 bottom. If this case is true, there could be further to fall unless DAA numbers pick up to fill the gap.
2. Possibility B: The introduction of side-chains, private transactions and the Lightning Network may have fundamentally altered the effectiveness of using DAA to value Bitcoin. As more daily transactions are completed off-chain, or on large platforms/exchanges which use fewer addresses, the relative number and growth of DAA may be misrepresented and artificially low. In this case, DAA as it is reported today is no longer useful in assessing the fair value of Bitcoin with Metcalfe’s Law and this Indicator is effectively useless.
3. Possibility C: Neither of the above are true. We are just in an anomalous period in which price and Metcalfe’s Law Fair Price have deviated from the mean for an extended period (and will meet again in the future, potentially at a higher price).
4. Possibility D: Metcalfe’s Law doesn’t really work for Bitcoin.
I am inclined to believe Possibilities “C” and “D” are unlikely. Given the way Bitcoin infrastructure is being developed and used in 2019, Possibility “B” seems the most likely, as this case is supported by the fact that a number of other metrics indicate that Bitcoin is currently on the lower side of “fair value” (including Dynamic Range NVT Signal).
Regardless, Possibility “A” remains a strong candidate. Only time will tell. It will be interesting to check back on this indicator in 12-24 months time. Hopefully this indicator has been proven redundant by then.
Applying Metcalfe's Law to Bitcoin, using "Daily Active Addresses" (DAA) as the "n" value, yields interesting results.
Historically, Bitcoin has tracked the Metcalfe Law Fair Price reasonably well. A number of studies have been performed over recent years which validate this and have used various derivations of Metcalfe’s Law. Note: this indicator sticks to the original Metcalf’s Law.
Prior to 2018, every time Bitcoin was above the Metcalfe’s Law fair price (calculated using a default “A” of 0.5 here), a bubble had formed, and price quickly reverted back down to the mean.
Nonetheless, since February 2018, Metcalfe's Law Fair Price has remained below the actual Bitcoin price, suggesting Bitcoin is currently overvalued.
There may be a few reasons for this:
1. Possibility A: Bitcoin may still be extremely overvalued. Since the December 2017 peak, Bitcoin has only reverted to the Metcalfe’s Law Fair Price briefly during the December 2018 bottom. If this case is true, there could be further to fall unless DAA numbers pick up to fill the gap.
2. Possibility B: The introduction of side-chains, private transactions and the Lightning Network may have fundamentally altered the effectiveness of using DAA to value Bitcoin. As more daily transactions are completed off-chain, or on large platforms/exchanges which use fewer addresses, the relative number and growth of DAA may be misrepresented and artificially low. In this case, DAA as it is reported today is no longer useful in assessing the fair value of Bitcoin with Metcalfe’s Law and this Indicator is effectively useless.
3. Possibility C: Neither of the above are true. We are just in an anomalous period in which price and Metcalfe’s Law Fair Price have deviated from the mean for an extended period (and will meet again in the future, potentially at a higher price).
4. Possibility D: Metcalfe’s Law doesn’t really work for Bitcoin.
I am inclined to believe Possibilities “C” and “D” are unlikely. Given the way Bitcoin infrastructure is being developed and used in 2019, Possibility “B” seems the most likely, as this case is supported by the fact that a number of other metrics indicate that Bitcoin is currently on the lower side of “fair value” (including Dynamic Range NVT Signal).
Regardless, Possibility “A” remains a strong candidate. Only time will tell. It will be interesting to check back on this indicator in 12-24 months time. Hopefully this indicator has been proven redundant by then.
リリースノート:
Upgrades to the script include
- Additional input data source Blockchain.info "Transaction Value (TV)", another option for calculating Metcalfe's Law Fair Price
- Additional Metcalfe's Law formula variant (A * n). This works best with Transaction Value input data, which makes sense as the total network transaction count is a closer representation of the total network connections (i.e. there is no need to "square" it).
- Tweaked chart formatting
- Reset chart defaults
- Ability to tweak all inputs and display options
Findings
- Transaction Value (TV) input data appears to work better than Daily Active Addresses (DAA) at calculating a Fair Price for Bitcoin.
- Both metrics suggest we are still overvalued today (at current BTC price $8400), though the TV data suggests we are closer to fair value.
Thoughts
As discussed in the first script release, DAA may no longer be an appropriate input for Metcalfe's Law due to private transaction data
A similar argument could be made for Transaction value (TV) data... EXCEPT:
- Transaction value data has continued to grow at a higher annual rate than DAA.
- It makes sense that fewer addresses could be used (on average) while those addresses can still grow their transaction value throughput (i.e. large exchanges managing more money, other institutions managing peoples money, insurance funds, etc).
Longevity
As discussed in the first release, I expect DAA based Metcalfe’s Law Fair Price will continue to underestimate the fair value of Bitcoin into the future.
TV Metcalfe’s law should track Fair Price more accurately going forward, but will likely tend to drift lower (undervalue Bitcoin) with time for the above reasons. Nonetheless, when Metcalfe’s Law TV Fair Price and actual price meet (eg. December 2018), a great buying opportunity is discovered.
- Additional input data source Blockchain.info "Transaction Value (TV)", another option for calculating Metcalfe's Law Fair Price
- Additional Metcalfe's Law formula variant (A * n). This works best with Transaction Value input data, which makes sense as the total network transaction count is a closer representation of the total network connections (i.e. there is no need to "square" it).
- Tweaked chart formatting
- Reset chart defaults
- Ability to tweak all inputs and display options
Findings
- Transaction Value (TV) input data appears to work better than Daily Active Addresses (DAA) at calculating a Fair Price for Bitcoin.
- Both metrics suggest we are still overvalued today (at current BTC price $8400), though the TV data suggests we are closer to fair value.
Thoughts
As discussed in the first script release, DAA may no longer be an appropriate input for Metcalfe's Law due to private transaction data
A similar argument could be made for Transaction value (TV) data... EXCEPT:
- Transaction value data has continued to grow at a higher annual rate than DAA.
- It makes sense that fewer addresses could be used (on average) while those addresses can still grow their transaction value throughput (i.e. large exchanges managing more money, other institutions managing peoples money, insurance funds, etc).
Longevity
As discussed in the first release, I expect DAA based Metcalfe’s Law Fair Price will continue to underestimate the fair value of Bitcoin into the future.
TV Metcalfe’s law should track Fair Price more accurately going forward, but will likely tend to drift lower (undervalue Bitcoin) with time for the above reasons. Nonetheless, when Metcalfe’s Law TV Fair Price and actual price meet (eg. December 2018), a great buying opportunity is discovered.
リリースノート:
Minor upgrade:
- Set default formula for DAA data to Metcalfe's Original formula (A * n^2). Note: TV remains the better fitting data.
- Set default formula for DAA data to Metcalfe's Original formula (A * n^2). Note: TV remains the better fitting data.
リリースノート:
Added Over- and Under-Valuation Bands to highlight opportunity.
Logic is based on actual price being greater or less than the Metcalfe's Law Fair Price(s) chosen.
Logic is based on actual price being greater or less than the Metcalfe's Law Fair Price(s) chosen.
リリースノート:
Added "Average" Metcalfe's Law Fair Price. It takes the average of the TV and DAA calcualted Metcalfe's Law Fair Prices.