Metcalfe’s law generally states that value of the network is proportional to the square of the number of connected users. aka. The value of the network increases exponentially with the number of users.
A lot of people believe we can apply Metcalfe's law to Bitcoin and other cryptocurrencies to predict their price. I’m not convinced.
Metcalfe's law was for Traditional Networks
Metcalfe referred to networks like Ethernet, or telephones and fax machines. If only two people have telephones, they can only talk to one another, the value of the network = 1. When another person gets a phone, there are 3 connections possible. 5 people with phones means the network has a value of 10 (10 connections are possible.)
Traditional Network Components
- Access - your telephone or computer that connects to the network
- Network - infrastructure connecting the phones
- Value - information transferred between phones.
Blockchain Network Components:
- Access - wallet you create on the network
- Network - blockchain infrastructure connecting the wallets, and creating the currency
- Value - cryptocurrency transferred between the wallets
Unlike in traditional networks, blockchain components are inherently interlinked and part of one another.
Blockchain Not = Traditional Networks
Here's why we can't assume Metcalfe's law will apply.
- Entry does not equal adoption or use
- More currencies does not equal adoption
- More blockchains might actually decrease the value of other blockchains
- More users in crypto does not equal more users in a particular currency
- More transactions does not equal increased value / price e.g. mass selloffs
- Price does not need to change to provide value as a means of exchange. (USD value doesn't change because of internal transactions, but external factors
- 1 wallets is not = 1 user. One user can, and is encouraged to, have multiple wallets.
- Cryptocurrency is also a store of value.
- Cryptocurrency is also a speculative asset.
- Metcalfe applied arbitrary values. 5 connected computers have a value of "10".