Ethereum, The Triple Halving
(2 min read)
(2 min read)
Bitcoin has dominated the cryptocurrency space so far, but investors are turning their attention to Ethereum. Prior valuation models based on inferior comparables (BTC Stock to flow, Payment networks, Metcalfe’s law, DCF model on YTD fees) result in a $30-50,000 base case for Ethereum. However, I believe a $150,000 price target is achievable by January 2023. I base this claim on the concept of ‘The Triple Halving.’ That is, I believe Ethereum will have a sell pressure reduction equivalent to undergoing all three of Bitcoin’s halving events consecutively.
Illiquidity Drivers: Stake+DeFi is locked up now at a 12% market cap. Incentives will bring this to 30%. Fee burn removes the most liquid supply first. Negative stock to flow means no release valve through issuance. Yields cause ETH HODLing to go viral more than BTC HODLing ever could. Yield starts at 25+%. Yield is USD price insensitive and attracts more staking and more illiquidity.
Demand Drivers: There are new onramps for retail and institutional flows: Robinhood, Paypal, Venmo, and Futures. Funds already did the work to get access to Bitcoin, so access to Ethereum will be faster. US ETF timing is a wildcard. Massive relative to Canada ETF’s, so expect over $1 billion in capital inflows. At $1 trillion market cap, CTA flows, Risk Parity. ETF unlocks ESG, other discretionary.
Catalyst: The Triple Halving event is a known catalyst. EIP1559 is expected 14 July 2021. Proof of Stake (PoS) is expected in October/November 2021. This is a 90% reduction in issuance equivalent to three consecutive Bitcoin halving events. The events are staggered by four months, giving investors time to look into and adopt the narrative.
Narrative Adoption: Price leads narrative. A rise in price and the ETH/BTC ratio leads to narrative adoption. ETH is not BTC. It has an ultra-sound store of value, exploding active accounts and transaction volume, insanely low fees, and attractive DeFi and staking yields. Also, Visa accepts stablecoins, NFTs are fun, and its use-case is more intuitive than digital gold. Narrative potential means until searches for ETH are greater than those for BTC, the party is not over.
Ethereum remains unknown: Few outside crypto are familiar with Ethereum. Check CNBC mentions and Google Search Trends. ETH search results are much higher than BTC searches. Why are people unfamiliar? In the last cycle, the world learned about Bitcoin, not Ethereum. When cryptocurrency mania last happened, the current narrative did not yet exist. There were no plans for Proof of Stake or EIP1559, and no DeFi existed. Notice how many parts of the Ethereum thesis were either only released in the last year or have yet to be released.
Ethereum is priced via Bitcoin: Due to lack of narrative adoption, the market prices Ethereum relative to Bitcoin. Ethereum is completely different from Bitcoin yet trades more correlated than stocks within the same industry. Bitcoin’s narrative has dominated attention in the cryptocurrency space so far.
Proof of stake lowers geopolitical risk and increases network security at that market cap. It also locks up float so the price is inelastic to new demand even at high market caps. Yield incentivizes further institutional flows, which increases volatility.
A $30,000-50,000 base case implies a $3.5-5.5tn market cap, which investors could sustain in the long term given fundamental network value. A $150,000 peak, however, implies a $16tn market cap, which is unlikely to be sustained past the short term. Illiquidity produces upside volatility just as easily as it seeds downside volatility.