Researchers from Switzerland published a twenty page study on the predictability of bitcoin bubbles, using Metcalfe’s law and Log-Periodic Power Law Singularity (LPPLS), and determined bitcoin’s market capitalization might fall as much as $44 billion, or 35% (at the time of writing), by the end of 2018.
Swiss Researchers Claim Bitcoin’s Value to be a Mere $77 Billion at End of 2018
If researchers from ETH Zurich got their sums right, by year’s end bitcoin’s value should get a haircut by as much as $44 billion, some 35% below its current $121 billion (as of this writing). The recent study Are Bitcoin Bubbles Predictable? Combining a Generalized Metcalfe’s Law and the LPPLS Model by Spencer Wheatley, Didier Sornette, et al, of ETH Zurich’s Department of Management, Technology and Economics, and Swiss Finance Institute at the University of Geneva, Switzerland, respectively, is attempting to make a prediction.
“We develop a strong diagnostic,” Mr. Wheatley explains, “for bubbles and crashes in bitcoin, by analyzing the coincidence (and its absence) of fundamental and technical indicators. Using a generalized Metcalfe’s law based on network properties, a fundamental value is quantified and shown to be heavily exceeded, on at least four occasions, by bubbles that grow and burst.”
Metcalfe’s law has been tied to bitcoin almost since the decentralized currency’s inception, and in most contexts is employed to further a case for bitcoin’s eventual price increase. Essentially, Metcalfe postulated the growth of a telecommunications network is proportional to the square of the number of connected users. It’s now known as the network effect. Mr. Wheatley believes the number of bitcoin users is declining.
Indeed, it would seem to be the case less folks are interested in bitcoin, if anecdotal evidence means anything: numbers across the board are down, in all sectors concerning bitcoin, and are likely the self-fulfilling nature of rapid price declines in recent months. The authors acknowledge the inherent problems, however, in determining the numbers of users. Most enthusiasts use multiple wallet address, for example, and so counting them seems like a dead end. Nevertheless, if it’s true price declines shed users, it’s probably just as true price increases bring aboard more users. Instead, researchers use market capitalization as a better estimate for user growth or contraction.
On the Other Hand
“We emphasize that one should not focus on the instantaneous and rather unpredictable trigger itself, but monitor the increasingly unstable state of the bubbly market, and prepare for a correction,” they argue.
Academic papers are often filled with linguistic hedging, and this paper is no different (on the other hand, but then again, etc.). As users decrease, then, so goes market cap … or at least its rate of growth.
“In any case,” the paper continues, “the predicted values for the market cap indicate a current over-valuation of at least four times […] and the Metcalfe support line suggest current values around 44, 22, and 33 billion USD, respectively, in contrast to the actual current market cap of 170 billion USD. Further, assuming continued user growth in line with the regression of active users starting in 2012, the end of 2018 Metcalfe predictions for the market cap are 77, 39, and 64 billion USD respectively, which is still less than half of the current market cap. These results are found to be robust with regards to the chosen fitting window. On this basis alone, the current market looks similar to that of early 2014, which was followed by a year of sideways and downward movement. Some separate fundamental development would need to exist to justify such high valuation, which we are unaware of.”
The LPPLS comes into play when evaluating bitcoin’s historic bubbles, and Mr. Wheatley examines four in particular, Mt Gox and South Korea’s perceived threat to ban exchanges being the most prominent examples. Crashes or crazy corrections usually followed.