- FundStrat cofounder Tom Lee says, “if you build a very simple model valuing bitcoin as the square function number of users times the average transaction value. 94% of the bitcoin moves over the past four years is explained by that equation.”
- This model is based on Metcalfe’s law, which says the value of a network is proportional to the square of the number of users on the network.
- Based on this model, bitcoin has been trading at a level above the price projected by the model. FundStrat remains positive on bitcoin long-term but sees risk of a short-term correction growing.
Tom Lee, cofounder of FundStrat Global Advisors, is bullish on bitcoin and has a unique way of valuing the cryptocurrency. His short-term valuation model is built on Metcalfe’s law, and he says it can explain the vast majority of bitcoin’s volatility. He explained his reasoning to Business Insider on our cryptocurrency show, “the bit.”
Metcalfe’s law basically says that the value of a network is proportional to the square of the number of users on the network.
For example, consider the fax machine — which is utterly useless if you are the only one who has one. The value increases exponentially as other people get fax machines. This is also true for social networks. Facebook is valuable because so many of your “friends” are on it. It’d be a boring place to surf alone. Or as Lee puts it, “if you double the number of users, you’re more than doubling the utility value.”
Lee contends that the same is true for bitcoin. FundStrat looked at unique addresses as a proxy for users on the bitcoin network and found the square of this value explained 63% of the variation in bitcoin prices since 2013.
Here’s the portion of “the bit” that explains his thinking. You Read More Here