How does Grayscale value ETH?
Since the beginning of this year alone, the price of Ethereum has almost doubled. There are many factors driving the strong performance of Ethereum prices, and these factors are interdependent, such as DeFi hotspots, institutional funds entering the market, and the recovery of the overall encryption market.
Today's article, we are divided into two main parts:
Share an analysis from The Capital to interpret the factors affecting the current price strength of Ethereum;
Share the Ethereum evaluation report from Grayscale, and see what is worthy of attention in Ethereum in the eyes of the largest player in the bright card institution.
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1. A quick overview of the fundamentals of Ethereum
According to an analysis article by The Capital, the recent strong performance of Ethereum is related to the following factors:
Participation from institutional and individual investors is growing
Flows drop, supply crunch emerges
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The impact of investor enthusiasm
First, the rally is the result of increasing allocations to Ethereum by both retail and institutional investors.
As the chart below from Glassnode shows, the number of wallets holding 0.1 or more ETH or more than 10,000 ETH has risen steadily since November last year with little resistance.
Ethereum searches on Google also show growing interest from small investors. While the trend has been revised downward since the second half of January, it remains strong compared to last year.
Corresponding to this,Coinbase’s recently released annual report shows that among large investors, Ethereum’s status as a popular asset class is also becoming more and more stable. Institutional investors have gradually realized the value of Ethereum, the second brother of the encryption market, and invested More and more assets.
In addition, the Ethereum creation has formed over the yearsThe collaborative network effect is gradually maturing, and the consensus is more robustsecondary title
Impact on Ethereum Circulation
With the increasing popularity of retail and institutional investors, the supply of Ethereum has relatively decreased. At the beginning of August 2020, there were nearly 19 million Ethereum in exchanges. at present,Exchange reserves have fallen to about 15.4 million ETH — a 19% drop in half a year. During the same period, the amount of ETH going into smart contracts rose by 50%, from 12.5% to 18.8%.
There is a strong correlation between these two key figures — a drop in ETH reserves on exchanges on the one hand, and a rise in lockups in smart contracts on the other — which has driven prices.
In particular, DeFi applications based on smart contracts are the biggest contributors.secondary title
Impact of ETH 2.0
The development of Ethereum 2.0 is in full swing. According to beaconcha.in, the network already has more than 77,000 validators who have staked a total ofMore than 2.5 million ETH,This number continues to increase.
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2. Grayscale Ethereum Valuation Report
In the above analysis, the preference of institutional investors for Ethereum is a factor worthy of attention. Grayscale created Ethereum Trust on December 14, 2017, and Ethereum Trust became an SEC reporting company on October 12, 2020, allowing a wider range of investors to participate.
At present, according to the official website data,The number of Ethereum held by Grayscale exceeds 3 million. If you are interested in comparing data such as ETH 2.0’s locked-up volume and DeFi’s locked-up volume, it is not difficult to infer that the continued increase of institutions such as Grayscale will have a heavy impact on the Ethereum ecosystem.
Next, we share the latest evaluation report from Grayscale, released in February this year.
Since its launch in 2015, Ethereum, the second largest blockchain network, has generated a lot of interest. Although Ethereum has matured to provide a robust settlement layer for billions of dollars in P2P transfers, investors often find it difficult to determine the investment case for it.
It's helpful to step back and consider Bitcoin's value proposition. Bitcoin promises a global, verifiable accounting system. This ledger system, powered and secured by the world's most powerful computing network, allows users to record value transfers in a highly credible manner.
Similarly, Ethereum also provides a transaction verification function, and the verification logic and information range is wider. In other words, the strong network of Ethereum ensures that applications can run according to the logic of the code, without the participation of third parties, and without external intervention.Ethereum creates an environment of trust, which historical precedent shows is a prerequisite for trade to thrive.
Does this mean Ethereum is better than Bitcoin? Not necessarily - they each specialize in different areas and make trade-offs accordingly. Bitcoin is designed in a fixed and relatively inflexible way, leading people to believe that its accounting system will not change at will. Ethereum is more adaptable and more flexible, cultivating an innovative and iterative environment.
Ethereum and Bitcoin are symbiotic, absorbing and capturing liquidity, awareness and value from the outside world. Bitcoin is the store of value of choice in the digital ecosystem, while Ethereum has become the leading financial infrastructure, with more than $12 billion in daily transaction settlement.
With the increased activity on Ethereum, investors can't help but wonder, what investment cases are there on Ethereum, andHow to value the native asset of the Ethereum network—ETH.
In August 2020, we published a report on Bitcoin valuation to help investors understand the investment case for Bitcoin and how they can monitor important evaluation metrics. Similar to this, this article is also dedicated to sorting out the important factors that need to be considered in evaluating ETH. Bitcoin is widely known as digital gold, but Ethereum's name is not so clear.
Next, we will evaluate Ethereum from three perspectives and related indicators, namely:
ETH as currency
ETH as a consumer good
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ETH as currency
Ether (ETH) is the native asset underpinning the emerging decentralized financial system. ETH is used as the minimum trust collateral when borrowing and lending, and it is also the most important source of funds for building applications on Ethereum. At the time of writing this article, there are about 7 million ETH locked in the DeFi protocol of the Ethereum network, worth more than $9 billion at current prices. (Translator's Note: According to the statistics on February 4, 2021,The locked-up volume in the current DeFi protocol exceeds 8 million ETH,Worth over $33 billion at current market prices)
As a new-age digital currency, ETH plays a role in multiple aspects on the Ethereum network. When users deploy smart contracts on the Ethereum network, provide liquidity for DeFi applications, or trade on DEX, they need to pay ETH as a fee for using the network.
The Bitcoin community believes that the money supply should be fixed, and Ethereum believes that the minimum necessary assets should be issued in order to fully guarantee the long-term network security. Supply fixation is the main focus of Bitcoin, while the actual utility of ETH in applications on the Ethereum network is the main factor driving ETH as money. For Ethereum, this utility drives its circulation as a monetary commodity across the Ethereum network.
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Relative market share of ETH
The use of Ethereum as collateral in the DeFi ecosystem continues to expand. However, the proportion of stablecoins (digital currencies anchored to USD) and BTC as collateral in the Ethereum network is rising, which will challenge ETH's status as the preferred collateral for the ecosystem.
For example, WBTC is a synthetic BTC asset on Ethereum, enabling Bitcoin to be used in the Ethereum network. USDT and USDC are the most widely used USD stablecoins on Ethereum. The chart below lists the growth of WBTC, USDC, and USDT.
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ETH as a consumer good
The operation of the Ethereum network is inseparable from ETH. Every transaction on the network incurs a certain cost, which is priced in ETH. These transaction fees, or network revenue, are distributed to miners. As the demand on the network increases, the fee will increase - different transactions will compete with each other, and the one with the highest price will be included in the block earlier.
Some analysts believe that the fee payment of Ethereum may not require ETH, but can be paid with any digital currency of your choice. This is called economic abstraction, and this idea will be used to challenge the value of ETH.
Likewise some see ETH as a simple medium of exchange asset, and investors may seek to minimize the amount of ETH they hold, only needed for payment services. That is to say, Ethereum will be used as working capital, because investors may seek to minimize their working capital, so the circulation speed of ETH will increase. According to the exchange formula, M=PQ/V, its value will decrease. in other words,This view holds that sustained selling pressure will bring down the price of ETH.
However, Ethereum plans to implement a proposal called EIP-1559,Proposal to burn ETH to pay transaction fees. This is important becauseIt will transform ETH from an asset used as a medium of exchange to a consumer product. ETH will be more of a gas than a currency.
If the EIP-1559 proposal is implemented, it will also establish ETH as the original economic unit on Ethereum. The agreement stipulates that only ETH can be destroyed. This reduces the possibility of the aforementioned economic abstraction, making assets other than ETH unusable for paying transaction fees.
The destruction method mentioned in EIP-1559 can also be regarded as a deflationary mechanism. If the destruction amount of ETH exceeds the additional issuance amount, it will enter a deflationary state.
If the activity on Ethereum increases and the supply of ETH decreases due to burning, the change in supply and demand will push ETH up. If EIP-1559 is realized, a consumption mechanism will be established, forming a positive feedback loop for the price of Ethereum. As a commodity, the price of ETH will change according to changes in supply and demand in the market. Fortunately, the Ethereum blockchain is transparent, and we can analyze user activity and analyze the fair price of Ethereum.
We can look at the total daily transaction fees on Ethereum to measure demand, as shown in the figure below.
Since ETH is required to pay transaction fees, high transaction fees will also drive demand for ETH, just as increased travel may drive demand for gasoline.
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Total daily transaction fee amount on Ethereum
Transaction fees measure all fees paid on the Ethereum network to execute transactions. Another way to measure ETH transactions is to compare the historical price of ETH with transaction fees.
As shown in the figure below, it is the ratio of the price of ETH to the transaction fee on the Ethereum network (Price to Sales Ratio, P/S Ratio),If the ratio is smaller, it means that the price may be undervalued,image description
The ratio of ETH price/Gas fee: Price/Sale Ratio, indicated by the green line
To analyze information on the supply side of Ethereum, we can study holding patterns.
In the previous "Bitcoin Valuation Report", we proposed the Holder vs Speculator Index (Holder and Speculator Index), where the holder refers to the asset that has not been moved for 1-3 years, while the speculator is Indicates that a transfer transaction has been made within 90 days.
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ETH as an interest-bearing asset
Marching towards Ethereum 2.0, the journey is underway. Ethereum 2.0 aims to be a scalable PoS blockchain. On the current Ethereum, miners consume electricity to mine through specialized mining machines, while Ethereum 2.0 allows holders to mortgage Ethereum tokens to become validators in the network, and participate in it to obtain part of the income from transaction fees. And some additional tokens from the Ethereum network. (In the EIP-1559 proposal, the fee may be destroyed)
Think about the value of ETH, and the key changes of ETH 2.0 also need to be considered.Under Ethereum 2.0, ETH is no longer a simple consumer commodity, but a productive commodity - ETH holders can mortgage tokens to obtain interest.This asset structure does not exist in the physical world.
Commodities are consumed, and equity securities provide income rights to cash flows.In Ethereum 2.0, ETH has the properties of both commodities and equity: it can be used as a commodity or as collateral to obtain cash flow income, similar to equity securities.
The initial value of ETH comes from its commodity use and dynamically changing supply and demand. Those investors who are confident in the future price of Ethereum can mortgage ETH to earn income and increase their positions. Because ETH needs to be used as collateral, this may further reduce the circulation of ETH.If a large amount of ETH is staked, the amount of tokens available for consumption decreases, thus potentially creating a positive feedback loop for the price of Ethereum.
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other indicators
active address
Daily active addresses are a valid proxy for network growth. Metcalfe's law, which states that the value of a network is proportional to the square of the number of users, has been used to value Facebook.
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Number of Ethereum Active Addresses
Mining power
Likewise, mining hashrate, a measure of the computer power miners use to validate transactions, has reached new highs on ethereum.
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3. Conclusion
Compared with Bitcoin, Ethereum is still very new, and the Ethereum protocol is also undergoing major upgrades. Therefore, how to evaluate the underlying asset of the Ethereum protocol—ETH, the evaluation method is not clear and continues to change. The three methods proposed in this article, using ETH as currency, consumer goods and interest-bearing assets, allow investors to obtain a variety of possible conclusions when evaluating the fair value of assets.
The improvement proposal for the ETH asset structure (EIP-1559) proposes to destroy ETH to pay transaction fees. This way, using ETH as a consumable, could be a catalyst for the value of Ethereum. Some analysts previously believed that it would be possible to remove ETH from the Ethereum ecosystem through economic abstraction. The EIP-1559 proposal confirms the status of ETH as the native asset of the Ethereum protocol, reducing the probability of the scenarios assumed in these analyzes.
Finally, if the Ethereum protocol is successfully upgraded to 2.0, investors have the ability to use ETH as a productive asset and mortgage their ETH to obtain income.
In addition to the active users on the network on Ethereum, the EIP-1559 proposal to improve the economic model of Ethereum, and the promise of improved scalability in Ethereum 2.0, the Ethereum community has something to be excited about.
As can be seen from the data, the price of Ethereum tends to change with changes in the basic activity of the network. As mentioned in this article, many indicators are currently hitting new highs, and many data such as active addresses, mining computing power, and network fees show that this is a positive signal for investors.
Disclaimer: This article is the author's independent opinion, does not represent the position of the Blockchain Institute (public account), and does not constitute any investment opinion or suggestion.
https://grayscale.co/ethereum-trust/#market-performance
https://tokenterminal.substack.com/
https://grayscale.co/wp-content/uploads/2021/02/VALUING_ETHEREUM.pdf
Translated by: Jing Kai
source:https://grayscale.co/wp-content/uploads/2021/02/VALUING_ETHEREUM.pdf
Disclaimer: This article is the author's independent opinion, does not represent the position of the Blockchain Institute (public account), and does not constitute any investment opinion or suggestion.
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