Ethereum Fairly Valued with Potential for 17x Long-Term Return, Says BMO Director
Summary:
Brian Russ, the managing director of BMO Financial Group, shared his quantitative models for evaluating Ethereum, suggesting it is currently fairly valued, with a potential for a 17x return in the long term. Russ used methods such as discounted cash flow, precedent transactions, market comparisons, and Metcalfe’s Law models, indicating that Ethereum might be 15% undervalued. He also projected a potential scenario where 50% of the global population could be using Ethereum by 2033. His models elaborate on the long-term view of Ethereum's value, indicating that an investment today could significantly grow by 2033.
Over the last year, the price of Ethereum (ETH) has risen by 128%, and since its launch on October 20, 2015, at a mere $0.43, it has soared by an astounding 804,027%. However, can Ethereum's price rise by a further 17x from its current level? Brian Russ, BMO Financial Group's managing director in the Colorado market, believes that this scenario may not be too farfetched. Russ shared, on March 1 at ETHDenver, his thoughts on how conventional finance experts employ a range of quantitative methodologies to assess the worth of businesses, blockchain, and the affiliated tokens.
Using Ethereum as a prime instance, Russ outlined his valuation methodology, which incorporates discounted cash flow, prior transactions, market comparisons, and Metcalfe’s Law models. He commenced with the discounted cash flow (DCF) model, which is instrumental in determining the worth of a company or a blockchain by calculating the summation of all its future profits. The model predicts these profits and then applies a "discount rate to reflect in 2024 chain dollars.” Hence, Ethereum might be 15% undervalued today.
To gauge the cash flows and their growth rates on the Ethereum network, Russ proposes examining the Ethereum wallet's growth rate. In the last half-decade, an annual growth of 36% is observed in Ethereum wallets, as per data from Etherscan. Projecting a 33% yearly growth for the next decade, it is estimated that 50% of the global populace, approximately 4.5 billion users, might be on Ethereum by 2033. Russ, however, agrees this is an ambitious assumption.
Russ next looked at the quantum of Ether issued and burned to understand the kind of profits Ethereum creates. The difference between "burn" and "issuance" refers to Ethereum’s profits. Consequently, Ethereum has recorded $1.8 billion in profits in 2023. Taking this value and multiplying it by 10 years with an annual growth of 33% gives $458 billion, Russ's future estimation of Ethereum blockchain's value. This valuation increases to $400 billion in the 10th year, reflecting a 15% premium.
Similar to conventional methods utilized in real estate and other company evaluations, the value of Ethereum can be calculated by conducting a comparative study of competitors' revenue, cash flow, and market capitalization. Ethereum appears 20% overvalued by this approach, where its current worth is set at approximately $312 billion.
When Ethereum is compared to layer-1 projects, a calculation involving dividing a blockchain’s market cap by the total value locked (TVL) on that blockchain is typically applied. Ethereum’s TVL at $47 billion is applied to this figure, valuing the blockchain at $376 billion, suggesting an overvaluation by 6%.
Lastly, Metcalfe’s law comes into play. It states “the value of a network is proportional to the square of the number of connected users.” This method gives Ethereum a valuation of $225 billion, representing a 44% undervaluation.
Overall, Russ concludes Ethereum is fairly valued plus or minus 15%. Although this valuation may not attract investors hoping for a higher Ether price, these quantitative models provide more accurate and conservative project value estimates. His model allows investors to form solid convictions about current Ethereum values and potential future evaluations.
Interestingly, drawing attention back to the yearly wallet/profit growth of Ethereum, Russ highlighted the possibility of a 17x return from the present valuation. Accordingly, an investment of $1,000 in Ether today could potentially increase to $17,319 by 2033.
Published At
3/5/2024 12:00:00 AM
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