Crypto grams

Crypto grams

Menu IconA vertical stack of three evenly spaced horizontal lines. Sara Silverstein: So you actually have a few research notes about this. Silverstein: And you’re — can you talk about your short-term model first. Where do you see bitcoin crypto grams and what valuation method are you using?

Lee: Yeah, in the short-term we think bitcoin has really followed very closely the idea of acting like a social network. Meaning the more engagement there is, the greater the value rises. Silverstein: And you’re using Metcalfe’s Law, can you explain that? Lee: Yeah, so Metcalfe’s a professor.

He actually came up with a theorem based on George Gilder, which is the value of a network is the square of the number of users. And so if you build a very simple model valuing bitcoin as the square function number of users times the average transaction value. Just to use an example, so this explains the network effect. Like one fax machine is worthless because there’s nobody you can fax. But once all of your friends have fax machines, it becomes very valuable.

So has this been effective in valuing things, in the past, that have a strong network but weren’t producing any money? Lee: Yeah, so three use cases — or businesses — where Metcalfe’s Law really explain the growth of the market value, is Facebook, Alibaba, and Google. And these are all examples where the number of users — like if you double the number of users, you’re more than doubling the utility value. It’s a little bit like the commercial in the 70s, you know, Prell. When you tell your friends, and they tell their friends, and so on. Silverstein: And so your long-term valuation model — you’re looking at it — bitcoin, as a substitute for gold, as an alternative currency? Lee: Yes, that’s right, and it’s really — what we were trying to do is recognize that the creation of value in the future is in the digital world.

I mean, all future great business are going to be digital. And with that concept, bitcoin represents a store of value because it’s an encrypted — personal encrypted database, that for seven years hasn’t been hacked. I mean, that is a way to store value. And if personal information is our gold, bitcoin is our digital gold. Lee: We explain this in our research.