Discussion Paper

No. 2019-16 | February 14, 2019
Metcalfe's law and herding behaviour in the cryptocurrencies market


In this paper, the authors investigate the statistical properties of some cryptocurrencies by using three layers of analysis: alpha-stable distributions, Metcalfe’s law and the bubble behaviour through the LPPL modelling. The results show, in the medium to long-run, the validity of Metcalfe's law (the value of a network is proportional to the square of the number of connected users of the system) for the evaluation of cryptocurrencies; however, in the short-run, the validity of Metcalfe’s law for Bitcoin is questionable. As the results showed a potential for herding behaviour, the authors then used LPPL models to capture the behaviour of cryptocurrencies exchange rates during an endogenous bubble and to predict the most probable time of the regime switching. The main conclusion is that Metcalfe’s law may be valid in the long-run, however in the short-run, on various data regimes, its validity is highly debatable.

Data Set

JEL Classification:

C22, C32, C51, C53, C58, E41, E42, E47, E51, G1, G17


  • Downloads: 113


Cite As

Daniel Traian Pele and Miruna Mazurencu-Marinescu-Pele (2019). Metcalfe's law and herding behaviour in the cryptocurrencies market. Economics Discussion Papers, No 2019-16, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-16

Comments and Questions

Anonymous - Invited Reader Comment
March 06, 2019 - 12:00

The authors are dabbling with a very thought-provoking subject regarding the cryptocurrencies market: the Metcalfe’s law and the herding behaviour.
One major finding of the paper is that the Metcalfe’s law for Bitcoin is does not hold short term, but rather over a long period of time.
Moreover, the paper ...[more]

... proves that the LPPL (Log Periodic Power Law) model can be applied to BTC, thus allowing to comprehend if the market is close or not to the explosion of a speculative bubble.
The authors derive a very nice argumentation from the Metcalfe’s law to the existence of some herding behaviour: if the Metcalfe’s law is valid for the Bitcoin, then there should be a significant correlation between the number of users and the transaction price. ”If the correlation is also a causality (in one way or another), then there may be room for the occurrence of some herding behaviour: if the market is driven by expected future price increases, then more and more players will enter the market, causing the price to develop a bubble which will end eventually in a crash.”

In my opinion, the paper meets the publishing standards of the Economics E-Journal and adds substantial value to the existing literature on the cryptocurrencies market.
However, there are some issues to be discussed and furtherly clarified:

• It is not clear how the first part of the paper, dealing with alpha-stable distributions, relates to the rest of the paper. My suggestion would be to remove this part or to better describe the connection to the other parts.
• Additional reference: Van Vliet B. (2018). An alternative model of Metcalfe’s law for valuing Bitcoin, Econom. Lett., 165 (2018), pp. 70-72.

Daniel Pele - reply to review
March 06, 2019 - 16:33

Thank you for your review.
We will consider your suggestions for the revised version of the paper.
1. The first part of the paper deals with the statistical properties of the cryptocurrencies, from the point of view of the alpha-stable distributions; indeed, the link with the other parts may ...[more]

... be too weak, and we will consider an updated for the revised version of the paper.
2. The suggested reference will be included in the paper, thank you.

Anonymous - Comment
March 14, 2019 - 14:43

From my viewpoint, the article is approaching an interesting (but not enough studied) topic. Bitcoin is a challenge for research in economics.
The main ideas of the study are well presented. The paper is well structured. Indeed, section 2.1 can be more integrated in the text, but I consider ...[more]

... this presentation useful for the article.
The methodology is presented adequately.
Regarding the disscusion of the results, I suggest some insights regarding the efficiency of the bitcoin market.
The conclusions are well presented.
In my opinion, the paper meets the publishing standards of the Economics E-Journal and can be published.

Daniel Pele - Reply
March 17, 2019 - 11:14

Thank you very much for your opinion.Indeed, we will consider to link the results with the idea of market efficieny for Bitcoin.

Anonymous - Referee Report 1
March 19, 2019 - 09:54

see attached file

Daniel Pele - reply to review
March 24, 2019 - 12:02

Please see the attached pdf file.