Dec 08, 2020

Interesting Crypto Price Research

Watching cryptocurrency prices oscillate can be truly nerve-wracking. While there is no foolproof way to eliminate this uncertainty, valuable insight how to alleviate it can be found using Metcalfe's law.

Metcalfe's law states the effect of a network is proportional to the squared number of its users. As crypto value is connected with network effects, would there be a way to understand the relationship between price and the number of its users?

While a few pieces of research confirmed this relationship using past data, this one used this data to provide a quite precise future forecast.

Without going too far into esoteric math, the authors compare the bitcoin market cap with the theoretic cap based on Metcalfe's law: number of bitcoin users squared. In each of the bitcoin bubbles so far this ratio was sharply growing. The better the fit between this ratio and other mathematical predictive bubble models, the closer we were to the end of the bubble.

This might sound overly complicated but using their model the authors predicted in March 2018, bitcoin would undergo a year of lateral/downward movement, which really hit the nail on the head. Wonder what the model would say about bitcoin price growth these days.