How Network Theory Predicts the Value of Bitcoin

Metcalfe’s Law, which measures the value of a network, can calculate a cryptocurrency’s value — and predict when to get out

Philosophers, economists, and theorists have various ways to judge how money should be valued. Some have said that its worth lies in a high cost of production. Others see it as simply a form of credit that allows the transfer of resources, which is why it can take the form of pieces of paper or even digital records.

Then there is the idea that a currency is worth whatever somebody is willing to pay for it given the limited supply. This explains the extraordinary valuations sometimes seen for the cryptocurrency Bitcoin.

All these approaches run into trouble of one form or another. There is certainly a high cost of production in the cryptographic “proof of work” required to create, or mine, bitcoins. But their value has little relation to this cost. By the end of 2017, a single Bitcoin was worth almost $20,000, and the cryptocurrency market as a whole had a value of $830 billion. Just a few weeks later, the market had collapsed to $280 billion.

So how much is a Bitcoin really worth?