Podcast Summary
Fidelity's Investment Report on Ethereum: A Blueprint for Institutional Adoption: Fidelity's report on Ethereum highlights its unique properties, such as staking yields and burn rate, making a case for it as a blue-chip asset. Institutional interest in Ether and crypto is growing, amplified by this report from a major traditional finance player.
Institutions are increasingly serious about Ether as an asset, as evidenced by Fidelity's recent investment report on Ethereum. This report, titled "Ethereum Investment Thesis," outlines Fidelity's case for why Ether is valuable and could be considered a blue-chip asset. Ether's unique properties, such as staking yields, burn rate, and other metrics, are being recognized and analyzed by institutions, which could lead to increased adoption and investment. Furthermore, this report serves as a framework for other crypto networks looking to join the ranks of established assets like Bitcoin and Ether. The significance of this report lies in its origin from Fidelity, a major player in the traditional finance industry with a massive $4-5 trillion AUM, and its potential to amplify the core analysis of the crypto industry to a broader audience. Ultimately, this report underscores the growing institutional interest in Ether and the broader crypto space.
Fidelity's Ethereum Investment Thesis: Fidelity highlights Ethereum's utility, security, and growing ecosystem as reasons for Ether's value as an investment. Decentralization, use cases in DeFi, NFTs, and other applications, and scalability solutions like Arbitrum contribute to its worth.
The Ethereum investment thesis, as outlined in Fidelity's research paper, explains how utility from the Ethereum network can translate into value for Ether, the token. Chris and Jack from Fidelity discuss why an investor would choose to buy and hold Ether rather than just using it for network interactions. They emphasize that Ethereum's decentralized and secure nature, combined with its growing use cases in DeFi, NFTs, and other applications, make Ether a valuable investment. Fidelity, with its massive assets under management, adds credibility to the Ethereum investment thesis, providing a different perspective compared to podcast hosts. The report also covers the benefits of Ethereum's scaling solutions like Arbitrum, which enable faster transaction speeds and lower gas fees. Overall, the Ethereum network's utility, security, and growing ecosystem are key reasons why Ether holds value as an investment.
Fidelity's Long History with Digital Assets: Fidelity Digital Assets, a Fidelity subsidiary, offers reliable and secure custody services for Bitcoin and Ether, and a platform for buying, selling, and holding digital assets, making it a leader in bringing digital assets to the institutional market.
Fidelity Digital Assets, a subsidiary of the large $1 trillion money manager Fidelity Investments, has a long history with digital assets, dating back to 2014. They started mining Bitcoin in 2015 and recognized the need for institutional-grade products to hold and manage digital assets. In 2018, they officially launched Fidelity Digital Assets and now offer custody services for Bitcoin and Ether, as well as a platform for buying, selling, and holding digital assets. However, from an institutional perspective, any digital assets, including Bitcoin, are still considered risky investments due to their volatility and decentralized nature. Fidelity, with its 75-year history and focus on risk management, approaches digital assets cautiously, making sure to offer reliable and secure solutions for their clients. Despite being seen as "edgy" in the traditional finance world, Fidelity Digital Assets is leading the way in bringing digital assets to the institutional market.
Institutions Approach to Cryptocurrencies Varies: Institutions like Fidelity are cautiously exploring Bitcoin for potential store of value, while adoption from smaller institutional investors like wealth managers and family offices is growing. The institutional investment in crypto is still evolving with risk parameters and investment thesis being defined.
While some institutions are starting to explore the world of cryptocurrencies, their understanding and approach to different digital assets like Bitcoin and Ethereum vary. Institutions, including Fidelity, have been cautiously approaching cryptocurrencies with a risk management mindset, starting with Bitcoin due to its historical significance and simpler nature. However, the allocation to crypto as a whole is still limited, with the largest institutional investors being few and far between. Instead, adoption is coming from smaller institutional investors like wealth managers and family offices. Traditional finance institutions view Bitcoin as a potential store of value asset, similar to gold, but their perspective on Ethereum is still evolving. Fidelity has focused on educating institutions about Bitcoin first, emphasizing its historical significance and simpler nature, before exploring other digital assets. The institutional investment in crypto is still in its early stages, and the risk parameters and investment thesis around these assets are still being defined.
Institutional investors focusing on Bitcoin and Ethereum: Institutional investors prioritize Bitcoin and Ethereum due to their market dominance and user activity, despite regulatory and liquidity challenges in other tokens.
Bitcoin and Ether are currently leading the way for institutional investors in the crypto space. The shift towards proof of stake and Ethereum's differentiated use case is making it a more attractive option for diversification. However, there are still considerations such as regulatory ambiguity and liquidity constraints that make investing in other tokens more complex for traditional investors. Institutional investors, with vast resources to allocate, are likely to focus on the largest networks, Bitcoin and Ethereum, due to their dominance in the market and user activity. While there are other promising projects, the regulatory and liquidity challenges make it a less viable option for institutional investors at this time.
Ethereum's unique properties and network effects: Understanding Ethereum's distinction from Bitcoin and its network effects led Fidelity to support it, emphasizing the importance of a differentiated use case and strong network for lower-cap coins.
Ethereum's unique properties and network effects have contributed to its rise as the second largest crypto asset, earning it a place alongside Bitcoin in the eyes of institutional investors. Ethereum's differentiated use case, marked by the addition of smart contracts and the ability to create composable applications, set it apart from Bitcoin during its early days. Ethereum's multiple hard forks and evolving nature contrasts with Bitcoin's stability, but also brings new capabilities. The report emphasizes the importance of understanding the distinction between Ethereum, the network, and Ether, the asset, and highlights the network effects that have garnered enough liquidity and interest for Fidelity to support Ethereum. For lower-cap coins aiming to join Ethereum and Bitcoin's ranks, replicating Ethereum's first-mover advantage in a differentiated use case and building a strong network could be potential paths to success.
Understanding Ethereum and Ether: Investors must distinguish between Ethereum the network and Ether the asset, as their value and incentives may not align directly.
It's important for investors to distinguish between Ethereum the network and Ether the asset. While Ethereum has gained popularity and value due to its innovative blockchain technology and growing ecosystem, Ether serves a different purpose as a digital asset with potential monetary properties. The value creation and value capture in Ethereum's ecosystem may not directly translate to Ether holders. Therefore, understanding the tokenomics and how network incentives align with token holder incentives is crucial for investors. The paper by Jack and Max delves into these concepts, discussing the potential of Ether as an emerging form of money, and the distinction between the two should be kept in mind for those considering investments in the crypto space.
Ethereum's deflationary nature makes it a store of value: Ethereum's scarcity, caused by protocol changes, positions it as a store of value. However, its lack of first-mover advantage and established use cases limits its potential compared to Bitcoin.
Ethereum, like Bitcoin, serves both as a medium of exchange and a store of value within their respective ecosystems. However, Ethereum's role as a store of value is more evident due to its deflationary nature caused by protocol changes, including reduced issuance and burning mechanisms. While Ethereum's scarcity aligns with a store of value asset, it lacks the first-mover advantage and network effect that Bitcoin possesses, which are crucial drivers of value accrual. Bitcoin's established narrative and industrial use cases further strengthen its position as a digital gold with a widely recognized store of value property. Ethereum, on the other hand, is still growing its user base and ecosystem, and its success in attracting demand will determine its long-term potential as a medium of exchange and store of value.
Understanding Ethereum as a form of money in traditional finance: Ethereum's role as a platform and scarcity element resembles money, but its acceptance as a new form of money in traditional finance is uncertain due to the complex and abstract nature of money itself.
Ethereum serves multiple functions, acting as both a platform for various applications and an industrial component with an element of scarcity, similar to silver and a precious metal like gold. However, introducing the concept of Ethereum as a new form of money to traditional finance institutions can be challenging, as many in this world are deeply immersed in money but may not have considered what money truly is. Money is a complex and nebulous concept, and while it is present in various forms and attributes in different assets, defining something as money itself is not black and white. Ethereum exhibits some monetary qualities, but the traditional finance world's readiness for this conversation is an open question.
Exciting Developments in DeFi and Blockchain with Mantle, Uniswap, and Celo: Mantle, Uniswap, and Celo are leading the charge in DeFi and blockchain innovation, with Mantle using Eigenlayer to reduce gas fees, Uniswap releasing a mobile wallet, and Celo proposing a layer 2 solution to join Ethereum. Ethereum is a key platform for innovation, and Ether's growing importance as a collateral asset adds to the bullish outlook.
There are exciting developments happening in the world of decentralized finance (DeFi) and blockchain technology, with projects like Mantle, Uniswap, and Celo leading the charge. Mantle, a DAO-led layer 2 Ethereum ecosystem, is using Eigenlayer's data availability solution to reduce gas fees and volatility, making it an attractive option for developers. Uniswap, the world's largest decentralized exchange, has released a mobile wallet that allows users to easily trade tokens, buy crypto, and store NFTs. Celo, a mobile-first carbon negative blockchain, is proposing a layer 2 solution to bring its rapidly growing ecosystem to Ethereum, offering advantages like decentralized sequencing, off-chain data availability, and 1 block finality. These developments demonstrate the growing potential of decentralized finance and blockchain technology, and the increasing importance of Ethereum as a platform for innovation. Additionally, the bullish outlook on Ether as a collateral asset and its potential to increase in value as it becomes more like money is a significant trend in the crypto space.
Ethereum's Multiple Value Propositions: Ethereum can be seen as a money due to its use as a medium of exchange, a commodity based on its block space, and a productive asset due to staking yields.
Ethereum, like Bitcoin, can be seen as a form of money due to its use and adoption as a medium of exchange. However, Ethereum's potential as a money is not its only value proposition. Ethereum can also be viewed as a commodity, specifically in terms of its block space, and a productive asset due to the yield generated from staking. Intellectually honest research acknowledges the subjectivity of these classifications, and while Bitcoin's scarcity may give it an edge in the "moneyness game," Ethereum's utility and potential for future growth make it an intriguing investment opportunity. The Ethereum network's ability to support various applications and the resulting fees paid to stakers create a yield-bearing asset that adds to its value proposition. Ultimately, investors can approach Ethereum from different angles, considering it as a potential money, commodity, or productive asset.
Ethereum's Transition to Proof of Stake and Yield Generation: Ethereum's shift to proof of stake allows holders to earn yield through staking, making it more attractive to traditional finance managers. DCF model can project future cash flows based on revenue growth and discount rates, providing a new perspective on Ethereum's value proposition.
Ethereum has transformed from a commodity-like asset, similar to Bitcoin, into a yield-bearing one through its successful transition to proof of stake. This change allows Ethereum holders to earn a cash flow through staking, making it more appealing to traditional finance managers. A Discounted Cash Flow (DCF) model can be applied to Ethereum to project future cash flows based on revenue growth and discount rates. The value of these cash flows is highly subjective and sensitive to changes in inputs. Ethereum generates cash through the act of selling blocks and transaction ordering, which includes transaction fees and MEV. This relationship between network usage and fees can be modeled as future cash flows, providing a new perspective on Ethereum's value proposition. This thesis did not exist three years ago due to the proof-of-work consensus mechanism, which did not allow asset holders to earn yield. Now, with proof of stake, Ethereum has created a linkage between fees and value accrual, making it an asset with unique tokenomics and value proposition.
Measuring Ethereum's Potential Value with DCF Models: DCF models provide objective insights into Ethereum's potential value by measuring staking rewards, fees, and cash flows, making it easier for traditional investors to understand and consider as an investment opportunity
Ethereum's value accrual and future fees are subject to various speculative factors, such as the adoption of Layer 2 solutions, regulatory clarity, and the success of use cases like NFTs. However, creating Discounted Cash Flow (DCF) models can help provide objective insights into Ethereum's potential value by measuring and reporting on metrics like staking rewards, fees, and cash flows. These metrics can make Ethereum more relatable and understandable to traditional investors, potentially accelerating its adoption and acceptance in the financial world. While Bitcoin requires a deep dive into philosophy, politics, economics, and game theory, Ethereum's DCF models can be presented as financial instruments, making it easier for institutions to grasp and consider as an investment opportunity.
Understanding Ethereum's Value: Probabilities and Growth Rate: Ethereum's value is determined by network usage and growth rate. Its positive real yield and network effects provide value, but competition and market position are crucial for long-term value.
Investing in cryptocurrencies like Ethereum involves understanding probabilities and scenario analysis. Ethereum's value is determined by the world's willingness to spend on its block space, and currently, Ethereum has a positive real yield due to fees paid to stakers and lower issuance after the merge. However, Ethereum's ability to defend its "blue chip" leadership and continue growing is crucial for maintaining positive cash flows. The Discounted Cash Flow (DCF) model indicates Ethereum's value is accruing, but the specific outputs of the Ethereum DCF model compared to others in the industry have not been discussed in detail. The median cost of capital used in the analysis is 10%, which is higher than usual due to the increased risk associated with cryptocurrencies. The growth rate is the most significant factor influencing the DCF model's output. As an analyst, focusing on accurately estimating the growth rate is essential for producing accurate valuations. Investors should keep in mind that while Ethereum has a positive real yield and network effects, it still faces competition from other proof-of-stake networks and alternative application chains. Ultimately, Ethereum's ability to maintain and grow its market position will dictate its long-term value.
Determining Crypto Value with Terminal Growth Rate: The terminal growth rate is a key factor in estimating crypto value using the DCF model. Market price reveals assumed growth rate, aiding in assessing over/undervalued expectations.
The terminal growth rate is a crucial factor in determining the value of a cryptocurrency or a blockchain network using the Discounted Cash Flow (DCF) model. This growth rate, which is assumed to continue indefinitely after the projected period, significantly impacts the present value of future cash flows. The market price of a cryptocurrency today can be reversed engineered to find the assumed growth rate, providing valuable insights without making any assumptions. This approach, known as expectations investing, can help investors assess whether the market's expectations are over or undervalued, ultimately aiding in the decision-making process. Additionally, considering these emerging crypto networks as analogous to emerging economies can provide another perspective when evaluating their growth potential. Institutional investors, in particular, might be more interested in comparing the potential of these crypto networks as a whole rather than individually, as they invest in growing industries to increase their chances of success.
Understanding Ethereum's Growth and Value: Ethereum, as a decentralized network with potential cash flows, is valued beyond being just a form of money. Institutional investors seek a framework to invest, recognizing its growth potential despite arbitrary value.
The growth of the cryptocurrency space, specifically Ethereum, is an important factor to consider rather than focusing on individual numbers. Ethereum, as a decentralized network producing cash flows, represents a new level of understanding in the crypto space, beyond just being a form of money. Valuing Ethereum through a Discounted Cash Flow (DCF) model is challenging due to the stacking effect of its utility value and monetary premium. Institutional investors are showing interest in this topic, recognizing the need for a framework to understand and invest in cryptocurrencies, despite the arbitrary nature of their value. The report aims to provide such a framework by focusing on the potential cash flows and growth of Ethereum, rather than attempting to predict an exact value.
Understanding Crypto Insights from Fidelity Research: Fidelity Research provides valuable insights and reports on Bitcoin, Ethereum, and other crypto assets, helping traditional finance grasp the evolving crypto landscape. They cover Layer 2 solutions and contribute to the community by applying traditional financial tools.
Fidelity Research is committed to providing valuable insights and reports on both Bitcoin and Ethereum, as well as exploring other crypto assets. They aim to help traditional finance understand the evolving crypto landscape, and plan to cover topics such as Ethereum's Layer 2 solutions and their potential impact on the ecosystem. The team, including Max Waddington, stays informed through developer calls and improvement proposals to provide up-to-date analysis. Their reports focus on the investor perspective and the importance of these concepts to their investment decisions. Fidelity Research's work contributes to the crypto community by applying traditional financial tools like discounted cash flows to the emerging asset class, adding precision to investment decisions. Remember, crypto investing carries risk, and none of this should be considered financial advice. Check out the Fidelity report in the show notes for more information.
