Metcalfe’s law is a general computing principle that you can also apply to the Bitcoin network. It states that the value of a network is proportional to the square of the number of connected users. What does this mean exactly? An easy-to-understand example is the phone network. The more people who own phones, the more exponentially valuable the network becomes. 

With Bitcoin, you can calculate a Metcalfe value by using the number of active Bitcoin wallet addresses and other public information on the blockchain. If you plot the Metcalfe value against price, you can see a reasonably good fit. You can also extrapolate the trend to predict possible future prices, as Timothy Peterson has done in his graph below.

The Network Value to Metcalfe ratio (NVM) provides another use of Metcalfe’s law. You can calculate the ratio by taking Bitcoin’s market cap and dividing it by a formula approximating Metcalf’s law. The formula uses the number of active unique addresses on a specific day as a stand-in for the network’s users. Unique addresses are defined as having a non-zero balance and also making a transaction that day.

A value over one indicates the market is overvalued and below one that it’s undervalued. You can see how this looks visually with the following graph from Cryptoquant. The NVM ratio is the left axis, while the network value is on the right.