Is Bitcoin Undervalued?

The halving Bitcoin is approaching and many cryptocurrency investors are asking themselves a crucial question: "Will the price go up this time like in previous editions?"

For many, let’s say the majority, as highlighted by many existing surveys in the literature, the answer to this question is comparable to a lottery, to a bet which, if won, leads to large profits, especially if the horse you are betting on is a high-potential altcoin.

The answer to this question can actually be explained in mathematical and statistical models, which by their nature are probabilistic and therefore not certain without a shadow of a doubt. We have often heard about Stock To Flow, the Golden Ratio, the hashrate model, and many others; However, it could be interesting to address a model that is little discussed in the financial field, but which, as regards Bitcoin, could provide a dynamic idea of its intrinsic value. We are talking about a strategy based on Metcalfe’s law.

What is it, what is the intrinsic value of Bitcoin, and what are the long-term prospects?

Bitcoin, the mathematical approach and Metcalfe’s Law

In this context, an interesting approach is the one based on Metcalfe’s law, known as Metcalfe’s Law. This law suggests that the value of a network is proportional to the square of the number of its users. Applied to Bitcoin, this would mean that the intrinsic value of Bitcoin is directly related to the number of people using it. The applications vary depending on the interpretation given to the law, but, assuming, as most users do, that each mined coin represents a user in the network, and since the maximum number of Bitcoins is known, it is possible to hypothesize a expected return, which will naturally vary depending on the user’s perspectives.

Among the main supporters of the application of this analysis methodology is Claude Erb, former manager of TCW Group, who used this idea to establish a fair value of the price of Bitcoin, reporting that currently, the price of Bitcoin seems to be discounted by 10%.

Bitcoin: what makes sense to expect?

Naturally, there are many more variables at play in 2023, full of new features, such as the evolution of the central banks’ monetary policy choices and the performance of the economy of developed countries. However, it may still be interesting to note that, despite the dynamic component linked to the price trend, there are mathematical models that try to identify a static and statistical basis to outline an underlying trend with respect to the price of one of the assets historically proved to be among the most volatile in history. This model, specifically, predicts a significant flattening of the growth rate of Bitcoin, as well as the quantity of Bitcoins issued in circulation. In this respect, it differs from other exponential models, such as stock-to-flow.

Original article published on Money.it Italy 2023-10-17 12:29:11. Original title: Il Bitcoin è sottovalutato?