Metcalfe’s Law, which states that the value of a network is proportional to the square of the number of its users, applies to bitcoin and ethereum according to a new study published at the journal of Electronic Commerce Research and Applications.
The study measured the value of the network based on the price of relevant digital currencies and compared it to the number of unique addresses that engage in transactions on the network each day, according to the abstract.
The results show that “the networks were fairly well modeled by Metcalfe’s Law, which identifies the value of a network as proportional to the square of the number of its nodes, or end users,” the study says.
The findings can be useful to identify bubbles, with the study stating that “value bubbles show up where repeated extremely high value increases are not accompanied by any commensurate increase in the number of participating users, or any other development that could give rise to the higher value.”
Which means that once the bubble is inflated beyond fundamentals, the fundamentals eventually catch up, causing the bubble to burst with sentiment then potentially moving too far in the opposite direction, until fundamentals catch up again.