Metcalfe's Law as a Model for Bitcoin's Value

21 Pages Posted: 2 Dec 2017 Last revised: 25 Feb 2018

Timothy Peterson

Cane Island Alternative Advisors

Date Written: January 22, 2018

Abstract

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 et.al. [2018] assertion of price manipulation in the Bitcoin ecosystem during 2013-2014.

Keywords: Bitcoin, Metcalfe, Finance, Investment, Economics, Network Economics, Currency

Suggested Citation

Peterson, Timothy, Metcalfe's Law as a Model for Bitcoin's Value (January 22, 2018). Available at SSRN: https://ssrn.com/abstract=3078248 or http://dx.doi.org/10.2139/ssrn.3078248

Timothy Peterson (Contact Author)

Cane Island Alternative Advisors ( email )

515A South Fry Rd #191
Katy, TX 77450
United States

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