Some Swiss researchers said that the increase of new active bitcoin users is slowing down, which, according to “Metcalfe’s law,” implies that the market capitalisation of the cryptocurrency will not improve as quickly as it has.
Metcalfe’s law states that the value of a network is proportional to the square of its users. In a paper dated March 16, professors of entrepreneurial risks at ETH Zurich, Didier Sornette and Spencer Wheatley said that by a generalisation of the said principle, the market value of bitcoin by the end of the year should be no more than $77 billion.
That is $41 billion, or almost 35 percent, less than the market capitalisation of bitcoin on Monday amounting to $118 billion.
In 2017, Bitcoin multiplied over 13 times in its price. However, it dropped by 50 percent during the first three months of this year. The cryptocurrency is the largest by market capitalisation. It traded little changed near the $7,000 mark on Monday afternoon.
The Swiss researchers stated: “Looking forward, our analysis identifies a substantial but not unprecedented overvaluation in the price of bitcoin, suggesting many months of volatile sideways bitcoin prices ahead (from the time of writing, March 2018).”
Three other researchers also contributed to the paper. The research was emphasised by the MIT Technology Review on the 29th of March.
Their analysis also includes “Log-Periodic Power Law Singularity” — a mathematical model that is used for the evaluation of speculative bubbles.
The researchers discovered four distinct bitcoin bubbles that correspond to the said model. The paper said that the triggers for the bubbles ranged from a hack at the now-defunct Mt. Gox bitcoin exchange in 2011 to the threat of the regulators in South Korea to shut down cryptocurrency exchanges last December. The said incidents “were followed by crashes or strong corrections.”
The increase of institutional and retail interest in the cryptocurrency was able to help bitcoin rise to a record high that is more than $19,000 in mid-December. CME, the largest futures exchange in the world, and Cboe, its competitor, were also able to launch bitcoin futures around that time, fueling the expectations of heightened institutional investment.
However, increased scrutiny during the past few months from regulators in the United States and major markets including Japan and South Korea have significantly dampened the enthusiasm for bitcoin and other cryptocurrencies. Proponents of digital currency maintain that bitcoin will be able to recover and move higher once there is clarity from the regulators and predict that the underlying technology of blockchain of the cryptocurrency will transform the world as much as the internet did.
However, the academic researchers say that mathematical analysis of the price action of bitcoin reveals a predictable path.
The paper said: “We emphasise that one should not focus on the instantaneous and rather unpredictable trigger itself.
“But monitor the increasingly unstable state of the bubbly market, and prepare for a correction.”