“Does Metcalfe’s Law Explain Bitcoin Prices? A Time Series
Analysis – Jamil Civitarese∗
” Metcalfe’s Law argues the value of a network is proportional to the square of its users. Bitcoin and other cryptocurrencies can be modeled as such: if Metcalfe’s Law is true, then it is possible to forecast prices using the size of the network. I test this assertion by a cointegration test between price and an adjusted number of wallets’ connections. It is stated that the series do not cointegrate, rejecting the Metcalfe’s Law. (…)On this paper, I test and reject the Metcalfe’s Law for Bitcoin long-term price formation. (…) First, the unit root tests are known for having small power (…) Second, and more importantly, the proxy for number of users is flawed.
(…) the variable used here possibly overestimates the number of users. Further studies with different variables may be important to reject the Metcalfe’s law. Nonetheless, the tests provided here present a challenge to pricing attempts based on such relation.
Future work using active addresses instead of number of wallets is welcome to add robustness for the conclusions devised in this paper.
The last flaw to be considered is the fact this model is somewhat backward looking. The value of Bitcoin is possibly related to the expected size of the network, not to the current size of the network. (…)”