He says his short-term valuation model, built on Metcalfe’s law, can explain the majority of bitcoin’s volatility. He explained his reasoning on Business Insider’s cryptocurrency show, “The Bit.”
Metcalfe’s law says the value of a network is proportional to the square of the number of users on the network.
For example, a fax machine is utterly useless if you are the only one who has one, but the value increases exponentially as other people get fax machines.
This is also true for social networks — Facebook is valuable because so many others are on it. It’d be a boring place to surf alone.
“If you double the number of users, you’re more than doubling the utility value,” Lee said.
Lee says the same is true for bitcoin. FundStrat looked at unique addresses as a proxy for users on the bitcoin network and found that the square of this value explained 63% of the variation in bitcoin prices since 2013.
Here’s the portion of “The Bit” that explains his thinking. You can watch the full interview with Lee here…