Bitcoin’s Growth — Metcalfe’s Law and the Lindy Effect

Metcalfe’s Law and Bitcoin

Metcalfe’s Law states that the value of a network is proportional to the square of the number of connected users in the system. Damn, talk about exponential growth! This week I explore how this relates to the growth of Bitcoin, both in users and in price.

Metcalfe’s Law, named for Robert Metcalfe, the inventor of ethernet, attempts to quantify the increase in value of a network based upon the growth in its users. (The law was named by George Gilder, publisher of Gilder Technology Report.) During the 1980’s and 1990’s when telecommunications networks and later, the internet, were taking off, this was the mantra of tech entrepreneurs. Grow the network. Digital companies gained competitive advantages through building networks, as opposed to linear businesses, which needed to buy assets and supply chains to spur growth.

Direct network effects occur when an increase in the number of users directly creates more utility for all of the users. Think Facebook. Before social media, think of the origins of the fax machine. The first fax machine, by itself, was useless. But, when a company added machines at each of its locations, then they had something valuable. Later, as their customers and suppliers added fax machines, the value of a machine grew exponentially.

The added bonus of this theory of non-linear, exponential growth of a digital enterprise is that costs would, at most, grow linearly.