Over the last couple of years I have heard quite a lot about an interesting equation, well "law" actually, that has been used to attribute value to certain social communities.
It's been used to attribute appropriate values to Facebook, Google, Amazon, and more recently it has even been used to calculate an appropriate value for bitcoin.
What am I talking about you might ask?
I am talking about none other than Metcalfe's Law.
Metcalfe's Law states that the value of a system is proportional to it's number of users squared.
Specifically it's defined as:
"Metcalfe's Law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n^2)"
The "law" was originally presented in 1980 but wasn't formulated in the above way until 1993 by Professor George Gilder.
The intent was to try and explain the network effect. How adding more users to a system doesn't just increase that network's value linearly but instead exponentially.
To illustrate that, the "law" is stating that if you have 100 users and a value of 10,000 and you double your user base to 200, the current value of your users doesn't double and go to 20,000. Instead it goes to 200^2 or 40,000.
Cool, but what's the big deal?
The reason I bring this up is because my favorite Analyst on the Street (Tom Lee) has been using this model for some time now to predict bitcoin prices.
Well perhaps, not so much predict, but to help get an idea of what plugging in certain numbers might do to prices of the coin.
Namely, expanding the number of users in the bitcoin network.
Surprisingly, (or not surprisingly), Lee's modeling has been extremely accurate!
Check it out:
Perhaps better than being a price predictor, this data might be useful indicating whether prices are in "bubble territory" and when prices are undervalued relative to their network usage.
For example, in the above model you can see that when the model was well below the actual line, the price eventually made it's way down to where the model was. Meaning that if you had looked at this at that time you might have guessed prices were a little overheated due to actual network usage.
Basically, this is saying that if you see a big divergence, in one direction or the other, between the number of active users squared and the price, perhaps you can gain some insight as to where prices might go next (if those usage numbers remain constant that is).
More on Tom Lee and his ideas behind using Metcalfe's Law in regards to bitcoin can be read here:
http://www.businessinsider.com/bitcoin-price-how-to-value-fundstrat-tom-lee-2017-10
Cool! How does this relate to steem?
I'm glad you asked!
For one, I would think that steem is probably even a better example of the network effect as its primary users mostly come from the social media site steemit.com.
Knowing that information, is it possible we could come up with a theoretical price of steem?
Maybe!
According to data pulled from @penguinpablo's daily steem stats report we can see that yesterday steemit.com had roughly 24,000 daily active users:
https://steemit.com/steemit/@penguinpablo/daily-steem-stats-report-friday-november-10-2017
(chart courtesy of @penguinpablo)
Applying Metcalfe's Law from above we can take that 24,000 active users number, square it, and come up with roughly 576,000,000 of value. (24,000 x 24,000)
That means with that number of active users, the total value of the system should theoretically be somewhere around $576,000,000.
More than double the current market value of $243,000,000.
To get a theoretical price of steem based on those numbers, we simply divide that 576,000,000 by the number of steem outstanding, which currently is 259,000,000.
(576,000,000/259,000,000)
Performing that calculation would give us a value of $2.22 per unit of steem.
Pretty cool eh?
My thoughts:
I know I know, this isn't really that great of a price predictor and probably not all that accurate as there are many variables that could explain why prices could be well below or well above that Metcalfe value.
Prices are often based on future expectations as well, so perhaps a number well below that might indicate that currently market participants are expecting those daily transaction numbers to not grow as fast as the inflation rate of the currency (steem)? Or it could be because of any other number of future expectations.
However, instead of being a price predictor it might be a valuable tool in deciding whether prices are over heated in terms of actual usage rate or possibly undervalued compared to its network of users.
Basically, this is all just more of something to keep in mind as opposed to something to base your buy or sell decisions on. :)
Also, keep in mind that this kind of comparison only works right now where steemit.com is the primary use case for steem. Once SMTs or any other number of apps start also using steem and the steem blockchain, the data from steemit.com mostly goes out the window as it would only be a small fraction of the coin's overall network usage.
Other than that, I hope you enjoyed my little fun steem price projection project. Feel free to leave me comments with your thoughts below.
Stay informed my friends.
Sources:
https://en.wikipedia.org/wiki/Metcalfe%27s_law
Image Sources:
Follow me: @jrcornel
Most applications of Metcalfe's Law use a coefficient to determine the value of a network. From this Wikipedia page, we can see the coefficient for Facebook is 5.7 X 10 ^ -9 based on a monthly active user count. Your calculation is correct if we assume the coefficient is 1. Which is very optimistic.
But, let's say that we that bound the valuation of Steem to 10 cents per Steem with the current user base. This is a very pessimistic valuation btw. That makes the coefficient for Steem around .045. If we expand to 100,000 active users in the next year using Metcalfe's Law and add 9.5% inflation to your current Steem number, we get a lower bound for 2018 of $1.56. If we reach 200,000 users by this time next year, that number goes up to $6.34. And that is using Metcalfe's Law with a pessimistic lower bound. Things are bright if the network can stay healthy.
I was just writing about the coefficient. It was all good write-up until the assumption that 1 user = $1.
@greer184, why do you think 10cents per Steem is pessimistic?
Also, the trend for number of users doesn't seem great. Do we have an indication that the number of active users might reach really 100k?
I think 10 cents per Steem is pessimistic because I feel that the market demand would never let the value of Steem decline to that point (unless the site was dying). The trend for active users is not great, but that is most likely due to Steemit still being in beta and thus having no marketing presence and a lot of attention to Bitcoin's 2X drama.
If you look at sites like Twitter or Facebook, with an effective marketing campaign plus crypto becoming more mainstream gives me believe that the platform can get to 100,000 active users sometime in the next 18 months. I feel that Bitcoin is on the verge of becoming mainstream. Once Bitcoin pops, people will look for other opportunities naturally leading them to other cryptocurrencies with "network effect" potential.
sounds like a win-win situation
0.50 USD - 2.00 USD per Steem is realistic range, so 0.10 USD is indeed pretty pessimistic valuation. I set my sell limit to about 1.70 USD per Steem on HitBTC, because I think the value will reach that in decent time.
Great points and thanks for breaking that down like that. Yes, I used a very simplistic version. The point is the same though, we grow this place, we likely grow the value of our holdings! ;)
this is so informative ... thanks for sharing
What would you get if you tried to derive the value of a single user? I'd love to know the value of a Steem user versus a Facebook user. I'm guessing you wouldn't just divide the coefficients
Yeah, you wouldn't divide the coefficients. You could calculate the value added by the next active user added to the network at the network's current sizes. So, perform both calculations for n active users and n + 1 active users and subtract. Then divide the results for both Steemit and Facebook. You would also need to make sure you are measuring against the same time span. The coefficient they used for Facebook was for monthly active users, while I just borrowed the daily active users number above.
But the issue here is that Steemit is so new that we don't know if we have a reliable trend against Metcalfe's Law like Bitcoin or Facebook currently have. So the biggest question would be finding a good way to derive that coefficient. The estimate I did as a lower bound might still be too optimistic given the small user base that we currently have. Metcalfe's Law might not kick in until we reach a certain point.
You break down complicated data into understandable bits...you are a math Master! Thank you @greer184, I admire minds like yours.
Lets not forget that STEEM can and does apply to much more than just steemit.com.
anybody can do it now , must wait .....
Wow man, this is really useful math. I never thought about it this way. I mean, I knew Metcalfe's Law but I never thought of deriving a valuation based on it in this manner. Kudos!
Community Liaison, Steemit
Nice support.
it can be possible as steemit coomunity is growing @rapid speed
https://steemit.com/song/@bhagyashri/highly-viewed-popular-song-155m-views
This is first time I hear about Metcalfe method and this is the kind of thing I was looking for! Thank you!
if only it was. Would be nice to see the platform growing because of it. The greedy people will wash out anyway and the actual community will grow.
This means at 1Million daily user the price of STEEM should be 3,861$ if you take todays number of STEEM outstanding as a basis. lol
Good to know...
60,000 daily users would be 13.90$
100,000 -> 38.61$
150,000 -> 86.90$
Thanks for your information :)
Awesome post!
I was hoping Steemit would have much more than 25k daily active users by now. Aren't we a bit on the low side with that figure?
I would tend to agree. Once the anchor is pulled and they start promoting this place I think that number quadruples pretty quickly. :)
Promoting bit is nice. I had actually written a few lines on my post but it did not go well with an editor. I guess it was not my day. There are a lot of experienced writers in our fb group but many are not familiar with the process of withdrawing earnings in the form of crypto currencies. If only, someone set up an agency or bot to do so and transfer it to paypal, I am sure there will be an influx of writers to steemit. Thanks for writing about this.
That's an excellent idea :)
Thanks
Promotion? Who believes that is probable?
Number of users should increase when attracting more platforms to use it. Most ICOs use Reddit, Telegram, Twitter, FB and so on.
advertising for #steemit would be nice.
The value of steem is bound to rise mainly because more and more people use them.
It's an interesting piece but I think it stops short of a few steps. Steem isn't the community. It's still a currency mainly driven by speculation and market forces. It's price is based on the value people think it has, not just the people who use it.
Personally I think it's valued right or even too high. There needs to be more uses for the currency and incentive for people to buy it.
I share your wisdom and perspective good sir - thank you
There are some big plans for the Spring, so I think taking into account the future value of these new features, Steem should correct upwards.
Anyone know how to find the number of unique accounts on Bitshares? I'm curious now.
I'm getting 459396 accounts at the moment by using the API
uint64_t graphene::app::database_api::get_account_count()
http://docs.bitshares.org/api/database.html#_CPPv2NK8graphene3app12database_api17get_account_countEv
scroll up just a bit to see
uint64_t graphene::app::database_api::get_account_count()
@marketreport @good-karma @jerrybanfield
Update on 27-Nov-17: The price of STEEM has moved up as I expected (see above) and is now at $1.17. If it can break above $1.47 in the next few weeks, IMHO it has a very bright future.
@marketreport @good-karma @jerrybanfield
I love reading articles like this. It really helps me expand and understand what's really being delivered. Thanks!
agree defango - follow you now
Well, here's hoping we can hit those numbers.
The Steem blockchain is an amazing project, more and more people will be part of this family in the coming days, social media will totally be reinvented in a couple of years.
Body builder here too bro.. can I get a follow back? Thanks man..
Steem is definitely undervalued, that's why every one should be buying now!
I hope you are right. Stalking my steem and waiting for the spike while being active and produce more content and earn more steem.
Another aspect of making steem worthier:
https://steemit.com/money/@mathsinnature/how-to-make-steemit-a-more-powerful-currency
It also means STEEM has bright future too since users can only go higher. STEEM has highest transactions among cryptos even surpassing ETH and BTC, more wallets/users than DASH, STEEM needs some real innovations in marketing to be valued properly/
Good Post and great info ;)
The issue is that the more content posters on Steemit who want to make money that way will cash out putting downward pressure on the price of Steem. Having more users alone won’t increase the price, we need more users who want to buy Steem to push up the price.
People like me who have long background in economics know that using just half of the payout for trading makes more sense than using all of the payout for trading. My account value went up from USD 0.52 to USD 2.34 due to effect of single post. It makes sense to leave Steam Power from awards accumulating and trade with just Steem and Steem Dollars.
That may be true but if you are blogging for a living you need to cash out to pay for things. Look at the highest valued posts from posters who regularly post. They all power down. Probably exghabge their Steem for fiat etc
I don't have enough Steem Power yet that I could power down... Obviously in few weeks I can reconsider how much Steem Power I want to keep and how much I want to exchange as Steem. I already transfered all my Steem and Steem Dollars to HitBTC so I can trade them to BTC and eventually trade to either Tether or move as BTC in Coinbase.
I know you said that this is something that we should just keep in mind, @jrcornel, but I think it's relatively true. There are many factors that I believe are keeping the price low for now. Once the beta is done and people are able to create accounts more freely without having to be approved, the Steem price will skyrocket. It's not so much a matter of if, but when.
New accounts doesn't encourage people to buy Steem, which is what is needed to drive the price up. Ultimately we need people wanting to curate rather than post to drive the price up as to have power as a curator, you need Steem Power.
That makes sense. I think that will happen naturally over time, but people will really need to see the value in curating instead of posting. Too many people are focusing the majority of their time posting (which isn't bad) and not enough on curating.
Love these analysis. Similar to the NVT ratio estimation of price. I find them so interesting and entertaining but don't really ever know how much weight to give them as far as practical uses.
yes ..it should be 2.2$ but it is 0.88$
and since June 9th 2017 ( STEEM was 2.79$) it has lost about 70%, in dollars.
In the same time bitcoin has doubled it's price -so in confront of bitcoin STEEM has lost 88%
I love steemit and I use it a lot, but , if you want to make profits get other altcoins or bitcoins
Thereat information about the primary value of a network Steem must be open for general use. From this page! STEEM needs some real innovations in marketing to be valued properly.
Nice
Nice too
I agree with you, steem has a lot of value, and the price is pretty low now!
If you take the crypto part out, what value does steem provide for an average user? I think the quality of content and stickiness needed to be added to the equation!!!!. I think the market is telling something here
bots are the reason the price of steem is low.
Just downvote all posts made by bots... Eventually that should nullify their effect.
how do you differentiate between a bot and a non-english speaker?
Non-English speakers usually make more spelling and grammar mistakes. Bots also use exactly same text in each post except where username is mentioned.
do you really thunk so? You might actually be right! If minnowbooster would stop for one day i bet steem would go up to $2 lol but we cant do anything about that so we just have to wait!
Actually i heard there are investors and theyre keeping it low for the 21 million steem on bittrex order books right now .... theres 21 million steem people are trying to buy on bittrex probobly more on poloniex
see all that on bittrx? 21 million steem peopel wanna buy
and poloniex has another 2 million on order books and i bet theres more elsewhere
Steemit is said to be a Social Media.
bots dehumanize it.
over 90% of all votes, and an increasing number of comments are done by bots.
not very social.
(I'll have my machine get with your machine)
I find bots as annoying as blood sucking botflies. I wish they would go away, but even I use steemvoter a couple days a week to vote on my favorite steemians. The rest of the week I manually vote.
i finally gave in and delegated 2000 out of my 2500 steem to @minnowbooster and i still am manually upvting my friends close to what i was but i just have so muc FOMO... if i cant make returns like bitcoiners (cuz i believed in steem and not bitcoin) then i should AT ELAST get to make some money on steem its so disheartening
Im stuck working for my money like a jackass lol i wanna be like these guys who just live off their passive income..... well i have passive income but i want at least $1000 a day and thats honestly how much upper middle class make and i should ne able tio fucking do it fuckin shit fuckin things sucks!
FUCK IT
ILL DO IT LIVE
Oh fuckity fuck fuck...falls over laughing...passive income, I've cannot comprehend what that would be like. I am like most American's working from paycheck to paycheck with just a little bit of savings to pay for my grave.
Not good girl. You want your money to work for you and not u working for your money.
Once we get more people on Steem, the bots will disappear to the background.
I hope that solves a problem and bots are just annoying and not a symptom of a larger problem @fechaugger.
Interesting! Wouldn't you need to compare it to the history though? You are assuming that 576,000,000 of value is $576,000,000. If you looked at the active users vs market cap through history wouldn't it give you a better number for what 576,000,000 of value would equal. maybe it's $0.50? Am I missing something?
Ya but steem dropped to .88cents usd why is is dropping so low if steem should be growing?
Because it's still new and in beta. Their's no guarantee yet that Steemit will be a Facebook killer.
But every day the platform survives, more unique content get's created and so the overall value of the block-chain should increase.
So a stable price of Steem means that the underlying value is growing faster than the coin. Which means that the coin is undervalued.
@jcornel hey your post came true! steem went to fucking $8 + in jan 2018 lol if only we had perfect hindsight
Theoric words and far from reality because the usage of Steemit has doubled in these months but its price has not changed and stabilized at $ 1!!!!
The way you broke down the calculations is very helpful to understand. Good piece of work.
All we need to do now is convince more friends to join Steemit :)
nice
@osman28
Excellent read! Statistics are useful for the community to understand what exactly is going on behind the scenes. If only your calculated value of $2.22 could (again) become the real value, I think we'd see a lot more happy Steemians!! Haha. Here's to hoping!
Keep up the good work, New follower here @jcornel.
Best Regards,
@Apocalypse612
Bishop Corey DeFrancesco
I would hope that the value of Steemit as well as other crypto based platforms and currencies raise in the near future and that Bitcoin doesn't become the cryptocurrency value monopoly.
Bitcoin is more hype than a certain future.
Once the community finds out that the basics of bitcoin aren't good enough for mass adaption. Then people will flock to alt which better tech.
Leaving the beta station and becoming a big and more important platform for artists, creators and blogger will boost steem to new all time highs in the following years.
Great news
Nice post . Interessting and complete continue
yup you are right
You have the capability of writing the best posts with the best information.Upvoted and resteemed.enjoy steemit. @jrcornel
@jatinaus follow me i'll follow u back
done mate @capetcha
Done too bro , thnkx
thanks to you mate.enjoy steemit. @capetcha
u know what would happen if everyone followed each other? It wouldnt mean anything to follow anyone! Just remember that experienced users hate seein this shit but hey i guess u guys enjoyed ur circle jerk lololol
here ill even give u an upvote just to show u theres no hard feelings
Nice means this plaste form rocked in future
steem will go up next month :)
how high? how can you tell?
what makes you think that? add me
Fun and worth considering. Thanks for sharing! Resteemed.
The crypto market is irrational and is hard to predict the price. At least what I learn, if you believe on the platform and people find a real value on it, then the price will grow organically.
Good method to valuate the Steem Price!!!!
Data is beautiful and my college math tutor always say, "mathematics is life!" I love the projection back by that maths. It is a feasible price that is completely doable. The logic behind it is solid. It was my easiest read for the day and THAT is not me BSing!
I think if you factor in the SBD it's a little closer to that $2.20 mark. Still short, but definitely closer. But that might not make a difference either way, it just seems that since Steemit basically has 2 currencies their combined value might be a bit more representative of the total worth of Steemit. Either way, I'm definitely with your thinking that STEEM should be higher than it currently is!
Normally the value you earn is split over the two currencies. But SBD is said to be around $1. So eventually people will 100% power up since that give you a bigger share of the reward pool (if Steem > SBD)
Thank you for the wonderful post, I really like your post. You are doing a real good job! Continue and get a wonderful day!!!
steem is less than 1$ now