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Metcalfe's Law lurks beneath crypto craze.

Metcalfe's Law, which states that a network's value increases exponentially with each additional participant, has been used as one of theories explaining the reason for the rapid hikes in prices of bitcoin and other cyrptocurrencies over the past few years.

The law has often been used to measure values of fax machines, social media and messenger services.

For example, a single fax machine is useless, but the value of every fax machine increases with the total number of fax machines in the network, because the total number of people with whom each user may send and receive documents increases.

Likewise, the more users of a social media service, the more valuable the service becomes.

The Winklevoss twins, who have been in limelight after suing Facebook CEO Mark Zuckerberg for alleged theft of their business idea, also mentioned the law to justify bitcoin's tremendous rise.

The twins are said to have recently become billionaires, after investing a portion of their $65 million Facebook settlement in the leading cryptocurrency a few years ago.

"Money is in many ways the ultimate social network," Tyler Winklevoss was quoted as saying. "It's a medium of value that connects us all."

Timothy Peterson, a founder and portfolio manager of Cane Island Alternative Advisors, a company managing global macro-investment strategy, also defined Metcalfe's Law as a model for bitcoin's value in his recent paper posted on the Social Science Research Network (SSRN).

The paper outlined the law as it applies to bitcoin and shows that the price movement has followed the law with great accuracy.

"This paper demonstrates that bitcoin's medium- to long-term price follows Metcalfe's Law. Bitcoin is modeled as a token digital currency, a medium of exchange with no intrinsic value that is transacted within a defined electronic network," the abstract of the paper reads.

Although many unknown factors, such as government regulations, could change the direction of bitcoin prices, the movements have been able to be explained by the law up until now.

If the network continues to expand, the value will continue to follow its previous movements.

What about kimchi premium?

Some people may raise questions if the law can explain the so-called kimchi premium, a phenomenon that digital coins are traded at 15 to 25 percent higher than global prices on Korea's exchanges. Kimchi is the country's traditional staple side dish.

Korea has recently been known for a crypto craze that has led so many Koreans to participate in the network of cryptocurrency investments. Online forums for students and alumni of Seoul National and Korea universities even opened new message boards for virtual money traders.

However, Metcalfe's Law does not explain everything about the cryptocurrency price hike, according to experts.

Lynn Sebastian Purcell, an assistant professor at the State University of New York, wrote in his recent article that bitcoin has been overvalued, while Ethereum has been undervalued, after comparing the number of people in each network.

Also, some people say other theories are needed to explain the kimchi premium, because Koreans do not regard digital tokens as currencies, but investment assets. They cite the imbalance between supply and demand, difficulties in transaction with overseas exchanges, government regulations and the influx of Chinese capital as reasons for the kimchi premium.
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Publication:The Korea Times News (Seoul, Korea)
Date:Jan 22, 2018
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