Former Goldman Sachs partner Michael Novogratz: Ethereum should be evaluated like Wall Street evaluates Facebook

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But according to hedge fund manager Mike Novogratz, ethereum’s dollar value is based on the concept of network effects — an economic concept whereby the value of a network depends on how many people use it.

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What's Behind Ethereum's $20 Billion Market Cap?

Over the past decade, cryptocurrencies have formed billions of dollars in market capitalization. According to CryptoSlate's ranking page [1], there are currently more than 16 digital assets with a market value of more than $1 billion, and 55 digital assets with a market value of more than $100 million.

But this raises the question: what is the reason behind these high valuations? How can a project of only a few years be worth so much money?

For Ethereum at least, it's a simple network effect.

Former Goldman Sachs partner Mike Novogratz made the comments during a panel discussion at the recent Ethereal Virtual Summit with Ethereum co-founder Joseph Lubin and Forkast.news' Angie Lau.

Mike believes that Ethereum's market value of $20 billion is based on the fact that the blockchain network aggregates different use cases, such as DeFi (decentralized finance), enterprise applications, and stable coins, which enable the network to gain a large number of users. This creates a network effect that multiplies its value.

This overturns the belief that during 2018 many people believed that Ethereum was only valuable because it facilitated many ICOs (Initial Coin Offerings).

Mike further explained:

What Mike expressed can be understood as attracting more users through the new use cases of the Ethereum network and the ETH token itself, rather than just using this cryptocurrency as an investment option. This is what the Ethereum network has and will continue to gain way of value.

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ETH may also be a store of value

Mike's main point is that Ethereum is a network effect, but he believes that some of Ethereum's $20 billion market cap may also come from the cryptocurrency as a potential store of value. Mike said:

"All the other cryptocurrencies -- ethereum being the most important -- will take a while to provide a real use case...then their value will be as a store of value."

On this point, Mike didn’t elaborate, but some analysts believe that ETH has its own scarcity mechanism, which may make it a long-term store of value, and may be similar to money.

• For example, David Hoffman and Ryan Sean Adams of cryptocurrency fund Mythos Capital believe that Ethereum has 3 core pillars[2] that are critical to the functioning of its ecosystem, each representing the core mechanics of the Ethereum blockchain , which also brings the demand and scarcity of ETH:

• ETH locked in DeFi: As DeFi grows, more and more ETH will need to be locked in smart contracts as collateral;

• ETH staked in Eth2.0: When Eth2.0 phase 0 (beacon chain) goes live, investors will be able to stake their ETH holdings and earn yield. This will reduce the amount of ETH in circulation, which some analysts believe could bring about a huge economic shift in the crypto space;