With the help of a formula by Robert Metcalfe, Tom Lee claims to have found a way to explain the price fluctuations of bitcoin. He compares Bitcoin to a social network whose value increases with the number of users.
The formula is based on the Metcalfe formula, which states that the value of a network is proportional to the root of the number of users in a network.
Up to now, bitcoin has been traded at a price above the formula. FundStrat is optimistic in his analyses, but believes that a correction of the share price, as it currently seems to take place, is realistic.
If you use a very simple formula to calculate the value of Bitcoin as a square function of the number of users and the average transaction value, you can explain 94% of the movements of Bitcoin within the last 4 years “,
Tom Lee, co-founder of FundStrat, a financial research institute in an interview with business insiders.
What you'll learn 👉
With 94% accuracy with Metcalfe
A fax machine can be used as an example of Metcalfe’s law. If only one person on earth possesses one, it would be quite worthless and above all useless. The faxes that this person would send to him would probably have only a limited value, even for him. However, the more people have a fax machine, the more valuable it becomes.
This law can be excellently applied to social networks. Facebook is not necessarily so valuable because it’s technically outstanding or innovative. The main value of Facebook is that so many people use it. Metcalfe’s law therefore applies: The value of a network is proportional to the root of its number of users. The value in terms of benefit increases exponentially with the number of users:
“If you double the number of users, you increase the benefit many times over, not just by half.”
Lee says the law could be applied to bitcoin. FundStrat has taken a closer look at the network and found out that the root function of the clearly assignable addresses as an indicator for users can explain 63% of the fluctuations in the bitcoin price since 2013.
From a previous point of view, everything suggests that Bitcoin is very much like a social network. The more activity takes place, the more the value increases. And in the short term, we think that Bitcoin will break the $6,000 barrier by mid-2018.”
Afterwards a course correction should take place. That’s what he said in October.
Metcalfe’s law was only able to explain 63% of the fluctuations, but they added the transaction volume as a factor to the model already described. Accuracy increased to 83%.
Finally, FundStrat has developed a formula that calculates the bitcoin price against both the root of the unique addresses and the transaction volume per user. This model actually explains 94% of price fluctuations since 2013.
The Metcalfe’s Law and the Future of Bitcoin
FundStrat can finally use this formula to estimate the future value of bitcoin. You need an estimate of the number of unique addresses (or their root) and an estimate of the number of transactions per day. Lee comes to the conclusion:
The Bitcoin trend is positive in the long term. But in the short term, the price seems to be limited and the risk of a correction seems to be growing.”
The current price fluctuations seem to indicate Lee right so far.
What’s the next step?
According to this law, more and more users would have to discover the cryptocurrency for themselves in order to increase the price further. Lee shows parallels between bitcoin and gold. He assumes that Bitcoin will be the digital gold of the future generation. With the most cautious estimates, he predicts a price of $25,000 per bitcoin.
Ultimately, the price could also be subject to extreme fluctuations. This is the case, for example, when fund investors discover the cryptocurrency for themselves. Since they can pump a large amount of money into the circuit at once, the total value can swell up sharply for a short time. This is because they are still considered to be a single user in this sense, even though they represent a large number of people. As a result, corrections can occur again and again after a high price increase. Whether Tom Lee will be right in the future remains to be seen. It will be very exciting period for all of us.
