What Is Bitcoin’s Value? Its Fair Value Is a Lot Less Than the Market Thinks.

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Bitcoin‘s fair value is $20,851, according to the only valuation model I’m aware of for this best-known cryptocurrency.

Your reaction to this depends in part on whether you see the glass as half-full or half-empty. On the one hand, this fair-value estimate is less than half Bitcoin’s actual price of around $42,000. On the other, the model ascribes far more value to Bitcoin than those skeptics who insist that the cryptocurrency is worthless.

The model in question bases Bitcoin’s fair value on what’s known as a “network effect,” according to which a network’s value grows faster than the number of connected users. A well-known articulation of a network effect is Metcalfe’s Law, which holds that a network’s value grows according to the square of the number of users.

One advisor who has explored the implication of Metcalfe’s Law for Bitcoin is Claude Erb, a former commodities portfolio manager at TCW Group. On the assumption that each Bitcoin that has been mined represents one user in a Bitcoin network, Erb calculates Bitcoin’s current fair value to be nearly $21,000. This fair value will grow as more Bitcoins are mined. (Erb posted on the Social Science Research Network his exploration of Metcalfe’s Law as it might apply to Bitcoin.)

You might be inclined to dismiss this Metcalfe’s Law-based model given how off-base it was last year. In December 2020, when Barron’s first reported on it, the model calculated Bitcoin’s fair value to be around $12,000 per coin. Over the subsequent four months, Bitcoin soared to over $60,000, before settling back to its current price.

Yet 2021’s experience isn’t a definitive basis on which to dismiss the Metcalfe’s Law-based model. Prices of all publicly traded assets are subject to wild swings above and below fair value; why should Bitcoin be any different? The

S&P 500
currently trades at 2.2 times its fair value, for…



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