Valuing Ethereum
Is ETH a business? A nation? or store of value?
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Crypto volatility continues to drop, with Bitcoin’s 30 day volatility dropping to a two-year low. As the market tries to find a catalyst for a break-out near-term, this week we take a look at crypto’s bigger picture.
Specifically, we evaluate the question: how do we value smart contract platforms?
We analyze Ethereum and whether it should be priced as a business, an economy or a store of value asset. Let’s dive in.
Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin fees climbed 55%, rebounding from yearly lows set last week
- Ethereum activity remained relatively high for bear market standards, with a new meme token $THE spurring speculation leading to Uniswap reaching the highest number of unique trades since June 2021 as per The Defiant
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- Exchange outflows for both Bitcoin and Ether persist, though at a reduced pace from that seen in the previous weeks
- This could indicate potential accumulation from investors buying and storing their assets outside centralized exchanges
Valuing Ethereum
Ethereum as a business — hosting thousands of applications atop its infrastructure, should we value Ethereum similar to tech businesses like cloud computing?
- Akin to Ethereum’s revenues, the fees users pay to use the network have been increasing exponentially historically
- Over the past 5 years, Ethereum fees have increased at a compound annual growth rate (CAGR) of 97%, roughly doubling every year
- These fees have been somewhat correlated to ETH’s price, but decreasingly so, going from a 0.55 correlation coefficient in 2017 vs 0.28 in 2022
Based on these revenues, we can estimate the price-to-sales ratio of Ethereum to attempt to understand its valuation as a business.
Growth Stock? Ethereum’s fast growth can draw comparisons to growth stocks, but its valuation remains somewhat high in comparison to some of the tech leaders
- Cloud company Snowflake, the fastest company to reach $1B in revenue, has recorded revenue growth of 92% with a significantly lower P/S of 32.5 at the moment (vs Ethereum’s 120)
- Does this mean Ethereum is overvalued?
- When looking at P/S of other smart contract platforms, the comparison is even more skewed, with most of them having over 1,000x P/S
So why is it that the market prices smart contract platforms at such a premium relative to their revenues? A plausible answer is their potential to accrue value from the economies to they host
Ethereum as an Economy — Could Ethereum be an equivalent to a digital emerging market?
- It’s potential citizens would be the 82 million addresses holding ETH (albeit 1 address ≠ 1 human)
- The financial industry has $30 billion under management, up from $8 billion a year ago, per DeFi Llama’s TVL figures
- Transaction volumes on Ethereum are larger than on Visa, with approximately $2.5 trillion being transferred in ETH, USDT, USDC and DAI alone in Q3 per IntoTheBlock volume data
But how does Ether the asset benefit from Ethereum’s economy? Burning, staking and MEV.
Ether as a Store of Value? ETH’s low inflation, especially after the merge, could make it a scarce asset
- Due to most of transaction fees being burnt and issuance dropping 90% after the merge, ETH’s supply is now increasing by only 0.03% annually
- Moreover, fees that are not burnt are used to reward those staking, providing a function akin to a GDP dividend where holders receive yield from the economic activity Ethereum supports
- Finally, value also accrues indirectly to ETH due to maximal extractable value (MEV), where (re)organizing transactions creates opportunity for profits and thus greater demand to validate them
Overall, if we aim to determine if ETH should be valued as a business, an economy or a store of value, the reality is that the answer lies somewhere in between. We hope that through this concise analysis you can understand some of the arguments and setbacks of each approach, and look forward to explaining them more in-depth through our Medium soon.
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