If Metcalfe’s law applies, the bitcoin price has much further to fall. A group of Zurich-based researchers developed a bubble/crash report, predicting that bitcoin’s market value, which currently hovers at about USD 124 billion, will be slashed by approximately 37% to no greater than USD 77 billion by year-end 2018. It’s all based on a theory known as Metcalfe’s law.
The findings may appear to chart the course for a bitcoin price that’s been under pressure year-to-date amid regulatory pushback from major bitcoin markets around the world. But by the same token, the bitcoin fog may be nothing that greater regulatory clarity could clear up. After all, the markets don’t like uncertainty.
So what is Metcalfe’s law, you may be wondering? It’s a theory introduced by Ethernet founder Bob Metcalfe from the 1980s stating “the value of a network is proportional to the square of the number of nodes,” also known as the “network effect.” While stocks rely on fundamentals such as P/E ratios, the Swiss researchers believe that “if Metcalfe’s law holds here,” valuing bitcoin could be easy.
ETH Zurich’s Findings
The researchers were led by Spencer Wheatley, a professor of entrepreneurial risk at ETH Zurich. They concluded the number of bitcoin users doesn’t support a rise in bitcoin’s value.
“Our Metcalfe-based analysis indicates current support levels for the bitcoin market in the range of 22–44 billion USD, at least four times less than the current level,” the researchers said.
If they’re right, bitcoin’s market value will not continue to climb higher as it did in 2017. Worse, the researchers say that considering the “close correlation” between the BTC price and that of altcoins, “the short-term movements of other cryptocurrencies are likely to be affected by corrections in bitcoin (and vice-versa), regardless of their own relative valuations.”
Doom and Gloom?
Bitcoin could be in for “many months of volatile sideways bitcoin prices ahead,” according to the March report, which also “identifies a substantial but not unprecedented overvaluation in the price of bitcoin.”
It’s not unprecedented because their research also documents four such “bubbles in market cap,” all of which eventually burst. Three out of the four previous bubbles burst in response to fundamental issues, such as the collapse of Japan’s Mt. Gox exchange on the heels of a catastrophic security breach. But the most recent bursting of the bubble, researchers say, was bitcoin “collapsing under its own weight” after the price neared the $20,000 mark.
In addition to Mt. Gox, the report points to several other key events that led to the bursting of the bitcoin bubble, including the following –
- The bitcoin-fueled Savings & Trust Ponzi scheme
- China’s central bank banning financial institutions from transacting in bitcoin
- Reports that South Korea would ban bitcoin exchange at year-end 2017
Their research also incorporates the e Log-Periodic Power Law Singularity (LPPLS) model, which is designed to “warn of market instabilities” and predict market crashes.