Study: Bitcoin Overestimated Sevenfold

April 26, 2018

Several attempts have been taken over many years to estimate the true value of cryptocurrency. Yet criteria used are more focused on theoretical scenarios of the future rather than current situation. According to the economic theory, markets define the cost of assets. But huge price fluctuations of Bitcoin gave a pretty wide range of values.

Bitcoin’s incredible rise however has gained attention of researchers and economists who determined correlations in price and cost. Google’s chief economist Hal Varian took the first steps in 2014 when suggested the idea that paper money gained its value not from governmental support but the network effects it produced. Last January the researchers published a document describing connections between Bitcoin and Metcalfe’s law. The latter one which initially was designed for telecommunication nets says, net value is proportional to the squared number of its users.

Resent study held by the experts of ETH Zurich has developed the concept and applied Metcalfe’s law to the current Bitcoin prices. The results may seem far from being pleasant for crypto enthusiasts:

“[There is] current substantial but not unprecedented overvaluation in bitcoin’s price…”

The term of “network effects” refers mostly to the crypto users. But the experts have slightly altered the notion. The point is that all nodes in Bitcoin blockchain are not connected with each other at the same time. The authors suppose that Bitcoin is a “sparsely connected network” with each user linked to 10,000 other users instead of 1 million. As they say, this picture of current cryptocurrency net is more true to life.

Taking the figure into account for the general formula of Metcalfe’s law and making adjustments for expected net growth rates (that reduce in time) until 2026 the researchers got 0.79 million users who are currently in the Bitcoin net and expect it to increase till 2.6 mln by 2023. Given the figures Bitcoin’s value must be estimated now within the range from 22 to 44 billion dollars. Today’s market cap of the cryptocurrency makes 150 bln dollars so the present Bitcoin value exceeds the expected on almost seven times.

“Some separate fundamental development would need to exist to justify such high valuation, which we are unaware of”, the report says.

So what overvalued Bitcoin is about? The authors suppose, the market of today resembles that of the early 2014. At that time the cryptocurrency’s price fluctuated at the level of 1,000 dollars. But flows of negative news about Mt. Gox’s collapse have caused Bitcoin price fall.


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