Metcalfe’s law states the effect of a technology network is proportional to the number of connected users of the system. The latest research has concluded that Metcalfe’s law may apply to Bitcoin for the long term. In the short term, the researchers found the validity of the law to be “questionable” as the number of users of Bitcoin has been changing dynamically.
The study called, “Metcalfe’s law and herding behavior in the cryptocurrency market,” authored by Danial Traian Pele and Miruna Mazurency Marinescu Pele has confirmed that Metcalfe’s law may apply to Bitcoin’s network in the long-term financial future of the world. Blockchain data from 2010- 2018 was carefully analyzed and correlated. The results of which showed a herding behavior in Bitcoin users from 2010 to 2018. The research also used Log Periodic Power Law (LPPL) model to determine the behavior of cryptocurrency exchange rates during bubble periods and to eventually predict the most probable time of a regime switch in the world financial landscape.
The researchers looked at the number of unique Bitcoin addresses and their progression through the time of the study (2010-2018).
As is evident in the picture above, the number of unique addresses in Bitcoin’s network has shown a general upward trend until the end of 2017. The exchange of Bitcoin against the US dollar has been moving sideways for the most part until it catches up eventually towards the end of 2017 as well. The Bitcoin’s price decreases with the number of unique addresses in the following year. This points to one fact that while Metcalfe’s law might not be applicable for the short term, it does eventually apply.
The detailed analysis from the researchers has come to the following conclusion:
“The results show, in the medium to long run, the validity of Metcalfe’s law (the value of a network is proportional to the square of the number of connected users of the system) for the evaluation of cryptocurrencies: however, in the short run, the validity of Metcalfe’s law for Bitcoin is questionable at best.”