With calculation methods, it is something like that in the crypto market. Statements about the future price development of the still young class of crypto assets are always reading tea leaves. The most cited attempt, the stock-to-flow model, which originated from commodity analysis and was adapted to Bitcoin, failed spectacularly. Dutch trader Plan B’s modified model had predicted a Bitcoin price rise to US$100,000 by December at the latest, and thus shot out of the game. Ryan Allis, president of Hive Digital, tries a different approach. He applies the discounted cash flow (DCF) model, which is used to value companies, to Ethereum. His central thesis: Ethereum is dramatically undervalued.
What is discounted cash flow (DCF)?
Discounted Cash Flow (DCF) is a method used to calculate the performance of companies. This is also known as the “discounted cash flow.” This involves making forecasts of a company’s future cash flow to derive a company’s equity value. There are different approaches to the DCF method, but basically it is about calculating the value of a company based on probable growth rates, less future costs and depreciation of money due to inflation, and thus be able to make statements about possible or undervaluation of a company.
Is Ethereum really worth more?
If you transfer this model to Ethereum, the network currently looks hopelessly undervalued. At least that’s what Ryan Allis thinks. According to him, based on current cash flow and a price-to-earnings (P/E) ratio of 100, which is not unusual for technology companies, Ether’s capitalization should now be worth $1.9 trillion. That would correspond to an ether price of US$16,000. Even with a conservative annual growth rate of just 25 percent, Ethereum should have a market cap of $1.6 trillion, $11,000 per ether. Either way: Ethereum should be four to five times its current value.
Proof of stake could bust knots
With DCF analysis, assets can be calculated based on the cash flow that is returned to the holders of an asset, i.e. shareholders or token holders. Ryan Alli’s thesis is that with the introduction of Proof of Stake, which basically pays dividends to validators, Ethereum can be valued like a company. Additionally, with EIP-1559 implemented last summer, Ethereum introduced a mechanism that reduces the number of tokens in circulation over time. Similar to the buyback method used by corporations, Ethereum uses its profits in the form of transaction fees to gradually reduce the supply of ether.
However, what sets Ethereum apart from a company and might even make the growth rates look pessimistic: Ethereum does not incur any costs. Ethereum is a decentralized network. You have no staff, no marketing expenses, or any other liability. The costs are only borne by the validators and are limited to security. However, these costs are reimbursed through the proof of stake method. Under the DCF model, all income can be accounted for as profit. All fees are paid to stakeholders, similar to stock dividends. So Ethereum has a 100 percent profit margin.
How realistic is the evaluation?
The appeal of DCF analysis applied to Ethereum is explained by its bullish outlook. Finally, $11,000 is still at the bottom of the scale. A P/E ratio of 200, which is not unrealistic for fast-growing companies, even yields an ether price of over $33,000. However, it is questionable whether the model can be seamlessly transferred to a blockchain network.
And where will the money come from? The total market capitalization is currently two trillion US dollars. If you follow Ryan Allis’s calculation, all funds in the cryptocurrency market would have to be transferred to Ethereum. Furthermore, it is not only “Ethereum killers” like Cardano, Solana or Avalanche that are increasing the competitive pressure. While scaling solutions like Optimism or Commit Chain Polygon enrich the Ethereum ecosystem, they also outsource user activities and liquidity.
The move to proof of stake certainly represents a turning point. Along with scaling solutions such as the sharding feature planned for 2023, the wiggle room for Ethereum applications and investors will increase significantly. But even if no specific date has been set for “The Merge,” the event should already be priced. Ryan Allis’ model shows that Ethereum still has immense growth potential. But don’t lower your expectations to $11,000.
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