Bitcoin's (BTCUSD) return over many decades is less than 1% annualized.

That's the implication of a fair-value model for the cryptocurrency that has performed admirably over the years I have been writing about it. It is based on Metcalfe's Law, which assumes that the value of a network is proportional to the square of how many members are in that network.

As you can see from the chart below, on each past occasion when bitcoin has diverged from its fair-value line, it has subsequently reverted. Now is the latest such occasion, with bitcoin currently trading almost precisely on top of that line.

This Metcalfe's Law model of bitcoin's fair value was first proposed to me six years ago by Claude Erb, a former commodities portfolio manager at TCW Group. In a recent interview, Erb stressed that while bitcoin's behavior is consistent with the model, it doesn't prove that it is right or true. Still, the model certainly seems to be a more helpful way of thinking about bitcoin than competing models - some of which have predicted bitcoin would reach $1 million.

In addition to calculating where bitcoin stands today relative to its fair value, the model is also helpful in projecting its possible future return. Given that bitcoin returns have fallen for years, and as long as the future growth in the number of bitcoins is limited, there may be no reason to believe that the price of bitcoin will rise substantially. This is implicit in the chart above, which shows the slope of the fair-value line becoming nearly flat.

That line will eventually become horizontal, in fact. Bitcoin's supply is projected to reach its algorithmically determined limit of 21 million around the year 2140, whereas just over 20 million coins have been issued up until today. The fair-value model puts bitcoin's price at roughly $120,000 when it hits that limit, representing a return of 0.6% annualized from its current price. Thereafter the price would not increase any further. In a paper recently posted on the Social Science Research Network, Erb spelled out these and other implications of the model.

Although many of bitcoin's advocates will be disappointed with this forecast, there is a silver lining: A flat price would help support bitcoin becoming a medium of exchange, which was the original use case for the cryptocurrency. If it were instead to appreciate at a fast rate in coming years, bitcoin transactions would often trigger a hefty capital-gains tax bill.

To illustrate, consider a scenario in which you purchase an iPhone 17 standard model, which retails for around $800, with bitcoin that you purchased for half its current price. Your capital gain would be $400, and the federal tax due on that would be as much as $80, while for California taxpayers, the state tax due would be as much as $53.

That's why a stable price is a prerequisite for bitcoin becoming a widely used medium of exchange. It would be ironic indeed if the Metcalfe's Law model were to help bitcoin come full circle to what its supporters originally intended it to be.