Is Bitcoin Undervalued?
  What you need to know today in crypto and beyond July 22, 2021 Sponsored By:  Welcome to The Node.
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Today's must-reads Top Shelf  ELON STRIKES AGAIN: Elon Musk-led aerospace company SpaceX holds bitcoin, the unpredictable chief executive said at the B Word conference on Wednesday. The company's bitcoin holdings had not been previously disclosed. Musk said he personally owns bitcoin, ether and dogecoin. Bitcoin's price jumped Wednesday by the most since mid-June.
ACQUISITION: Stellar Development Foundation has contacted MoneyGram International about a potential purchase of the 81-year-old remittance giant, Bloomberg reports. Stellar is partnering with private equity firm Advent on the possible deal, according to unnamed sources. Stellar and Advent could decide not to push forward with the acquisition. LIGHTNING FAST: Blockstream, a prominent and influential Bitcoin technology startup, has introduced a service designed to make setting up a node on the cryptocurrency's Lighting Network a snap. Known as Greenlight, the service allows users to maintain complete control over their funds while setting up a Lighting node using the company's infrastructure. BLOCKED? Another state is taking aim at BlockFi. The Alabama Securities Commission has asked the New Jersey-based crypto lender to show cause why it shouldn't be stopped from selling unregistered securities in the state. This comes just days after New Jersey regulators took aim at BlockFi's interest bearing accounts. Separately, another major U.K. bank has cut ties with Binance.
DOGE: Coinbase's e-commerce platform has begun accepting dogecoin payments, the company announced Wednesday. Doge is one of only a handful of Coinbase Commerce's supported cryptos, alongside bitcoin, bitcoin cash, ether, litecoin and USDC.
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A message from CoinDesk  The Investor's Perspective on the Bitcoin Taproot Upgrade Taproot is a bundle of three upgrades to Bitcoin aimed at improving network security, privacy and scalability. At the same time, it poses some potential drawbacks to Bitcoin including risks of low adoption, unintended privacy shortcomings and Bitcoin community disappointment and fracturing.
CoinDesk Research's newest report dives into the economic impact and investment implications of the Taproot upgrade. Download the full report.
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Putting the news in perspective The Takeaway  Is Bitcoin Undervalued? What Metcalfe's Law Says A specter is haunting bitcoin – the specter of Metcalfe's Law. In a new report from Goldman Sachs, analysts in the bank's global investment research division suggested that bitcoin's price may be undervalued relative to the size of the network. Bitcoin has grown, but the price apparently hasn't kept pace.
Goldman analysts Zach Pandl and Isabella Rosenberg draw upon a framework popular in computer science, but relatively unexplored in economics – Metcalfe's Law, named after the founder of Ethernet – that states the value of a network grows along with the number of possible connections. In particular, a network's value is proportional to the square of all connected devices.
Network effects have been crucial for understanding the development and adoption of the internet and social media. Likewise for cryptocurrencies. But it's worth stepping back to ask what type of network Bitcoin is and why these interpretive frameworks might fall short. "Metcalfe's Law is a simple statistical rule-of-thumb for thinking about the value of network technologies, and not a complete description of these assets' fundamentals," Pandl said in an email. Yet, it's often been cited to presage a surge in the price of Bitcoin or even predict its collapse.
Looking at data provided by Coin Metrics, Pandl and Rosenberg found that the number of blockchain addresses for eight different digital assets – BTC, ETH, XRP, LTC, BCH, DASH, ZEC and ETC – is often correlated with price. But, in many cases, you'd expect such developed networks to have more societal value (at least as measured by market cap).
Taken together, they found that these assets had a "Metcalfe coefficient" of about 1.5, whereas Metcalfe himself would expect a two – a squared relationship. (A Metcalfe coefficient measures the relationship between network capitalization and users – a coefficient of one suggests a one-to-one relationship.)
A variation of Metcalfe's Law has often been applied to social media giants. Facebook's valuation, especially before going public, was derived from looking at monthly active users (MAUs). If just Mark Zuckerberg was on the blue page, it wouldn't be a very useful social platform. The same could be said for Bitcoin – it wouldn't be the same if it was just Satoshi and his node.
What separates cryptocurrencies from other information networks commonly measured by Metcalfe's Law is that the asset being valued is also the technology being adopted. A Bitcoin user is a stakeholder in the system.
Last November, bitcoin-native upstart NYDIG published "The Power of Bitcoin's Network Effect," which was nominally a look at Metcalfe's Law but which also included a look at how the use of bitcoin has changed as it is adopted.
The number of daily active addresses was shooting up at the time, the company noted, as was the number of addresses that held BTC without moving it for at least a year. This latter statistic played into NYDIG's argument that Bitcoin's adoption is driven by its qualities as a store of value.
Bitcoin's hard-capped supply of 21 million coins coupled with a growing user base means the price is due to increase over time, NYDIG argued. It provided a chart showing potential five-year price levels, if the annual address growth was 5%, Bitcoin might reach $20,905. If 25%, then $118,544. That's not just Metcalfe's Law: it's "pumpanomics."
Others have looked to Metcalfe's Law to explain the messy way crypto bubbles burst. In 2018, Spencer Wheatley from the Swiss university Zurich ETH and colleagues found that bitcoin grows at an exponential rate with a Metcalfe coefficient of 1.69 (they used a slightly different way to generalize what counts as an "address" than Goldman).
With that in mind, the researchers were able to look back at periods where Bitcoin's price surged past its level of uptake and crashed – like the downturns of 2012, 2013 and 2017 – to come up with a generalized rule. Put simply, when the growth rate itself is growing, you're in trouble.
So does Metcalfe's Law help us predict the future value of bitcoin or its periodic crashes? According to Pandl and Rosenberg, Metcalfe's Law is likely a misnomer – less of a law than a mental model. "This research report was [to] explain the basic statistical relationships for some of the oldest crypto assets for our clients," Pandl said.
In fact, of all the assets the Goldman analysts looked at, bitcoin was the closest to meeting the expectations of Metcalfe's Law – with a coefficient of 1.9. But Pandl was wary of saying the asset "behaved in line with expectations." A number of factors could influence this: most notably bitcoin's use as a speculative asset, which is hardly sustainable, he said.
–D.K.
 The CoinDesk Quarterly Review 2021 Q2
After two consecutive quarters of strong price gains for most of the top crypto assets, Q2 2021 finally brought an end to market euphoria with a resounding crash.
Most CoinDesk 20 assets, which constitute 99% of the crypto market by verifiable volume, ended the quarter with negative returns. Meanwhile, protocol development for the world's largest cryptocurrencies by market capitalization, Bitcoin and Ethereum, reached new milestones.
CoinDesk Research's latest Quarterly Review dives into the trends, developments and technological progress that shaped the crypto markets from April to June 2021. The full report is now available from the CoinDesk Research Hub.
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