Podcast Summary
ETH's potential value based on blockchain fees alone could be $4 trillion: Discounted cash flow analysis suggests ETH's undervalued, potential value could be $4 trillion due to blockchain fees, with bullish sentiment and dreams of new heights for ETH and Ethereum.
According to a discounted cash flow analysis, ETH, the native cryptocurrency of the Ethereum network, could be significantly undervalued based on its blockchain fees alone, with an estimated value of $4 trillion. The bullish sentiment towards ETH was discussed in depth on a recent episode of the Bankless podcast, with guest Ryan Ellis explaining the reasoning behind this analysis. The discussion also touched upon the importance of dreaming bigger dreams when it comes to understanding the potential of ETH and Ethereum as a whole. The episode also featured a shout-out to Xerion, a platform that simplifies the process of trading and bridging assets across multiple blockchain networks. The state of the nation, as described by the podcast hosts, is one of aspiration and dreaming bigger dreams, with the belief that ETH and Ethereum have the potential to reach new heights. The episode was sponsored by Slingshot, a decentralized trading platform that offers users the best prices on thousands of crypto assets with no fees and social trading experiences.
Exploring the Future of Web 3 with Brave Wallet and Arbitrum: The Brave Wallet, a secure crypto wallet within Brave Browser, offers enhanced security and control in Web 3. Arbitrum, an Ethereum scaling solution, revolutionizes DeFi and NFTs with faster, cheaper transactions and improved performance. ETH, as the primary money of the digital age, is undervalued according to some models, potentially worth over $10,000.
The Brave Wallet, a secure crypto wallet built natively inside the privacy-focused Brave Browser, offers users enhanced security and control in the Web 3 space. This wallet allows users to buy, store, send, swap crypto assets, manage NFTs, and connect to other wallets and DeFi apps, all within the best privacy browser on the market. Additionally, the discussion highlighted the potential of Arbitrum, an Ethereum scaling solution, which is revolutionizing DeFi and NFTs by offering faster, cheaper transactions and improved performance. Ryan Ellis, a managing partner at Heart Rhythm and the creator of the Coin Stack newsletter, presented a compelling argument that ETH, as the primary money of the digital age and the token driving demand for the Ethereum Blockchain, is significantly undervalued according to his discounted cash flow model, with a potential fair price of above $10,000. Overall, the conversation emphasized the importance of Web 3 technologies like the Brave Wallet and Arbitrum, and the potential for significant growth in the value of ETH.
Ethereum's new cash flows from PoS and EIP-1559 make it attractive for institutional buyers: DCF analysis prices Ethereum based on present value of future cash flows from PoS and EIP-1559
Ethereum's transition to Proof of Stake (PoS) and the implementation of EIP-1559 have created new cash flows for Ether holders, making it attractive for institutional buyers. This is similar to a stock buyback and a dividend distribution. A Discounted Cash Flow (DCF) analysis is an important tool to price Ethereum based on these cash flows. DCF takes into account the present value of future cash flows, discounting future money to account for its present value. Ethereum can be seen as an asset with cash flows, and businesses and investors will use DCF to determine its fair value. Essentially, a $100 today is worth more than a $100 in the future, so we discount future cash flows to their present value. Ethereum's cash flows, including those from the PoS transition and EIP-1559, make it valuable from a business perspective, and the DCF model is the tool used to determine its fair price.
Ethereum's Unique Characteristics for DCF Model: Ethereum's decentralized nature and high revenue growth make it an undervalued asset for DCF analysis, with potential upside due to proof-of-stake transition
Ethereum presents a unique opportunity for a Discounted Cash Flow (DCF) model due to its distinct characteristics as a decentralized, smart contract platform. Unlike traditional businesses with costs and profits, Ethereum has no inherent costs since the network's security is paid for by third parties. This results in 100% net profits and cash flows for Ethereum. Additionally, Ethereum's revenue growth rate has been exceptionally high, with a 407% increase in revenues year over year in January 2022. These factors contribute to Ethereum's undervalued price relative to its earnings, offering significant upside potential. Furthermore, with Ethereum's upcoming transition to proof-of-stake, stakers will receive a share of the network's revenue, making it an even more intriguing asset for fundamental analysis using a DCF model.
Ethereum's Proof of Stake Transition: Distributed Security and Revenue for Long-Term Holders: Ethereum's PoS transition creates a network of stakers, generating direct and indirect revenue for long-term holders through staking and buyback/burn mechanism, making ether more scarce and available for real-time revenue modeling.
Ethereum's proof of stake transition will result in a distributed network of stakers providing security, leading to revenues flowing directly and indirectly to long-term holders. Direct revenue comes from staking ether and validating the network, while indirect revenue comes from the buyback and burn mechanism, which makes ether more scarce. This is unique because companies typically buy back their stock, decreasing the total number of shares, but in Ethereum's case, the burned ether is removed from circulation permanently. Another difference is the real-time availability of revenue data, allowing anyone to create their own discounted cash flow models without relying on annual reports or analysts.
Ethereum's Significant Annual Revenue and Profit Margin: Ethereum generates $19.2B annual revenue, a 100% profit margin, and potential for 25% annual growth
Ethereum's total annualized revenue, calculated from January 2022's $1.35 billion in fees, is a significant $19.2 billion. This revenue comes from the sale of block space on Ethereum, a product unique to blockchain technology. The first input in calculating Ethereum's value is its annualized total revenue. Furthermore, Ethereum's profit margin is 100% since all costs are covered by miners and later stakers and validators. Assuming all revenues are cash flows, this $19.2 billion annual revenue can be input into a discounted cash flow model as the beginning year's cash flow. With a modest and conservative growth rate assumption, Ethereum's revenues could grow at an average of 25% per year for the next 20 years. However, considering Ethereum's recent exponential growth, the actual growth rate might be even higher. Ethereum's dominance as the "Manhattan of block space" underscores its potential for continued revenue growth.
Ethereum's Revenue Growth Despite High Gas Fees and New Ether Issuance: Ethereum's continuous issuance of new Ether through staking rewards won't hinder revenue growth over the next 15-20 years as stakers receive the rewards directly, and the total Ether supply will decrease, increasing its value.
Ethereum's high gas fees and continuous issuance of new Ether through staking rewards won't deter large-scale transactions or users, leading to significant revenue growth over the next 15-20 years. The issuance of new Ether, while a cost to the network, is not a cost to stakers as they receive the rewards directly. The total supply of Ether will decrease, increasing its value further. The model's perspective on this is different from traditional DCF models, as the issuance is considered revenue for stakers instead of a cost. The assumptions in the model are conservative, focusing mainly on revenue growth and the sustainability of Ethereum's block space usage despite competition from alternative layer 1 and layer 2 solutions.
Ethereum's Underlying Value Estimated to be Between $101,300 and $12,000: DCF model analysis suggests Ethereum's underlying value is much higher than current market cap, presenting significant growth opportunity for investors.
According to the DCF model analysis, Ethereum's underlying value per ether is estimated to be between $101,300 and $12,000. This estimation is based on the net present value of Ethereum's expected market cap, assuming a 12% discount rate. The value includes the fundamental value of ether as a cryptocurrency and the incremental value from staking and network security participation. The discrepancy between Ethereum's current market cap and its estimated value presents a significant growth opportunity. Furthermore, the analysis suggests that the price of ether is likely to move towards its actual value once proof of stake goes live and there is a track record of its utilization. The difference between the current ether price and its estimated value can be attributed to the lack of mainstream institutional understanding of how to properly value Ethereum and the risk discount applied due to the delay in proof of stake implementation. A simpler way to understand the estimation is by comparing Ethereum's expected growth rate to that of other companies in the industry. For instance, Tesla, a high-growth tech company, is currently valued at 302 times its 2021 earnings. Ethereum's growth potential, based on its estimated value, could justify a similar or even higher multiple. In summary, the DCF model analysis indicates that Ethereum's underlying value is significantly higher than its current market cap, presenting a substantial growth opportunity for investors.
Ethereum's PE ratio underestimates its potential value: Ethereum's PE ratio is much lower than it could be due to its exponential growth rate and unique nature as a network, potentially worth 100-200 times current value.
The current PE ratio of Ethereum at 20.3 is significantly lower than what it could potentially be, given its exponential growth rate and the unique nature of networks compared to traditional companies. The speaker argues that Ethereum's PE ratio should be closer to 100 to 200, based on its current growth rate of over 400% a year, which is much higher than the average growth rate of companies in the S&P 500. The speaker also emphasizes the difference between valuing Ethereum as a network versus a traditional company, as networks have the potential for geometric growth in all directions, unlike linear growth of traditional companies. Additionally, the speaker suggests that Ethereum's current valuation based on discounted cash flow models is only considering it as a capital asset, and not taking into account its potential as a commodity or store of value. Overall, the speaker believes that Ethereum's fair market value is likely underestimated based on current valuation methods.
Considering Ethereum's Monetary Premium for Valuation: Ethereum's price could reach $33,000 based on a fair PE multiple of 200, considering its monetary premium and utility value in addition to its discounted cash flow.
Ethereum's value goes beyond just its discounted cash flow (DCF) and utility token uses. The discussion suggests that Ethereum's monetary premium, which comes from people hoarding wealth in ether and its role as a utility token, should also be considered. Using this perspective, the price of ether could reach $33,000 based on a fair PE multiple of 200. Additionally, the aggressive buyback from Ethereum Improvement Proposal (EIP) 1559 and distributions to ETH stakers could significantly impact the long-term price dynamics of ether. Overall, the full value of Ethereum lies in its baseline DCF, utility value, and monetary premium.
Ethereum Merge to Decrease Ether Supply and Increase Staking Dividends: The Ethereum merge is expected to decrease ether supply by up to 3.6% per year, increasing the value of staking dividends and potentially reaching $15,000 or more per ETH within a decade. This could create a large gap between the value per stake ETH and DCF value per ETH, offering a substantial opportunity for institutions and investors.
The reduction in Ethereum's ether supply post-merge is expected to significantly increase the value of staking dividends over time. This is due to the net issuance becoming negative, leading to a projected decrease in ether supply by up to 3.6% per year. As the supply decreases, the value per stake ETH will increase, potentially reaching $15,000 or more within a decade. This dynamic could lead to a substantial opportunity for institutions and investors, as the annual staking rewards could reach $16 billion in USD basis, creating a large gap between the value per stake ETH and the DCF value per ETH. If the ether supply is locked in at 100 million, the potential value per stake ETH could reach up to $25,000 with a PE multiple of 200. This concept is new to Ethereum, as the current net issuance is slightly positive but is expected to become negative post-merge. This decrease in supply and increase in dividend value could be a game-changer for Ethereum's staking economy.
Ethereum's Undervalued Potential Cash Flows: Speakers believe Ethereum is undervalued, with more institutions expected to invest post-merge, potentially leading to significant price increases. Long-term expectations are for values exceeding 10x current price within a decade, but short-term volatility and a wait of up to a year for widespread adoption is anticipated.
The speakers believe that Ethereum (ETH) is currently undervalued based on its potential cash flows, which are not fully reflected in the market due to a knowledge gap and risk aversion. They argue that as more institutions become educated about Ethereum's value proposition and the cash flows start being distributed after the merge, the price of ETH is expected to increase significantly. The speakers suggest that this could be an opportunity for individual investors to accumulate ETH before the institutional inflow. They also mention that as Bitcoin's dominance declines, Ethereum and other assets will be valued based on their own merits rather than in relation to Bitcoin. The speakers are optimistic about Ethereum's long-term potential, with expectations of values exceeding 10x the current price within the next 10 years. However, they caution that there will be short-term volatility and that it may take up to a year after the merge for the knowledge to spread and risk committees to approve large investments.
Investors bullish on alternative layer ones despite lower revenues: Some investors see potential in Terra, Phantom, and Avalanche, but value them differently than Ethereum due to lower revenues and reliance on market share growth and future revenue potential.
While Ethereum is currently the leading smart contract platform with a large market share, some investors are bullish on alternative layer ones like Terra, Phantom, and Avalanche due to their technological promise and potential for growth in total value locked. However, these investors may not be using Discounted Cash Flow (DCF) models to value these assets, instead, they view them as speculative bets or early-stage venture investments. The rationale behind this is that these alternative layer ones have not yet reached the point where they can charge for block space like Ethereum, and their revenues are significantly lower due to their trade-offs in decentralization. Therefore, their valuations are seen as overvalued based on current cash flows and DCF models, and may be more reliant on market share growth and the potential for future revenue generation.
Crypto Market Evolution: New Valuation Metrics: The crypto market's evolution brings new opportunities for valuation methods, such as Discounted Cash Flow (DCF), as digital assets generate cash flows and revenues. However, crypto's reliance on narratives and memes may differ from traditional finance, posing risks to valuation models.
The crypto market, specifically Ethereum, is evolving and maturing, with the potential for layer 2 solutions to bring reasonable metrics and revenue generation, leading to new methods of valuation. The Discounted Cash Flow (DCF) model, borrowed from traditional finance, may apply as digital assets begin to yield actual cash flows. However, the crypto market's valuation could differ from DCF models due to its reliance on narratives and memes. The risks to this model include assumptions about growth rates and the potential dominance of layer 2 solutions or alternative smart contract platforms. Despite these risks, the cash flows and revenues generated by Ethereum and other digital assets could attract traditional investors, leading to the development of new valuation metrics. Overall, the crypto market's evolution is bringing new opportunities and challenges, requiring adaptability and careful consideration.
Ryan sees Ethereum as significantly undervalued: Ryan, a crypto hedge fund founder, believes Ethereum is undervalued by 5-10x based on its fundamentals since late 2021, when it was $1,300. He encourages considering Ethereum's ecosystem potential beyond price fluctuations and reminds of investment risks.
The speaker, Ryan, believes that Ethereum (ETH) is significantly undervalued based on its fundamental attributes, potentially by 5 to 10 times. He has identified this opportunity since late 2021 when ETH's price was around $1,300. Ryan's perspective is rooted in his experience as the founder of a crypto hedge fund and his belief in the potential of Ethereum's ecosystem. He also emphasizes the importance of considering the fundamentals of ETH beyond its day-to-day price fluctuations. Ryan encourages interested individuals to sign up for his newsletter, Coinstack, for more insights on Ethereum and the crypto space. However, he reminds listeners that investing in crypto, including Ethereum, carries risks and is not suitable for everyone.
