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Metcalfe's Law as a Model for Bitcoin's Value
Alternative Investment Analyst Review, Q2 2018, Vol. 7, No. 2, 9-18.
21 Pages
Posted: 2 Dec 2017
Last revised: 10 Feb 2020
Timothy Peterson
Cane Island Alternative Advisors
Date Written: January 22, 2018
This paper demonstrates that bitcoin’s medium- to long-term price follows Metcalfe’s law. Bitcoin is modeled as a token digital currency, a medium of exchange with no intrinsic value that is transacted within a defined electronic network. Per Metcalfe’s law, the value of a network is a function of the number of pairs transactions possible, and is proportional to n-squared. A Gompertz curve is used to model the inflationary effects associated with the creation of new bitcoin. The result is a parsimonious model of supply (number of bitcoins) and demand (number of bitcoin wallets), with the conclusion bitcoin’s price fits Metcalfe’s law exceptionally well. Metcalfe’s law is used to investigate Gandal’s [2018] assertion of price manipulation in the Bitcoin ecosystem during 2013-2014.
Keywords: Bitcoin, Metcalfe, Finance, Investment, Economics, Network Economics, Currency
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45 References
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