The Power of Bitcoin’s Network Effect

Bitcoin’s improving network fundamentals, increased investor holding periods, and reliably diminishing new supply make it a compelling long-term investment.

Download report
November 27, 2020 | 11 minute read

By Greg Cipolaro and Ross Stevens, PH.D.

Overview

Increasing fundamental demand combined with a fixed supply and automatically declining supply growth makes a compelling case for bitcoin as an alternative investment for institutional investors.

Examining addresses that hold bitcoin balances and daily active addresses, we show that network adoption and network usage are each growing. Regarding supply, we show average investor holding periods rising, with the percentage of total bitcoin supply held for at least one year recently hitting an all-time high. We also see record highs in the number of addresses that control large bitcoin balances, which we define as at least 1,000 bitcoins. This development supports our view, and direct experience at NYDIG, that bitcoin is being increasingly adopted by institutional investors.

These positive network fundamentals are set against the backdrop of automatically dwindling new bitcoin supply and an ultimate cap of 21M bitcoin. Bitcoin’s supply growth, which asymptotically approaches 0% over time, is now down to 1.3% annually, on par with the annual growth in gold supply. While far from perfect, gold is bitcoin’s closest real-world analogy. The ultimate supply of bitcoin is fundamentally limited by the design of the system itself and cannot be increased regardless of its value or the level of demand. One critical insight: bitcoin is the first store of value in history in which its supply is entirely unaffected by an increase in its demand.

To value bitcoin, we apply Metcalfe’s Law, which states that a network’s value is proportional to the square of the number of its users. Applying Metcalfe’s Law to Bitcoin’s network, we find that bitcoin’s historical valuation levels are well explained by the square of its addresses. Applying this relationship to potential future network growth of 15%–25% per year suggests a price level range of $51,611–$118,544 in 5 years.

Let’s connect

Discover how you can unlock the power of Bitcoin.

This report has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Charts and graphs provided herein are for illustrative purposes only. This report does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (“NYDIG”).

It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client accounts. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this report.

There can be no assurance that any investment strategy or technique will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment, which may differ materially, and should not be relied upon as such. Target or recommended allocations contained herein are subject to change. There is no assurance that such allocations will produce the desired results. The investment strategies, techniques or philosophies discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.

The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. The information in this report may contain forward-looking statements regarding future events, targets, or expectations regarding the strategies, techniques or investment philosophies described herein. NYDIG neither assumes any duty to nor undertakes to update any forward-looking statements. There is no assurance that any forward-looking events or targets will be achieved, and actual outcomes may be significantly different from those shown herein. The information in this report, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Information furnished by others, upon which all or portions of this report are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions that occur subsequent to the date hereof.

Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Legal advice can only be provided by legal counsel. Before deciding to proceed with any investment, investors should review all relevant investment considerations and consult with their own advisors. Any decision to invest should be made solely in reliance upon the definitive offering documents for the investment. NYDIG shall have no liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the information set forth herein. By accepting this report in its entirety, the recipient acknowledges its understanding and acceptance of the foregoing terms.