Bitcoin continues to fascinate investors and enthusiasts alike. On the other hand, different approaches continue to come. Accordingly, a reputable prediction model based on Metcalfe’s Law suggests a fair value of approximately $31,400 for the world’s leading cryptocurrency. This model also says that Bitcoin will deliver an annual return of 1.1% over the next century.
Metcalfe’s law and Bitcoin
Metcalfe’s Law, which relates the value of a network to the square of the number of users, forms the basis of this prediction model. Claude Erb, a former commodity portfolio manager at TCW Group, applied this law to Bitcoin. Accordingly, he makes a unique assumption. Each Bitcoin mined represents one user on the network. Erb’s model considers the total number of Bitcoins that can be mined and when this limit will be reached. Accordingly, it calculates Bitcoin’s expected long-term return. The result is an annual return projection of 1.1%.
Erb acknowledges that the model has its challenges. In particular, Bitcoin ownership varies significantly. However, although some users may own less than one coin and others may own more, each mined Bitcoin is assumed to represent a single user. Moreover, the number of missing Bitcoins makes an exact user-to-Bitcoin ratio difficult. In Erb’s own words, the model falls into the “all models are wrong, but some are useful” category. Erb presents this model as a tool to start a dialogue about Bitcoin’s valuation. He also describes it as “interesting” and remarkable.
Historical performance of the model
The model’s past performance demonstrates its ability to provide valuable insights into Bitcoin’s price movements. The model provides warning signals when Bitcoin reaches unsustainably high levels. Accordingly, when the price drops too much, it becomes incentive. For example, the model correctly detected that Bitcoin BTC was overvalued just before its price rose from around $20,000 to over $60,000 in late 2020. Subsequently, Bitcoin rose by more than 50%.
In early June, the model suggested that Bitcoin’s fair value was about 10% above the market price. Bitcoin has gained 4.2% since then. Currently, the model estimates Bitcoin’s fair value to be around $31,400. Accordingly, the fair value is approximately 14% above the current trading price.
Bitcoin BTC’s future and asset volatility
Despite the success of the model, it is important to remember that assets, including Bitcoin, often oscillate between price extremes, moving well above and below their fair value. Even if the model continues to make accurate predictions, fluctuations are a natural part of the cryptocurrency market. Just like the stock market can trade both above and below its long-term average price/earnings ratio. BTC is no exception to this rule. As investors navigate the dynamic world of cryptocurrencies, they must be prepared for ongoing market fluctuations.
When we look at Kriptokoin.com, the Metcalfe Law-based model provides an interesting perspective on the fair value and long-term returns of Bitcoin BTC. It has been useful in the past. However, the inherent volatility of the crypto market requires a cautious approach for investors.
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