A study published by the venture capital firm Electric Capital established a comparison between five narratives about Ethereum (ETH) for investors, and how the market can arrive at a valuation of ether (ETH), the cryptocurrency of this network , in each scenario.
The authors point out that a unified narrative is important to create a common valuation framework. “The market has accepted bitcoin as digital gold since the end of 2017,” says the report. Investors, on the other hand, do not converge towards a unified narrative on how to value ETH, says the study, and offers five proposals in this regard.
The narratives on ETH as a value presented by Electric Capital, are the following: ETH as a commodity, specifically a digital version of oil; a non-sovereign digital store of value (not restricted to one nation); Ethereum as a payment network; ETH as a productive financial asset; and finally, the one that considers Ethereum as a digital nation, in which ETH is the currency.
In this first part, we will address the first two narratives for Ethereum.
Narrative 1: ETH as a commodity
A common narrative proposes that ETH is like oil, according to the study. “Oil energy brought us into the industrial age, but now that we are in the software age, ETH can be the fuel for the digital economy,” say the authors.
With the expected changes in Ethereum and the progress of decentralized finance (DeFi) in 2020 , the comparison seems increasingly relevant, according to the report. Among the similarities between ETH and oil, the study mentions that both “burn out” as they are used and that the demand for both assets comes from various sources. Just as bitcoiners often say that BTC is « digital gold «, Ethereans reply that ETH is « digital oil «.
In the case of Ethereum, the demand comes from DeFi platforms, to provide security to the ETH 2.0 network, and issuance, sale or transfer of digital assets such as ERC20 tokens, stablecoins and non-fungible tokens (NFT), among other uses, the study points out.
Another similarity with oil, according to the report, is that the supply of ETH is limited, while its growth should become more and more gradual in the near future. “Not only will commissions previously allocated to miners be burned, also the transition to Proof of Stake requires blocking a significant amount of ETH, which creates a supply shock” , say the authors.
In the following table, the most important raw materials are included next to oil and bitcoin (BTC) and ether are added for comparison purposes in terms of price, reserves and market capitalization in billions of Dollars.
In each case the price that ETH should reach to equal the market value of the respective merchandise is placed. For example, with a price of USD 137,913, ETH would reach the market value of gold.
Limitations of the comparison of ETH to goods
Oil has a finite number of alternatives, such as solar energy, that from coal, or hydroelectric, etc., says the report. In the case of ETH, cryptocurrencies can fork, or new cryptocurrencies can be created, he claims. For this narrative to hold up, users of the Ethereum network would have to keep it as the dominant and preferred solution.
Digital goods are cheaper to produce than physical goods, the study maintains. Consequently, it affirms that while we compare ETH with oil, that cryptocurrency could have less value than hydrocarbon, even if both become equally important for the global economy.
Other One of ETH’s limitations is that Ethereum’s supply and monetary policy may be changed in the near future. This means that, although the supply is limited, as it is expected to be when version 2.0 of the network is fully operational, could technically grow (or decrease) by a certain moment.
As reported by CriptoNoticias, there are those who estimate that the maximum circulating amount of ETH would reach 120 million, and then begin to decrease and become a deflationary asset.
Narrative 2: ETH is a reserve of Non-sovereign digital value
The ‘digital gold’ narrative has already been accepted by many investors in bitcoin, the study holds. And there are four reasons why this narrative is relevant to Ethereum, according to the report, considering the improvements that are occurring in the network.
Like BTC, ETH has properties that make it preferable to gold, the authors claim. Cryptocurrencies are easier to acquire, transport and transfer , and they are also easier to use to buy and sell goods and services, says the report.
The growth of supplies of BTC and ETH is, on the other hand, less than that of gold , states Electric Capital. The annual growth of gold is 2.5%, while that of BTC supply is 1.75%. The annual growth of the ETH supply is expected to be less than 2% after the EIP 1559 improvement (in force since August 5) and will continue to decrease, the study says.
The third reason relies on ETH is more easily programmable than BTC, creating strong network effects, the authors argue . “Thanks to the ease of programmability, ETH has become the reserve currency of DeFi, and processes more transactions than any other network,” says the report.
As for BTC, there is the need for more programmability, the study maintains, stating that there is already more than 1% of the BTC supply that has been “wrapped” in Ethereum. This occurs through tokens such as WBTC.
Finally, the study argues that the market value of a global digital store of value could grow above the value of gold. The programmability and better access of digital value reserves, which also lower friction, could increase their value.
As an example, the report compares the US taxi and limousine service with Uber. When this service was born in 2009, taxis and limousines had a market of $ 9.4 billion and were growing at a CAGR of 3.2%. After Uber improved the user experience, the taxi service grew to USD 47 billion with an annual growth of 11%.
Other reasons for the increase in the total market of the digital store of value are the fear of inflation, which leads investors to increase the demand for good stores of value, and the fact that new generations prefer cryptocurrencies to gold. The study states that 25% of millennials With savings of more than USD 50,000, they already have some investment in cryptocurrencies and 42% are interested in acquiring them.
If ETH becomes a leading digital store of value, it can capture a significant value, even if it remains behind BTC, the study raises. The following tables show scenarios for the market capitalization and for the price of ETH, with different percentages of dominance of that cryptocurrency with respect to gold.
Among the observations regarding BTC and ETH, other limitations could arise for the latter, he says the study. He mentions, for example, the fact that the large number of users in the case of BTC can prevent the The rest of the cryptocurrencies gain greater market share.
However, concerns about social and environmental governance (ESG) could favor networks that adhere to alternative consensus mechanisms to Proof of Work, the study warns.
“It is not clear if there can be two“ golds ”or if a digital store of value is a market where the winner dominates the majority of the market,” says the report. The precious metals market suggests that the leading store of value may take 70% of the market.
A second part of this article will address the narratives of Ethereum as a payment network, ETH as financial asset and Ethereum as a digital nation.
