The price of Ethereum (ETH) has experienced a remarkable increase of 128% over the past year and an astonishing gain of 804,027% since it began trading at $0.43 on October 20, 2015. Despite this incredible growth, there is speculation about whether the price of Ether has the potential to rally 17 times from its current trading price.
Brian Russ, the managing director of BMO Financial Group at the Colorado market, believes that this is a possibility. During his speech at ETHDenver on March 1, Russ discussed how traditional finance analysts use quantitative models to value companies, blockchains, and their tokens.
Using the Ethereum network as an example, Russ explained the methodology behind his valuation models, which include the discounted cash flow (DCF), precedent transaction, market comparables, and Metcalfe’s Law models.
Starting with the DCF model, Russ stated that this model determines the worth of a company or blockchain by considering all the profits it will generate indefinitely. The model projects future profits and applies a discount rate to bring those profits back to the present day.
To estimate the cash flows and their growth on the Ethereum network, Russ suggests looking at the growth of Ethereum wallets. Data from Etherscan shows that wallets on Ethereum have been growing at an annual rate of 36% for the past five years. Assuming a 33% annual wallet growth for the next ten years, Russ predicts that Ethereum could potentially have 4.5 billion users by 2033.
To determine the profits generated by Ethereum, Russ analyzes the amount of Ether issued and burned. Based on this analysis, he estimates that the Ethereum network generated $1.8 billion in profit in 2023, and this figure is projected to grow at a rate of 33% per year for the next decade, resulting in a future value of $458 billion for the Ethereum blockchain.
After the tenth year, Russ uses a more conservative growth rate of 5% and applies the Fed Funds rate of 5% to bring the cash flow figure back to the present day. This calculation leads to a valuation of $400 billion for the Ethereum blockchain, suggesting that it is currently undervalued by 15%.
By analyzing precedent transactions, Russ compares Ethereum to other early-stage tech companies that achieved dominant market share. He calculates the value of the Ethereum network to be $312 billion, indicating that it is currently overvalued by 20% according to this model.
When comparing the Ethereum network to other layer-1 projects, Russ uses a formula that divides a blockchain’s market cap by the total value locked on the same blockchain. This calculation shows that the Ethereum network is valued at $376 billion, suggesting that it is approximately 6% overvalued.
Lastly, Russ applies Metcalfe’s Law, which states that the value of a network is proportional to the square of the number of connected users. By squaring the number of monthly active Ethereum users (15 million), Russ estimates a valuation of $225 billion for the Ethereum blockchain, indicating that its true value is 44% below its current market cap of $400 billion.
Considering the outcomes from these four models, Russ takes a weighted average of 25% from each model, resulting in an implied value of $345 billion or $2,875 per Ether.
While this valuation may not excite investors who expect the price of Ether to rise higher than its current value, Russ argues that quantitative-based models provide more accurate and conservative estimates of a project’s true value. Additionally, the use of multiple valuation models can help investors identify arbitrage opportunities.
In terms of future price predictions, Russ suggests that Ether could potentially achieve a 17 times return from its current valuation. Based on the 33% annual growth of Ethereum wallets and profits, a $1,000 investment in Ether today could be worth $17,319 by 2033.
It is important to note that this article does not provide investment advice or recommendations. Readers should conduct their own research and exercise caution when making investment decisions.