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Ethereum Value and Price (Part 1)

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2023-06-23
Ethereum Value and Price (Part 1)

This is an attempt to rationalise the market's imperishable hype with Ethereum - the Mother of all altcoins.

One of the key articles in Bitget Academy’s 101 Series is Bitcoin Value and Price, where we discuss the determinants of Bitcoin price and how the mass adoption is reflected in its price. Now, it is a general perception that Ethereum and Bitcoin are different in nature. The questions have become: should we give Ethereum the status as money, and if yes, how can it be valued?

The Current State Of Ethereum Markets

According to Google Trends, the number of searches for ‘Ethereum' reached its peak during the bull market of 2021 before crashing in 2022 - twice - due to the Terra (LUNA) collapse and the FTX demise. Of course we are seeing some interest surge around the announcement and the actual event of Ethereum Merge, an event expected to push the token's price much higher.

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Ethereum market share has taken off since the start of 2023, though it doesn't seem to be shown in the level of Google interest. If Bitcoin dominance averages at 42.5% year-to-date, Ethereum has no trouble maintaining its second place with 18.1%, which is way ahead of the third-largest cryptocurrency Tether (USDT) at 6.7%. Mind you that Tether is a stablecoin, thus often considered a safe option to onboard crypto by newbies.

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This analysis is divided into two parts; Part 1 explores Ethereum's utilities and Part 2 introduces some valuation framework for ETH.

The Future Of Money

The most well-known Bitcoin notions are ‘Bitcoin as a store of value’ and ‘Bitcoin as a medium of exchange'. Those are just dimensions of money; from a store of value to a medium of exchange then to an unit of account, any item must tick all the characteristics of scarcity, durability, acceptability, portability, divisibility and fungibility. Let's see if Ethereum can fulfil these requirements.

Durability, Portability, Divisibility and Fungibility

As a digital asset and a programmable money, Ethereum for sure is:

durable: It can't be spoiled; damage or alter is only possible if the attacker breaks through the defence of large networks such as Ethereum (PoS). One must own at least 51% of the total staked ETH to corrupt the very same network, and consequently risk losing all their assets should a slashing take place.

portable: ETH is a digital money used on the Internet, especially for peer-to-peer transactions regardless of place and time.

divisibility: ETH has an extremely high degree of divisibility as one Ethereum is represented by 1018 gwei, the smallest denomination. That allows Ethereum to be utilised even by the world population.

fungibility: any two gwei or two ETH are interchangeable, and that makes the ERC-20 ETH fungible.

Scarcity

The scarcity principle talks about the relationship between limited supply and growing demand and how the equilibrium price will go up as a result.

The original PoW Ethereum is an inflationary asset, meaning that there are more ETH going into circulation everyday, whereas Bitcoin supply is capped at 21 million. A reason, albeit not the main one, for the Ethereum Merge execution is to reduce the ETH supply and thereby increase its value.

Take a look at the ETH supply chart below. The amount of daily rewarded ETH significantly decreases with the shift to PoS consensus, turning the net supply growth rate a.k.a. the annualised difference between daily ETH issuance and daily ETH burn to negative. It translates to an ETH deflation or an ever-decreasing supply of ETH, and the chart shows that ETH price tends to move in the opposite direction of its supply change.

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Summary: Less ETH in circulation after The Merge, ETH prices climb up.

Stability

Stability is the most crucial money attribute because none of the given dimensions of money can hold if its value keeps changing. Ethereum value rises and falls equally to periods of euphoria (DeFi Summer, bull market 2021) as well as crashes (May and November 2022). However, it's worth mentioning that Ethereum volatility has clearly declined over time, showing signs of better resistance towards market events such as the fall of FTX in November 2022 and staying well below 10% p.a. since 2023.

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Also important is how easily ETH value changes compared to other assets. We choose the NASDAQ Composite Index (COMP) as the stock/TradFi representative here due to the tech-savvy nature of this market and the Dollar Strength Index (DXY) for the US-Dollar is the global reserve currency.

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As of June 18, 2023, Ethereum volatility is nearly three times higher than that of COMP and 7.5 times higher than DXY. Historically speaking, Ethereum had always been more volatile than Bitcoin, but we already have two periods of ‘ETH volatility lower than BTC' in April and June 2023. This is a good start.

Acceptability and Cognisability

With a market cap of US$207,595,972,780 (as of June 18, 2023), Ethereum has remained the second-largest cryptocurrency by market cap for at least five years. The number of daily transactions on Ethereum looks remarkably stable throughout the years but is second to BNB Chain's daily transactions, mostly because of the exorbitant gas fees. BNB Chain is cheaper and hence has become home to a plethora of crypto projects during the 2021-22 bull cycle, even though 12% of BNB Chain-based tokens have fraudulent characteristics, per Solidus Labs.

Ethereum developers plan to reduce gas fees on the network by introducing Sharding. Once successfully executed, this entry barrier to Ethereum will be lowered, resulting in a new wave of investors flocking to the ecosystem. Big guys, on the other hand, have already aped in via liquidity staking derivatives (LSDs) with eagerness.

More on Sharding, ETH tokenomics and LSDs can be found here.

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It's safe to say that DeFi, and even NFT, originates from Ethereum, and many L2s are built on Ethereum, too. Ethereum is also widely recognised as the first bona fide Bitcoin's alternative - therefore the ‘Mother of All Altcoins'.

A sound investment

In light of recent lawsuits against Binance and Coinbase, the Securities and Exchange Commission (SEC) has published a list of tokens that they refer to as ‘securities’, including BNB, BUSD, SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, COTI, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO. It seems that the securities regulator has a not-so-hostile attitude towards Bitcoin and Ethereum, whilst the Commodity Futures Trading Commission (CFTC) has stated several times that Ethereum is a ‘commodity'. As long as Ethereum has nothing to do with the term ‘security', it should easily outperform other altcoins in the long run.

To avoid the hassle that may arise with owning the actual Ethereum, Bitget offers a variety of Ethereum trading products, such as Bitget USDT-Ⓜ Futures, Bitget USDC-Ⓜ Futures and Bitget Copy Trade, all of which can give our users better, yet indirect, exposure to this token. Not yet a Bitgetter? Register with us today!

Despite the fact that crypto prices are more volatile than stocks, their yields are actually higher. For example, the year-to-date return of ETH is 1.4 times higher than COMP as shown in the chart below. It's simply a trade off between risk and return.

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Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.

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