The Ethereum network has a fair value, but ETH can still see a 17x return – Brian Russ

The price of Ethereum (ETH) has increased 128% in the last 12 months and has gained 804,027% since opening on October 20, 2015 at $0.43. Despite this impressive growth, there is room for Ether's price to rise 17x from its current level. Transaction value?

Brian Roos, managing director of BMO Financial Group in the Colorado market, thinks that's possible.

March 1, at ETDenver, Russ talked about how traditional financial analysts use different quantitative models to value a company, blockchain and token.

Using the Ethereum network as an example, Ross detailed how the methodology incorporates discounted cash flow, prior trading, market comparisons, and Metcalfe's Law models.

Ethereum can currently have a 15% lower price

Starting with the discounted cash flow (DCF) model, Russ explains, the model assumes that a company, or in this case, a blockchain, “makes sense to accumulate the profits it makes forever.”

The model projects what those profits might be and then applies a discount rate to bring those profits into 2024 chain dollars to get a more accurate representation of what the project is worth today.

To determine what the cash flows are and how fast they are growing on the Ethereum network, Russ suggests looking at the development of the Ethereum wallet. According to data from Etherscan, wallets on Ethereum have been growing by 36% annually for the past 5 years.

Assuming 33% annual wallet growth for 10 years, Russ estimates that 50% of the world's population, or 4.5 billion users, could be using Ethereum by 2033. A high estimate, but it remains possible.

To determine the type of profit that Ethereum generates, Russ looks at the amount of Ether and it is burned as a proxy for Ethereum earnings.

“If we subtract the burn (revenue) minus the cost (cost), revenue minus cost equals profit.

The result is a profit generated by the Ethereum network of 1.8 billion dollars in 2023, and increasing this figure by 33% per year for 10 years gives the future value of the Ethereum blockchain to Russia 458 billion dollars.

After the 10th year, a more conservative 5% growth rate is used, and the Fed Funds rate, or risk-free rate, is applied at 5% to “return the cash flow figure to $2024.” The resulting $400 billion valuation reflects a 15% premium and suggests that the Ethereum blockchain is undervalued by this amount today.

Previous transactions give an idea of ​​the current price of Ethereum

Similar to real estate, estimating the value of a company or property requires analyzing competitors' revenue, cash flow, and market capitalization. We compare Ethereum to other early-stage technology companies with dominant market share and analyze each company's price-to-earnings ratio in its first profitable year versus the average P/E ratio over a 5-year period.

The result indicates that the total value of the Ethereum network is 312 billion dollars, that is – according to the model – Ethereum is currently overvalued by 20%.

How does Ethereum compare to other blockchains?

Comparing the Ethereum network to other Layer-1 projects, Russ uses a formula that takes a blockchain marketplace and pays based on the total value (TVL) locked on the same blockchain. “Taking the sum of the market capitalization of the top 6 blockchain projects and dividing it by the total value locked across the 6 projects, the total MC/TVL figure is 8.”

Applying this figure to the Ethereum network (8 x Ethereum's TVL at $47 billion) shows a blockchain valued at $376 billion, indicating that the blockchain is approximately 6% overvalued.

Metcalfe Law

Metcalfe's law is often used to estimate network density. According to the model's creator, Robert Metcalfe, because of the way new technologies are scaled, network valuation and future value must be evaluated more broadly than linearly. The law states that “the cost of a network is proportional to the square of the number of connected users.”

Using data from Etherscan and looking at monthly active Ethereum users (15 million) squared, the Ethereum blockchain is valued at $225 billion, which is 44% below the network's true market value of $400 billion. Russ notes that using the Metcalfe Law model produces a figure that is “very consistent with the other models,” but there is a catch.

So, is Ethereum undervalued or overvalued?

Taking the various results from the four models used and adding a 25% weighted average from each model gives an implied value of $345 billion, or $2,875 per Ether, Russ said.

Russ said.

“The final conclusion is that the Ethereum block based on this model is worth plus or minus 15%. This is not the most exciting conclusion, but this exercise is important.

Russ concluded that while the model's ETH price estimation does not encourage investors who expect ETH's price to rise significantly above its current price, the use of quantitative models provides accurate and conservative estimates of a project's true value. Using multiple valuation models can help investors “identify arbitrage opportunities.”

For investors, Russ says his model allows for deeper confidence in Ethereum's current value and future prospects.

“With this rigorous, quantitative approach, we've determined that the value of the Ethereum blockchain is accurate. We think it's fairly priced and that's important especially as investors because it gives us confidence that we're investing in something and we can hold onto that confidence for a long time. For 3 years, 5 years, 10 years. Imagine if you did this exercise and determined that Ethereum had this upside potential in 2016 or 2017.

Related: How Will Ethereum Price React to Bitcoin ETF Approval?

Can the value of Ether return 17x?

Russ Eater has hinted at a potential return of 17x its current valuation. Citing Ethereum wallet/profit growth of 33% per year, Russ, using simple compounding and a 10-year view of this trend, means that $1,000 invested in Ether today will be worth $17,319 in 2033.

This article does not contain investment advice or recommendations. Every investment and business activity involves risk, and readers should do their own research when making a decision.