Bitcoin is in a bear market — why it’s still too soon to buy

BTC-USD +4.23%

Bitcoin’s roughly $40,000 loss from its early October peak equals about a 30% haircut — but the cryptocurrency still fetches far more than its current fair-market value.

That’s according to a bitcoin BTCUSD valuation model based on something known as Metcalfe’s Law, which assumes that the value of a network is a function of the number of users. I last wrote about this model in September 2024 — and by its calculation bitcoin was already overvalued at that point. But the cryptocurrency nonetheless more than doubled since then, and the model fell into disfavor.

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Bitcoin’s latest plunge has brought the model back into focus. Metcalfe’s Law was first proposed to me six years ago by Claude Erb, a former commodities portfolio manager at TCW Group. To put Metcalfe’s Law into practice, Erb assumed that the number of bitcoins that have been mined equals the number of users. The chart below shows where the cryptocurrency stands relative to the model, which calculates bitcoin’s fair value to be around $53,000 — about 38% below its current price.

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In multiple interviews, Erb has readily conceded that the model is not perfect. Numerous individuals own more than one bitcoin, for example, while others own just a fraction of one. Still other bitcoins have been lost forever. So the number of bitcoins that have been mined is not the same as the number of bitcoin users. Erb still insists that the Metcalfe’s Law model is useful as a “conversational anchor” in discussing bitcoin’s fair value — far more useful than the myriad rationales bitcoin marketers have proposed and then discarded (such as bitcoin as currency, bitcoin as inflation hedge, bitcoin as digital gold and so on).

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Notwithstanding bitcoin’s latest plunge, its price currently is about $33,000 higher than what the Metcalfe’s Law model says is fair value. While that certainly appears to be a wide spread, in relative terms it’s far smaller than at different past occasions. The ratio of bitcoin’s price to fair value is around 1.6 to 1, for example. Over the past five years, this ratio has been as high as 3.2 and as low as 0.4.

Even at bitcoin’s high earlier this year, its price-to-fair-value ratio never was more than 2.4 — within the range of past ratios. So bitcoin’s impressive rise above $100,000 wasn’t a reason to conclude that the Metcalfe’s Law model had become less useful.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

Also read: ‘My retirement is completely in bitcoin’: Why don’t more people do what I do?

More: Here’s what bitcoin and U.S. Treasurys have in common right now

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