By using the Metcalfe’s Law, the MIT has analysed that the value of bitcoin is significantly overvalued right now and it market reflects that of 2014. Following the law, the predictability of an imminent crash was possible and can be spotted.
Metcalfe’s Law: Finding the value of Bitcoin, how much is it worth?
In an analysis done by MIT, the value of bitcoin has been tried to determine by using the Metcalfe’s Law. When trying to decide how a money can be valued, people hold different views. Some would say the currency is worth whatever one is willing to pay for it while others would counter that its worth is in its high cost of production. And this is exactly why bitcoin experiences extreme valuations.
In December 2017, Bitcoin prices were at its all-time high at $20,000 while the entire cryptocurrency market size had been an exemplary $830 billion. However, in a matter of few days, the market collapsed and dropped down to $280 billion which was a massive slump.
So, the question that arises is what exactly bitcoin is really worth? The MIT analysts point out the value of cryptocurrency actually lies in the network of people that uses them. Moreover, if a bitcoin is valued at such a high price, it becomes difficult to really see and understand the telltale signs of the market crash that is sure to come.
Following the Metcalfe’s Law which states that “a network’s value is proportional to the square of the number of its users.”
It states that based on the number of users, it is pretty straightforward and easy to find the value of bitcoin. The original law’s idea assumes that all the nodes can connect with each other. Furthermore, the law reflects that the value of bitcoin has increased with the number of its users.
The significant bitcoin crashes
The law also shows when bitcoin has been overvalued. Four occasions have been specifically mentioned when bitcoin was overvalued and then crashed.
The first big event of crash happened in 2011 with the Mt. Gox fiasco. The Tokyo-based exchange was hacked resulting in about 88 percent drop in cryptocurrency prices over the period of three months.
The next was the 2012’s crash, that was due to a Bitcoin Ponzi scheme discovery. Then the crash of 2014, the Mt. Gox collapsed due to high trading volumes leading to a 50 percent drop in bitcoin prices in just two days.
Now, the most recent crash of 2017 that was triggered by several factors especially South Korean government’s crackdown on crypto exchanges.
The analysis follows the approach where a market is growing at an extremely exponential rate. This kind of growth is not sustainable and happens only for a short period of time. This crash is inevitable for this market.
Moreover, this crash is predictable because unsustainable growth only leads to high volatility meaning increased instability that further means even a small event can trigger a crash.
The analysis further notifies that at the time of those crashes, the market was in a critical state and if those events wouldn’t have triggered the crash, any other event surely would have. Moreover, the past data can be used to predict the market crash and spot upcoming collapses.
Bitcoin is still extremely overvalued, might see another drop
As per the Metcalfe’s Law, even after 2017’s crash, the value of bitcoin is significantly overvalued, illustrating that:
“Our Metcalfe-based analysis indicates current support levels for the bitcoin market in the range of 22–44 billion USD, at least four times less than the current level.”
This means it is no stable ground ahead yet as “the current market resembles that of early 2014, which was followed by a year of sideways and downward movement.”
So, all in all, it sends a clear message of being beware of the coming events to all the associated parties to bitcoin market, from investors, speculators to miners and everyone else as a further price down is a possibility.
Do you think according to Metcalfe’s Law value of bitcoin is overvalued, and is it still a rocky road ahead for bitcoin? Let me know your thoughts below!
I am an associate content producer for the news section of Coingape. I have previously worked as a freelancer for numerous sites and have covered a dynamic range of topics from sports, finance to economics and politics.