Ethereum has experienced a market pullback following bitcoin recently. Although the market remains in a downtrend, the digital asset has been holding up quite nicely. Ethereum has been trending above $2,800, almost 50% down from its all-time high. But a model suggests that three is a 4x movement in the near future of the digital asset. Let’s take a look at this model.
Ethereum To 4X?
In a recent Twitter thread, a crypto investor known as Shaan Puri lays out the model that could drive Ethereum to four times its current price. It starts out by stating that the digital asset is currently undervalued by up to 4 times meaning that they expect the price to be much higher than it currently is.
Related Reading | TA: Ethereum Recovers Losses, Why Bulls Face Major Challenge
Pointing to a basis laid out by Ryan Allis, another crypto investor, Puri explains how the former’s model puts ETH at $10K. Instead of just going through “hopes and dreams” or the usual wider adoption argument, it uses three key attributes to put the cryptocurrency at such a high price.
ETH recovers above $2,800 | Source: ETHUSD on TradingView.com
The first of these is the revenue generated by the asset. As with many crypto projects, sending the tokens incur a fee on the part of the sender. This fee is then paid to the miner for providing the computational power required to confirm these transactions. Puri points out that in January alone, generated revenue from transaction fees was $1.3 billion, which are then split into the base and tip fee.
With the implementation of the EIP-1559 last year, the ethereum fee burn was implemented. With time, more ETH is being burned than is being created, thus turning the digital asset deflationary.
Google “ETH watch the burn”
There's a great website that shows you how much ETH supply is being reduced everyday.
Last 24hrs, $36M worth of ETH was burned.
Long term, this is why ETH believers created the term “ultra sound money” bc ETH supply goes down over time pic.twitter.com/yzQ21KuWtD
— Shaan Puri (@ShaanVP) February 2, 2022
The second point was valuing companies that have cash flow. Something which the created of this model understands well, given that they went to business school. It follows up with a picture that explains ethereum’s discounted cash flow valuation and how it ties into this model.
ETH discounted cash flow valuation | Source: Twitter
Last but not least, the assumptions behind the model, which are “the model assumes a 25% annual growth rate and a 35x P/E ratio (the average of the SP500.” Puri explains that the high gas fees are a cause for concern for both devs and users, which leads to two major risks; all transactions moving to L2s to manage transaction fees or another smart contracts platform winning out in the end.
Related Reading | Bitcoin On-Chain Demands Suggests That The Market Has Reached Its Bottom
Basically, given that ethereum possesses real cash flow, it can be used in the fundamental analysis of the asset, Puri added.
But a bigger point is – we've heard for years that crypto is:
“Rat poison”
“It’s just speculation”
“Not an investment. No fundamental value”From value investors like Warren Buffet
That's wrong now. ETH now has real cashflows to use in fundamental analysis.
— Shaan Puri (@ShaanVP) February 2, 2022
Featured image from NullTX, chart from TradingView.com