There was a lot of dilemma regarding Bitcoin and its credibility. Bitcoin is either mined or invested in, against some exchanges. Bitcoin does not fall under the jurisdiction of any central authority, that is, any government. It remains unaffected by market forces, and only depends on the individuals investing in it. These are factors that make investors very suspicious of its credibility. However, this article seeks to clarify how the valuation of Bitcoin works.
What is Metcalfe Law?
Fundamentally, Metcalfe Law states that the value of a network is directly proportional to the square of the total number of people using it. Timothy Peterson, a Crypto expert tries to explain the law by using examples relating to Facebook and Tik Tok.
Peterson explains that the social media networks only grow in worth as the number of people using them grow. If Facebook had only one user, they would have nobody to connect to. Hence, there would be zero utility of the application, of the networking site. A networking site is as good as the number of people who pin their faith in the application and take the leap.
When Facebook or Tik Tok was initially launched, their usefulness was nearly negligible. As the number of people using it kept growing, its worth skyrocketed, and generates a huge amount of revenue. The more the people build network, the more help is being extended. As the networking increased, the value it provided to people also multiplied. Hence, the generation of revenue increases.
Same for platforms like YouTube or Tik Tok. It is only the possible because of the millions of people who use these platforms to share their content, and the rest of them who consume these contents. This makes a network where people meet to share their ideas, and others who are benefited by it. Hence, the revenue generated on this platform, and by the creators of this platform is way too high in comparison to the newly developed platforms who may not have as many users.
Thus, Metcalfe Law states that the determination of a particular network’s worth is attached to the number of people using the network.
Effects on Bitcoin
Peterson implied that the same is true for Bitcoin. When Bitcoin first started out as a Cryptocurrency, its value was estimated to be $2 due to the sheer lack of people who even knew about it. There were only a countable number of Bitcoin wallets across the length of the world. With the rise in popularity of Bitcoin, the number of people investing in Bitcoin has increased as well. Bitcoin was estimated to be worth a multiple thousand dollars when in 2017 the number of Bitcoin wallets rose to almost 20 millions across the world.
Under the current circumstances, there are more than 60 million Bitcoin wallets active around the world. Hence, the amount each Bitcoin transactions cost has escalated to at least tens of thousands of dollars.
Right now, Bitcoin may seem an expensive investment. But the early birds have greatly benefited by the hike in price of Bitcoins. They had gauged the importance of investing in Cryptocurrency early on, and can even sell their Bitcoins to generate a huge revenue.
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Exceptions to the Law
However, it cannot be said without doubt that Bitcoins will further increase in value if they were incorporated in the mainstream and made more accessible to the people. The fact that people need some sort of coding expertise to procure them, and the huge amount of cost incurred is not affordable to all, places Bitcoin beyond the reach of many.
Not every rise or fall in the price of Bitcoins needs to be accredited to the Metcalfe Law. It provides a simplistic explanation to one aspect of its growing prices. Anything else can be possible too, since there is a lot more to discover about Cryptocurrency.