Metcalfe’s Law puts Bitcoin at ‘fair value’, Peter Brandt predicts it’s going to $1000 & its ‘Z-score’ says its undervalued. So who’s right?
Bitcoin is currently trading around $5400, after a horror few weeks in which it lost up to 60% of its value. So is it fairly priced or should bargain hunters snap it up at discount prices?
FAIR VALUE: Metcalfe’s Law is a method of valuing the network effect of technologies and businesses, and has been used to value businesses like Tencent and Facebook.
The idea is that each incremental user in a network exponentially increases the value of the network. A two phone network can only make one connection, five phones can make 10 connections, while 12 phones can make 66 connections.
According to a post from Charles Edwards from Capriole digital asset management, if you measure the network effects of Bitcoin’s average transaction value using Metcalfe’s Law and its variant Sarnoff’s Law means Bitcoin has been overvalued for years.
The combination is called TV Metcalfe’s Law and Edwards notes it has predicted price falls historically.
“The results are fascinating. TV Metcalfe’s Law provides a much better fit to historical Bitcoin Prices. It has also predicted all of the major drops from Bitcoin’s historic peaks.”
After last week’s price plunge, Bitcoin was undervalued, but it has since returned to trading around fair value around $5451.
Bitcoin is currently undervalued for the first time since Dec 2018 bottom at $3500.
Price dipped below both DAA(Daily active users) Fair price and TV (Transaction value) Fair price per Metcalfe's law.
— Anondran (@AnondranCrypto) March 14, 2020
Technical analysis says $1000 is on the cards
OVER PRICED: Veteran trader Peter Brandt – who cares not a jot for fair value and just looks at what the charts are saying – believes that Bitcoin is headed back to $1000.
Asked on Twitter for his price target he said: “Leaning toward $1,000, but there remains one “pie-in-the-sky” bullish chart construction possibility.”
Leaning toward $1,000, but there remains one "pie-in-the-sky" bullish chart construction possibility
— Peter Brandt (@PeterLBrandt) March 16, 2020
Market Value To Realized Value
UNDER VALUED: But yet another metric – one that has also successfully predicted price movements in the past – suggests Bitcoin is now trading at a discount.
The Market Value To Realized Value score looks at the total dollar value of the supply in existence and compares it to the total value paid for all coins.
Another way to think about it is if the average price people bought Bitcoin for was $1000 and the price hits $4000, that gives us a MVRV Z-score of 4 and suggests Bitcoin is over valued (7 is usually the market’s ceiling). If Bitcoin was bought for and average price of $1000 and the current price is $1000 that gets a score of 1.
Bitcoin is currently undervalued for the first time in 12 months with a Z-score around 0.833. A score of 0.5 usually indicates the market bottom, so it potentially has a tiny bit further to fall on this metric but it won’t stay there for long.