Ethereum has held the number 2 spot on CoinMarketCap for years. It is the second most valuable cryptocurrency behind Bitcoin. XRP comes behind it in a close third.
Ethereum, as you likely know, is much more programmable than Bitcoin and aims to be a “decentralized world computer” and a smart contract platform, with the ETH token as the value source.
However, Ethereum has made many great promises that is has not entirely delivered on. Yes it is a smart contract platform, yes it is decentralized, yes it has vast community developer support… but it has not scaled as it promised and it is still using proof-of-work instead of proof-of-stake.
Despite Ethereum’s history of upgrade delays, the cryptocurrency has undergone many smaller EIP upgrades. The Ethereum Foundation has stated that they are quite confident in the upcoming upgrade to Ethereum 2.0 that will be initiated in July 2020, and slowly rolled out over the next year.
Over the bear market, Bitcoin’s price fell by about 85%. Comparatively, the Ethereum price plummeted from roughly $1,300/ETH in December 2017 to $88/ETH in December 2018 (a 93% drop). Today bitcoin has recovered almost 50% of its loss, compared to a paltry 18% recovery for Ethereum. With all of the great news, partnerships and developments in the Ethereum ecosystem I am incredibly bullish on the project as a cryptocurrency technology as well as a financial asset.
These are the main reasons I am very bullish on Ethereum:
- Upgrade to Ethereum 2.0
- The Decrease in New ETH Supply
- Locked up ETH
- DeFi (Decentralized Finance)
- Market Cap of Ethereum
- Ethereum Adoption and Community
Upgrade to Ethereum 2.0
Ethereum launched in 2015 with a Proof-of-Work consensus mechanism that works quite slowly, at roughly 15 TXS (transactions/second). There have been minor upgrades over the past 5 years, but nothing substantial for scaling, which is Ethereum’s biggest flaw at the moment. It also requires functional programming that makes smart contracts easier to program and understand.
In comes Ethereum 2.0, the long-awaited upgrade that was promised back in 2016. The roadmap was outlined in 2016, but today the Ethereum Foundation is taking steps to move towards implementing it, with phase 0 expected to roll out in late July 2020.
The Ethereum 2.0 Upgrade will occur in a series of smaller upgrades called phases. There is currently a test network live for Ethereum 2.0, run by a developer team called Nimbus.
- Phase 0 (PoS)
- Phase 1 (Data Sharding)
- Phase 2 (State + execution)
- Phase 3 (STARKS, further scaling)
The upgrade to Ethereum 2.0 will make Ethereum more scalable as well as more programmable to meet the dynamic needs of smart contracts in the real world and have increased on-chain security. The consensus mechanism within Ethereum 2.0 helps to preserve and strengthen decentralization, preventing centralization by large staking pools with powerful computers. For the most part, anyone with 32 ETH up to a few hundred ETH can stake their coins on a laptop, more than that and you’ll need a specialized computer. Many more and you’ll need a powerful server. This helps to prevent centralization by wealthy entities opening large computer farms.
The Decrease in New ETH Supply
Ethereum started out with new supply (flow) of 5 ETH/block. It was cut down to 3 ETH/block in 2018. Then in 2019, the supply had a 33% cut to 2 ETH/block.
For the Ethereum 2.0 Upgrade, there is a discussion for a 10x decrease in supply, meaning that only 0.2 (0.22 was proposed) per new block. That is a significant decrease in new Ethereum supply. This would put the daily new supply of ETH at roughly 1,267 (with a 15-second block), and 462,455 new ETH/year.
The current supply of Ethereum at the time of writing is ~110 million ETH. With this flow rate of new ETH cut to 0.22/block, that would make the effective stock to flow ratio 0.4% – much lower than Bitcoin’s stock to flow ratio.
I am not suggesting that Ethereum will flip Bitcoin for the highest market capitalization since there is so much more than stock to flow that determines market cap. But it would not be impossible in 5 to 7 years time.
If the supply rate cut for Ethereum is decreased to 0.22 ETH/block, it would make new Ethereum quite rare and increase its value, theoretically.
Locked up ETH
There are a few ways that Ethereum is being locked up. Well two main ways: (1) HODLers and (2) DeFi and Smart Contracts. Soon, with staking in Ethereum 2.0, people will also lock up Ethereum to stake it to secure the network and earn staking rewards.
It is estimated that there is roughly 2.8 million ETH locked in DeFi (2.5% of total ETH supply) and more is being locked up every month. It is estimated that roughly another 2-4% of ETH will be locked up for staking once staking begins on the Ethereum network. I personally think that that is a low estimate for locked up ETH in staking and that it might be closer to 6-8% as people will want to earn more ETH on their staked ETH.
But with a growing amount of Ethereum being locked up in DeFi, plus a baseline locked up in staking, the circulating supply is effectively reduced and increases the demand for the Ethereum cryptocurrency.
DeFi (Decentralize Finance)
DeFi, or Decentralized Finance, has gotten quite a bit of attention recently. Ethereum was the first real project that would allow disintermediation of financial services from regulated/”trusted” authorities such as banks and financial institutions.
The potential for the DeFi space is gargantuan. This encompasses nearly (if not more) the entire financial markets. Everything from digitized stocks (security tokens), debt, foreign currency, insurance, legal and financial contracts, property deeds, rental agreements, membership agreements, tokenized credit, etc.
Below is a figure that illustrates the Ethereum DeFi ecosystem and the many layers and development that go into such a decentralized economic system. It looks simple, but a complicated and thorough understanding of economics and coding went into developing this ecosystem. For this reason, and the great developments already achieved on Ethereum, I am bullish.
The financial world is a very large one to disrupt/disintermediate. To give a rough idea:
- American Fed Balance sheet is worth roughly $4.5 Trillion USD,
- All of the world cash (physical paper money) is worth roughly $7.6 Trillion USD,
- The worlds stock markets are worth roughly $73 Trillion,
- The Entire Money supply is roughly $90.4 Trillion USD,
- Global Debt is roughly $215 Trillion USD,
- Real estate worldwide is approximately $217 Trillion USD,
- The derivatives market is roughly $544 Trillion USD
If Ethereum captures even a fraction of this market, with the digitized assets operating on the Ethereum cryptocurrency blockchain, Ethereum’s market capitalization will be in the tens of trillions of dollars.
Market Cap of Ethereum
Today with a market cap of roughly $25 Billion it is a far second from Bitcoin who’s market capitalization is roughly $160 Billion.
Why does Market Cap matter? Institutional investors.
Institutional investors do not want to invest much money into small-cap businesses, asset classes or cryptocurrencies. For example, pension funds do not buy duplex real estate for rental units, they buy large apartment buildings to earn on their investments. Institutions do not buy shares of small corporations, they buy Microsoft, Johnson & Johnson, Apple, Amazon, AT&T, etc.
This is because they are investing vastly larger sums of money compared to the retail investors. So if one pension fund were to invest $100 million, that eliminates every cryptocurrency beyond the 50th on CoinMarketCap since none of the other thousands of cryptocurrencies are worth more than $100 million. Also, even if there is a market cap greater than $100 million, to invest $100 million would cause a huge, unnatural spike in the price.
Similarly, when they come to invest in cryptocurrencies, they do not want to invest in smaller assets like Cardano, EOS, Tron, etc. Partly because with the vast amount of money they have to invest, they can easily sway the prices of the smaller cap cryptocurrencies and that is disadvantageous to them. This is called price slippage.
As Institutions will come to invest in Ethereum, it will drive up the price/market capitalization of Ethereum at a more stable, sustainable rate. This combined with the other factors outlined in this post will drive the market cap of Ethereum higher, enticing further Institutional investment, further driving the price of Ethereum – theoretically.
Ethereum Adoption and Community
Like any network, its value increases with the number of nodes in the network. With telecom corporations, this was the number of phone lines in the country. With Facebook, this is the number of users, social groups, corporate groups, school groups, etc. With cryptocurrency, it is the number of users, use cases, applications, combined with the number of coins.
Ethereum has a large developer community as well as a large number of use cases. There is the Ethereum Enterprise Alliance (EEA), which is a long list of companies and organizations that strive to create standards in the development of open blockchain specifications that drive harmonization and interoperability for businesses and consumers worldwide.
The Enterprise Ethereum Alliance has over 1,400 individual developer members, 180 member companies, 19 Technical, industry and legal advisory groups, all from 45 different countries.
Some examples of companies in the Enterprise Ethereum Alliance include:
- Citi Bank
- Bank of New York Mellon
- George Brown College
- AMD (Advanced Micro Devices)
- Santander Bank (Banco Santander)
- Ernst & Young
- The Depository Trust & Clearing Corporation (DTCC)
- FedEx Corporate Services, Inc.
- ING Bank N.V.
- John Hancock Life Insurance
- JP Morgan Chase Bank
- National Credit Card Center of ROC
- McDermott Will & Emery (Legal)
- Pacific Gas & Electric Company
… and many, many more…
There are many examples of legit, serious organizations testing the use of Ethereum.
For example, the Canadian Government’s Nationa Research Council of Canada (NRC) in collaboration with Bitaccess have started trialling the use of Ethereum’s public blockchain for a more transparent administration of government contracts.
Universities and colleges around the world are using Ethereum’s blockchain to issue graduation degrees/diplomas etc. The degrees are issued in PDF form, assigned a hash, and given to the student. The degree can then be verified with the hash on the Ethereum blockchain. This helps to prevent degree fraud, is inexpensive and easy to verify if someone actually has a degree.
JP Morgan (the largest US bank) is experimenting with the project Quorum, built on Ethereum, for intrabank cross border settlement.
There are decentralized, trustless digitized dollars on the Ethereum blockchain (DAI) as well as decentralized trustless bitcoin (TBTC).
Needless to say… Ethereum has a large development community, social fan-based community as well as one of the largest network effects when it comes to cryptocurrency, aside from Bitcoin. Below you can see the user network of DeFi protocols and the highly integrated way the internet of value is being built with Ethereum.
The above examples and image of the Ethereum network take time, energy, effort, money, trial and error, brainpower and adoption. This is not something that can easily be overcome. There is large inertia to beat Ethereum with every passing day, week, month and successful upgrade.
Moreover, with cryptocurrencies being open-source by nature, any good ideas created by smaller cryptocurrencies such as EOS, Cardano, Tron etc, could potentially be adapted and integrated into Ethereum, furthering its usability and this its adoption.
Final Thoughts – The Bull Case for Ethereum
Ethereum has the advantage of being a first-mover. While Bitcoin was the first cryptocurrency, Ethereum was developed in 2014 and first released in 2015. Yes, there were other cryptocurrencies developed between 2009 and 2015 such as XRP and Litecoin – but none of them had the foresight, creativity, backing or raw execution that Ethereum had.
Ethereum also took a serious new stance on cryptocurrency and had a new narrative compared to bitcoin’s digital currency/digital gold narrative. Ethereum boasts about being a world computer and programmable smart contract platform.
Ethereum presents an interesting risk-reward profile. Ethereum is not a stock/equity. Ethereum is a protocol for value exchange network and smart contract capabilities. Since it is a network it follows the laws of the network effect, Metcalfe’s law. Once people, corporations, trust funds, institutions (i.e. banks, universities, stock exchanges, pension funds, etc) and nations build on Ethereum, it entices more to do the same.
Below is a quote from David Hoffman, Cheif of Operations at RealT that really sums up a lot of what we talked about in this post:
Ethereum is a foundation for building an alternative Internet-based financial system. This financial system has the capacity to be completely open and trustless. This new financial system needs a native money to operate. Financial applications in this new landscape need a trustless form of collateral for their operation, and the only truly trustless asset on Ethereum is Ether.
As a result of this demand, Ether has become an economic-trifecta; a “triple-point” asset, satisfying all the requirements that a new economy needs, all at once. As a result of this, Ether has become the best model for money that the world has come up with.David Hoffman, Interview with The Defiant – Ether is the Best Model for Money the World has Ever Seen: David Hoffman
There is not a single person, company, or even foundation working on Ethereum – there are hundreds, even a few thousands.
The network effect is hard to appreciate since it starts very slow, imperceptible.
Then it is still slow.
Then you might notice it is getting some traction, but it is still slow. Adoption starts to gain traction and you take notice of Ethereum and start wondering if it would be worth adding to your portfolio. But as the network effect works, the growth is exponential and by the time you decide it might be a good idea to buy into Ethereum, the price has gone up so much you think you’ve missed the opportunity. Then more exponential growth happens…
In summary, I am bullish on Ethereum LONG TERM due to the following:
- Betting on a successful upgrade to Ethereum 2.0
- A decrease in new Ethereum supply issuance per block.
- An increase in Ethereum being locked up for a combination of staking and DeFi – which ultimately drives utility demand and not speculative demand.
- DeFi itself, with so many various applications for Ethereum, I imagine that the cryptocurrency will penetrate many markets, industries and institutions.
- Market Capitalization for institutional investors – With Ethereum’s lead/head start and remarkable execution and functioning it makes sense for institutions to invest in Ethereum over any other DeFi/smart contract cryptocurrency. Since institutions will invest hundreds of millions or billions of dollars, they do not want to risk price slippage while buying in. It is more difficult to move the price of a larger market cap asset than a smaller market cap asset.
- Ethereum has greater reach with respect to community and adoption of the cryptocurrency.
Please let me know what you think of Ethereum or your investment thesis on Ethereum. Would love to have a lively discussion in the comments.
A reminder that no information on this post or site constitutes financial advice. Always consult with your financial advisor, do your own research and make your own investment decisions.
- Coin Desk – ‘95% Confidence’: Ethereum Developers Pencil In July 2020 for Eth 2.0 Launch
- Coin Desk – 3 Ways Staking Will Upend The Economics of Ethereum
- DeFi Pulse – https://defipulse.com/
- Interview with The Defiant – Ether is the Best Model for Money the World has Ever Seen: David Hoffman
- Medium – Ethereum: The Digital Financial Stack
- Trust Nodes – Ethereum Planning to Reduce Issuance in 2021
- Medium – Visualizing the Evolution of a Connected System
- Trust Nodes – Canadian Government Launches Live Ethereum Public Blockchain Trial for Government Contracts
- ICO.li – University of St. Gallen To Launch Blockchain-Based Degree Verification System
- Ethereum Enterprise Alliance
- Reuters – Exclusive: JPMorgan in talks to merge blockchain unit Quorum with startup ConsenSys – sources.
- The Visual Capitalist – All of the World’s Money and Markets in One Visualization