Explore quantitative models predicting Ethereum's valuation, potential undervaluation, and insights from BMO Financial Group's Brian Russ.
Ethereum (ETH) has witnessed a remarkable surge of 128% in the last 12 months and an astonishing 804,027% growth since its debut at $0.43 on October 20, 2015. Despite this phenomenal performance, the question looms: Can Ether's price rally 17 times its current trading value?
Brian Russ, the managing director of BMO Financial Group in the Colorado market, believes this is a plausible scenario. Speaking at ETHDenver on March 1, Russ delved into the methodologies employed by traditional finance analysts to assess the value of a company, blockchain, or its token.
Illustrating the Ethereum network as an example, Russ outlined his approach, which incorporates discounted cash flow, precedent transaction, market comparables, and Metcalfe’s Law models.
Ethereum's Potential 15% Undervaluation
Starting with the discounted cash flow (DCF) model, Russ explained that it calculates a company or blockchain's value as the sum of all profits it will generate indefinitely. The model projects future profits, applying a discount rate to bring them back to 2024 chain dollars for a more precise current valuation.
Examining Ethereum wallet growth to determine cash flows, Russ noted a 36% annual increase over the past 5 years. Assuming a 33% annual growth for 10 years, he speculated that 4.5 billion users, or 50% of the global population, could be using Ethereum by 2033. By subtracting Ethereum revenues (burn) from expenses (issuance), Russ estimated a $1.8 billion profit in 2023, leading to a projected $458 billion future value for the Ethereum blockchain in 10 years.
After the 10th year, with a more conservative 5% growth rate, the Fed Funds rate is applied to bring the cash flow back to 2024 dollars, resulting in a $400 billion valuation. This indicates a 15% premium, suggesting Ethereum is undervalued by this amount today.
Insights from Precedent Transactions
Similar to real estate valuation, estimating a company's or property's worth involves analyzing competitors' revenue, cash flow, and market capitalization. Comparing Ethereum to early-stage tech companies and analyzing their price-to-earnings ratios, Russ's model suggests Ethereum's total value is $312 billion, indicating a current overvaluation of 20%.
Ethereum vs. Other Blockchains
Comparing Ethereum to other layer-1 projects, Russ used a formula based on market cap and total value locked (TVL) to suggest a $376 billion valuation. This implies a slight overvaluation of approximately 6%.
Metcalfe’s Law
Metcalfe’s Law, often used to estimate a network's valuation, states that a network's value is proportional to the square of the number of connected users. Applying this law to Ethereum, Russ used monthly active users squared to suggest a $225 billion valuation, indicating a 44% undervaluation compared to its current $400 billion market cap.
Ethereum's Overall Valuation
Considering outcomes from the four models and applying a simple weighted average of 25% from each model, Russ suggests an implied value of $345 billion or $2,875 per Ether. He concludes that, based on this model, the Ethereum blockchain is fairly valued, plus or minus 15%, providing investors with conviction about its current and potential future valuation.
Potential for a 17x Return?
Russ hints at the possibility of Ether achieving a 17x return from its current valuation. With a 33% per year growth in Ethereum wallets/profits and a 10-year compounding view, Russ suggests that a $1,000 investment in Ether today could be worth $17,319 by 2033.
It's important to note that this article does not provide investment advice or recommendations. Every investment involves risk, and readers should conduct their own research before making decisions.