Can Ethereum Hit $15k? – An In-depth Analysis

Ethereum is a decentralized blockchain platform that allows developers to create and deploy decentralized applications (dApps) using smart contracts. It is the second-largest cryptocurrency with a current market capitalization of around $190 billion as of March 2023.

In this report I will provide arguments for the thesis that Ethereum is one of the best long-term risk/reward investments within the crypto ecosystem. 

Use Cases for Ethereum

The two main use cases that have taken off so far within the ethereum ecosystem are DeFi (decentralized finance) and NFTs (non-fungible tokens). 

Potential Value for Ethereum

First we can look at categories that might be disrupted by Ethereum’s use cases [1]. This gives us an indication of a ceiling in terms of valuation. To explain the concept we can take bitcoin as an example where we can use the market cap (mc) of gold for a ceiling. If it were to completely replace gold as a store of value, the price would be $1.3m per bitcoin. 

For the DeFi use case of ethereum the relevant category is Financial Stocks ($7T). We can also imagine the L2 ecosystem becoming sufficiently performant that it could enable payment backends such as currently provided by Visa and mastercard (together $0.8T mc). Since ethereum acts as the settlement layer for L2s, it would also benefit from their growth.

Fig 1: Market capitalization in trillion USD of different categories relevant for crypto 

So if we use this approach we can estimate the potential value for Ethereum to be $2T (e.g. $0.5T from payments, $1.5T from DeFi). This would equate to ~$15000 per ethereum. 

Security

Another important aspect is security. Blockchains are only as secure as the cost to 51% attack them. In the case of ethereum which switched to a proof-of-stake consensus mechanism last year, we can calculate this cost as being roughly 51% of its market cap (~$0.1T). This is relevant for a scenario where the value stored on top of ethereum grows a lot. The current total value stored on ethereum can be approximated by adding the total market cap of all ERC-20 tokens ($95B [3]) and the value of all NFTs ($20-40B [2]). This results in roughly ~$0.12T in value stored. But of course if DeFi wants to fulfill its ambition to replace parts of the current banking system backend it must be able to secure much higher values (the relevant categories here are Real Estate with $250T mc and Debt $226T). An open question is whether the valuation of ethereum can keep pace with the value it needs to secure. 

Ethereum as a high beta tech stock

We can also look at ethereum as a high beta tech stock. It provides a technical solution to programmatically handle value in a decentralized way. The correlation with the nasdaq (on a weekly timeframe) for example is consistently around 0.75 or higher on a rolling basis.

Fig 2: Weekly chart of ethereum and nasdaq with rolling correlation coefficient

Stocks are traditionally valued using a discounted cash flow model. So if we were to estimate the potential value of ethereum by estimating the potential cash flow it can generate for the stakers we also have to consider factors that can influence transaction fees and other factors that can increase staking yield. 

In general stakers earn more if ethereum gas prices rise. But of course if we one day live in a world where gas prices are consistently at 150 gwei or more, this makes interacting with ethereum very expensive for the average user. This scenario is still possible however if we think of ethereum as a global settlement layer for a large L2 ecosystem where most of the activity happens. Another source of income for stakers is earning parts of the miner extractable value (MEV). If more and more trading volume happens on ethereum (maybe also trading of synthetic equivalents of off-chain assets such as stocks, forex, options, debt) the MEV will increase dramatically and with it the staking yield of ethereum. 

Another very relevant topic is the fee burning mechanism of ethereum. If gas prices rise above 15 gwei, ethereum becomes deflationary. We can think of this as being similar to a stock buyback program of a tech stock. Even now – during a bear market – ethereum is already net deflationary since the merge which happened 175 days ago [4]. This deflationary trend will accelerate dramatically once gas prices start to rise due to more on-chain activity. 

One of the biggest factors that can also increase staking yield potentially in the future is a concept called restaking that is enabled by the EigenLayer project. The whitepaper [5] states: “EigenLayer is a set of smart contracts on Ethereum that allows consensus layer Ether (ETH) stakers to opt in to validating new software modules built on top of the Ethereum ecosystem. Stakers opt in by granting the EigenLayer smart contracts the ability to impose additional slashing conditions on their staked ETH, allowing an extension of cryptoeconomic security. By opting in to EigenLayer, stakers can validate for many types of modules including consensus protocols, data availability layers, virtual machines, keeper networks, oracle networks, bridges, threshold cryptography schemes, and trusted execution environments.” In a nutshell this means that ethereum can be used to secure a large variety of applications, not just the ethereum network itself. It remains to be seen how much additional income stakers can earn by opting in to restaking using EigenLayer but it is safe to say that the potential is huge.

We live in an EVM world

One last aspect that is worth highlighting is that the ethereum virtual machine (EVM) has basically become the standard for developing smart contracts. This leads to a large network effect in terms of tooling for developers. 

Conclusion

A long-term price potential of ethereum of $15000 seems possible when analyzing the financial segments it wants to compete with (see Fig 1). We saw that ethereum needs to have a much higher market cap if it wants to secure more value on-chain to defend against 51% attacks. We looked at ethereum through the lens of a high beta tech stock and looked at potential factors that can increase the revenue that is generated for stakers. The most prominent factors are higher gas prices, MEV and restaking through EigenLayer. We also saw that ethereum has the potential to become heavily deflationary if gas prices rise due to higher usage. Lastly, ethereum benefits from the fact that it has the biggest network effect in terms of adoption of its EVM standard which has led to the best tooling ecosystem for developers.