Is Bitcoin still overvalued after the big drop?

In recent days, the price of Bitcoin has dropped significantly, falling to around $6,500 at one point, hitting a new low for the second half of 2019. However, at the same time, LongHash's mainstream coin market valuation model still shows that Bitcoin is in a relatively high valuation range. Does this mean that Bitcoin still has a significant bubble after experiencing a sharp decline?

LongHash uses Metcalfe's law to evaluate the value of cryptocurrencies. Metcalfe's law, proposed by George Gilder in 1993 and named after Robert Metcalfe, the founder of 3Com, states that the value of a network is proportional to the square of the number of connected users. Originally used to assess the value of communication networks, Metcalfe's law has also been applied to social networks with the growth of social media and large-scale datasets. Independent studies on the value of Facebook and Tencent, the largest social networking company in China, have confirmed this law. Researchers found that the value of these companies over the past decade has not grown linearly with the increase in user base, but rather in accordance with Metcalfe's law.

Cryptocurrencies create networks of interconnected users in the digital space, allowing interaction through information exchange and transactions. These networks, being digital, always online, and published on the blockchain, provide more accessible usage data compared to other types of networks such as telephone, fax, instant messaging, and social media. Therefore, LongHash uses Metcalfe's law to build valuation models for cryptocurrencies like Bitcoin based on the unique addresses of daily active users.

The image above compares the valuation of Bitcoin and Ethereum using Metcalfe's law. It was found that the predicted value of ETH closely matches its actual market value, while there is a larger disparity between the valuation and market value of BTC. One possible reason for this is that Bitcoin produces a block approximately every 10 minutes with a transactions per second (TPS) rate ranging from 3 to 7, leading to a pile-up of unconfirmed transactions and limiting the growth of active addresses. Therefore, the valuation of Bitcoin is lower using the Metcalfe model. On the other hand, Bitcoin is often seen as digital gold and plays a similar role to the gold standard in the cryptocurrency market, anchoring all other cryptocurrencies to Bitcoin, which gives Bitcoin a higher investment premium. These factors are not considered in the Metcalfe model.

Hence, the Metcalfe model is more suitable for valuing cryptocurrencies with high TPS or high scalability. While its performance in valuing Bitcoin may not be perfect, it still provides some reference value. According to the model's predictions, although Bitcoin is currently in a higher valuation range, it is far from bubble risk, allowing for cautious optimism in the future.

This article is from our partner LONGHASH

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