If you’ve paid attention to the most successful technologies in history, you’ll notice that it’s always the best “platform” that ends up winning big. For example, Facebook is the largest advertising platform, Google is the largest search engine platform, Amazon is the largest online retailing platform, and the invention of the “internet platform” enabled the dominant growth of all of these companies. So as you can see, history shows that as an investor in technology, it’s never a bad idea to diversify into the most promising platform plays. It’s the opinion of mine and many experts in the crypto space that Ethereum is the dominant platform bet. In this article, I am going to break down what Ethereum is, why it’s value proposition is looking extremely bullish for this next altcoin cycle, and my personal Ethereum price prediction for this next bull rally.
Disclaimer: I am not a financial advisor, this article is for informational purposes only and should not be considered investment advice or an individualized recommendation. Please consult a financial advisor regarding your personal financial desires.
It’s not often that you get to live in a time where a brand new asset class is born. As Bitcoin continues to soar past its all-time highs, history was made on January 7th 2021, as the crypto market cap surpassed $1 trillion for the first time. Even better news is that there is still much more room for exponential growth. Even at a $1 trillion market cap, crypto assets still represent the smallest major asset class, and Ethereum is a sleeping giant amongst the maze of different cryptos. Let’s first go over what Ethereum actually is.
Ethereum, released in 2015, is a decentralized software platform that enables smart contracts and decentralized applications (DApps) to be built on top of it, and run without any downtime, control, fraud, or interference from a third party. To give a simple analogy as to what that entails, let's look at Apple and its creation of the app store (another wildly successful platform). Inside of your iPhone is what's called an Operating System, this Operating System has allowed the creation of applications to be built on top of it that didn't exist before its creation. The app store paved the way for billion dollar businesses/applications to be created on top of it such as Facebook, Instagram, Uber, Airbnb, Whatsapp, Snapchat, Candy Crush, Angry Birds, etc.
Ethereum is essentially an “Operating System” for DApps, in other words, a large majority of the crypto assets on the market today are built on top of Ethereum. The rise of Ethereum with its Turing-complete scripting language and the ability for developers to include state in each block, has paved the way for smart contract development. This has led to an influx of teams building decentralized projects seeking to take advantage of the most valuable property of blockchains — the ability to reach a shared consensus that everyone agrees on without intermediaries or a centralized authority. Let’s cover a few Ethereum facts then go over how Ethereum came about and the role it's been playing.
Ethereum out performed its big brother, Bitcoin in 2020 by over 44% with percentage gains north of 600%, without even reaching its all time high of over $1,400. While Ethereum is still number two behind Bitcoin in terms of market cap ($151,350,279,103 at the time of this writing) it’s number one in transaction volume. Ethereum searches on Google have reached an all-time high. Since August, there has been a sustained decrease in the amount of Ethereum tokens held on exchange wallets. This signals one of three things, investors are transferring their Ethereum over to self-custodied wallets to hold for a longer term, they’re sending their Ethereum to a Defi protocol to generate a yield, or they’re sending their Ethereum to the beacon chain contract for staking. On top of that Ethereum has the most developers working on it and the most DApps built on top of it compared to all other crypto projects.
When Bitcoin was created, it was designed to be a decentralized, non-sovereign store of value that you could send anywhere around the world in a short time. While this is very beneficial, finance doesn’t stop there. Every robust financial system needs a set of other important services such as lending, borrowing, trading, funding, and derivatives. Bitcoin, with its simple yet limited programming language called “script”, was not suitable for the applications I just listed. Script’s programming limitations was one of the most important factors that contributed to the creation of Ethereum.
Let’s talk about why it’s so beneficial to be the dominant platform by using Metcalfe’s Law, which was Formulated by Robert Melancton Metcalfe who helped pioneer the internet, co-invented Ethernet, and co-founded 3Com. Metcalfe’s Law says that a network’s value is proportional to the square of the number of nodes in the network. The end nodes can be represented as computers, servers or simply users. For example, if a network has 10 nodes, its inherent value is 100 (10×10=100). Add one more node, and the value is 121. Add another and the value jumps to 144. So basically, Metcalfe’s Law is how the value of a network grows exponentially by its positive network effects. Network effects can be seen with the user bases from Twitter, Facebook, Airbnb, Uber, and LinkedIn; telecommunications devices like the telephone; and instant messaging services such as MSN, AIM or QQ. Network effects can also be used to quantify the staggering growth of Ethereum. The greater the number of users building DApps on the platform, the more valuable the services become to the community. And given that Ethereum is truly decentralized, it can experience exponential growth without anyone ever worrying about it being controlled or censored. Let’s cover most of the main reasons why Ethereum is looking so bullish.
Let’s start with the exponential growth of decentralized finance (Defi). Defi is aiming to create a censorship resistant financial system (decentralized lending, borrowing, trading, funding, and derivatives) that’s open to everyone and minimizes one’s need to trust or rely on central authorities. Technologies like the internet, cryptography, and blockchain give us the tools to collectively build and control a financial system without the need for a middleman to dip their hands in everyone’s pockets. 2020 was definitely a great year for Defi as the total value locked (TVL represents the amount of capital locked up in Defi smart contracts) was just below $500M. We are now sitting at a TVL north of $20B, which is an astounding 40x. An even crazier statistic is that over 95% of the TVL locked up in Defi resides on the Ethereum blockchain. This means almost $20B of Ethereum has been taken off the market and is currently locked up in different protocols, which means less Ethereum available to sell. Less supply + more demand = price increases.
There has also been a major increase in institutional demand for Ethereum. Greyscale had just $210 million Ethereum tokens represented by shares outstanding of 13,544,800. Fast forward to today, they have $3.8 billion in Ethereum with shares outstanding of 285,269,400. In addition to that, the on-chain data shows that in the last few weeks of December, the number of wallets over 10,000 Ethereum tokens has been increasing while the number of wallets with less than 10,000 tokens has been decreasing. However, I believe institutional adoption in 2021 will be much greater because of the launch of Ethereum futures by CME Group on February 8th. Ethereum futures are nothing new and have been trading on a number of different exchanges for some time now, but CME Group isn’t like any of the retail exchanges currently listing Ethereum futures. This is because the brokerage account holders are institutions not average leveraged traders. I think this will trigger a powerful surge in institutional adoption, simply because the Ethereum futures will give them a further avenue to hedge positions they have in the spot market, which could help them increase their portfolio performances. Not to mention the major publicity this will bring Ethereum.
Another bullish case for Ethereum is its utility demand. Remember, Ethereum is also a utility token, which means in order to use its blockchain, you have to pay fees called “gas fees”. If you take a look at the total amount of transactions on the Ethereum blockchain over the past year, you’ll see that the number of transactions has been steadily increasing. We’ve recently seen that number break past one million transactions per day. The more transactions that happen on the Ethereum blockchain, the more that gas fees are generated. And given that the gas fees are paid in Ethereum means that the increased demand to settle transactions leads to an increased demand for Ethereum tokens. Let’s now talk about one of the main drivers of all of this transactional demand…. Stable coins.
A stable coin is simply a cryptocurrency that attempts to offer price stability by being backed by a reserve asset such as fiat or precious metals. Stablecoins have gained notoriety by attempting to offer the best of both worlds—the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies. Ethereum has become the dominant settlement layer for most stable coin transactions including USDC, SUSD, Tether, and Pax. Over the past few months, we’ve seen a major increase in the total amount of stable coins issued on the Ethereum network along with an increase in the number of total stable coin transfer volume. Billions of dollars of transaction volume are being settled on the Ethereum network, which means there is a consistent demand for gas fees. But I think this is just the tip of the iceberg and that we’re likely to see an avalanche of stable coin issuance and demand on the Ethereum network in the months ahead for a few reasons.
First, Visa announced in December that it’s partnering with the Circle Consortium to connect Visa’s global payments network to USDC. To give you an idea of the potential scale, Visa’s payment network has over 60 million merchants and Visa processes trillions of dollars every year. This means that if only a small fraction of these merchants start accepting payments in USDC, that would mean billions of dollars in transaction volume (more gas fees) and stable coin demand.
Second, and perhaps even more groundbreaking than the Visa partnership and has a solid chance to enshrine stable coins deep in the heart of the U.S. financial system. The office of the comptroller of the currency (OCC) has stated that federally chartered banks can facilitate stable coin payments and run their own independent nodes on the stable coin network. This means that these banks can now use public blockchains to validate, store, record, and settle payment transactions as long as they’re compliant with existing laws. Why is this news hugely bullish for Ethereum and the crypto industry as a whole? The value of intra bank transfers in the U.S. is in the trillions. By banks being able to settle transactions on chain, they will be able to settle them more quickly and effectively than they can with traditional transfer methods such as SWIFT. More importantly they will be saving themselves a lot of money. If banks do start to transact on chain, which network do you think they’ll be most likely to use?
Another fundamental demand for Ethereum is the launch of the first phase of Ethereum 2.0 on December 1st 2020. This is when the beacon chain officially went live with the Ethereum 2.0 staking contract securing enough funds to launch. The positives of Ethereum 2.0 to the Ethereum network cannot be overstated, as there are over two million Ethereum tokens and growing locked in the staking contract. Individuals will get staking rewards paid out in Ethereum, but more importantly, Ethereum sent to the beacon chain currently cannot be withdrawn. This means whoever decides to stake their Ethereum will have their Ethereum off the market for a certain time period which means more price appreciation, due to the increased scarcity to an already scarce asset.
Lastly you have the EIP 1559 improvement proposal, which could ultimately fix (amongst other things) the only issue I’ve had with Ethereum… Its monetary policy. Currently, gas fees on the Ethereum network are determined by a simple auction mechanism. This system works by having everyone submit their bid (gas price) for how much they’re willing to pay to have their transaction processed by a miner. Not surprisingly, miners select transactions ranked by the highest fees which results in many users egregiously overpaying. If users know what others are bidding, they could avoid making bids that are higher than necessary. In many cases (especially during network congestion), there is a large divergence of transaction fees paid by different users in a single block, suggesting that many users often overpay by more than 5x.
In short, EIP 1559 can fix this problem by incorporating a BASEFEE, which attempts to generate “the market rate” for gas prices, natively on Ethereum. This would work by starting with a BASEFEE amount adjusted up and down by the protocol based on how congested the network is. This would remove the need for each and every wallet to generate their own individual gas estimation strategies because they would have the ability to auto-set the gas fees in an easy, highly reliable fashion. However, In times of high network usage, a user can ensure that their transaction will be included sooner by including a larger tip along with the BASEFEE amount. Meanwhile, users who are not in a hurry can set a maximum fee that they’re willing to pay. The protocol will then wait for the BASEFEE to drop below this number before confirming their transaction.
But here’s the kicker, miners only get to keep the tips. The BASEFEE is always burned (destroyed by the protocol, taking those Ethereum tokens out of circulation forever). Burning the BASEFEE is important because it prevents miners from manipulating the fee in an effort to extract more fees from users. It also ensures that only Ethereum tokens can ever be used to pay for transactions on Ethereum, cementing the economic value of Ethereum tokens within the Ethereum platform. This would also provide a deflationary mechanism to Ethereum’s supply, which would add to the scarcity of Ethereum tokens and long-term security of Ethereum. To quickly summarize, the benefits that EIP 1559 would create for Ethereum will be a savings of up to 90% of gas fees, improving the user experience by automating the fee bidding system, provide a predictable fee system for advanced users, reduce unexpected wait times for transaction confirmations, allow users to still “cut” in line during times of network congestion, discourage selfish mining despite dominate fee rewards, and most importantly set in stone the economic value of Ethereum at the protocol level. Now that you firmly understand Ethereum’s value proposition, let's go over everyone’s favorite, my personal price prediction for this bull cycle.
I think Ethereum will continue to grow at a rapid pace and will continue to be the dominant platform for DApps to be built upon. I also think that with everything Ethereum has to offer that I explained in this article along with its partnerships and integrations with Google, Samsung, Amazon Web Services, Fidelity, Foxconn, Microsoft, Signature bank, Intel, Citigroup and more, makes it severely undervalued from a price standpoint. It’s no wonder why the notable exchange “Kraken” wants to hire an Ethereum evangelist to appear in media interviews and serve as a thought leader on social media by communicating "the value proposition of the Ethereum ecosystem in an informed and opinionated voice."
Let's put things into perspective; as of September 2020, Paypal started selling Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. Currently Ethereum has a circulating supply of only 114,254,558 ETH. Paypal currently has a user base of 360 million while they’ve been consistently growing. This means that if only Paypal’s users wanted to purchase one Ethereum each, they wouldn’t be able to. To go even further, even if the number of Ethereum tokens somehow tripled, each Paypal user still wouldn’t be able to own one Ethereum each. Having that said I can realistically see Ethereum reaching a price of $7,000 - $15,000 per Ethereum token in 2021. As usual, I’ll finish this article with one of my favorite quotes as it pertains to this subject, “Patience is bitter, but its fruit is sweet”.