Ethereum network is valued fairly, but ETH could still see 17x return — Brian Russ


Ethereum (ETH) price has increased by 128% over the past 12 months and has gained 804,027% since opening for trading at $0.43 on Oct. 20, 2015. Despite this phenomenal growth, is there room for Ether price to rally 17x from its current trading price? 

Brian Russ, the managing director of BMO Financial Group at the Colorado market, thinks it is a possibility.

On March 1, at ETHDenver, Russ spoke about how traditional finance analysts use various quantitative models to value a company, a blockchain and its token.

Selecting the Ethereum network as an example, Ross detailed how his methodology is comprised of the discounted cash flow, precedent transaction, market comparables and Metcalfe’s Law models.

Ethereum could currently be 15% undervalued

Starting with the discounted cash flow (DCF) model, Russ explained that the model says that a company, or in this case, a blockchain, “is worth the summation of all the profits it will generate forever.”

The model projects forward what those profits might be and then applies a “discount rate to bring those profits back to 2024 chain dollars” for a more accurate representation of what the project is worth today.

To determine what cash flows are and how quickly they are growing on the Ethereum network, Russ suggests looking at Ethereum wallet growth. Data from Etherscan shows wallets on Ethereum growing at 36% annually for the last 5 years.

Assuming a 33% annual wallet growth for 10 years, Russ estimates that 50% of the global population, or 4.5 billion users, could be using Ethereum by 2033. Russ concedes that “half the world’s population” using Ethereum in 10 years “is a lofty assumption,” but it remains a possibility.

To determine the type of profit that Ethereum generates, Russ looks at the amount of Ether issued and burned as a proxy for Ethereum revenues.

“If we take the burn (the revenue) minus the issuance (the expense), revenue minus expense equals profit.”

The result is $1.8 billion dollars in profit generated by the Ethereum network in 2023, and growing this figure by 33% per year for 10 years gives Russ’s $458 billion future value of the Ethereum blockchain.

Estimating the Ethereum network’s value based on wallet growth projections. Source: Brian Russ

After the 10th year, a more conservative 5% growth rate is used, and the Fed Funds rate or risk-free rate at 5% is applied “to bring the cash flow figure back to 2024 dollars.” The resulting $400 billion valuation reflects a 15% premium and suggests that Ethereum blockchain is undervalued by this amount today.

Precedent transactions give insight into Ethereum’s current value

Similar to real estate, estimating the value of a company or property requires analyzing competitors’ revenue, cash flow and market capitalization. Comparing Ethereum against other early-stage tech companies that achieved dominant market share and analyzing each companies price to price-to-earnings ratio during their first profitable year, along with the average P/E ratio on a 5-year basis.

Comparing Ethereum valuation against listed Big Tech companies. Source: Brian Russ

The result suggests that the Ethereum network’s total value is $312 billion dollars, meaning — according to the model — that Ethereum is currently overvalued by 20%.

How Ethereum compares to other blockchains

Comparing the Ethereum network to other layer-1 projects, Russ uses a formula that takes a blockchain’s market cap and divides it by the total value locked (TVL) on the same blockchain. “Taking the sum of the market caps for the top 6 blockchain projects and dividing it by the total value locked on the 6 projects gives a total MC/TVL figure of 8.”

Ethereum network valuation versus other blockchains. Source: Brian Russ

Applying this figure to the Ethereum network (8 x Ethereum’s TVL at $47 billion), shows the blockchain valued at $376 billion, suggesting that the blockchain is approximately 6% overvalued.

Metcalfe’s Law

Metcalfe’s law is often used to estimate a network’s valuation. According to the model’s creator, Robert Metcalfe, because of the way new technologies scale, a network’s valuation and future value should be evaluated on an exponential basis, rather than linearly. The law states that “the value of a network is proportional to the square of the number of connected users.”

Metcalfe’s Law visualized. Source: Google

Using data from Etherscan and looking at monthly active Ethereum users (15 million) squared gives a $225 billion valuation for the Ethereum blockchain, suggesting the network’s true value is 44% below its current $400 billion market cap. Russ notes that using Metcalfe’s Law model kicks out a figure that is “the most out of line with the other models,” but there’s a catch.

So, is Ethereum undervalued or overvalued?

Taking the various outcomes from the four models used and adding a simple weighted average of 25% from each model gives an implied value of $345 billion or $2,875 per Ether, according to Russ.

Russ said,

“The ultimate conclusion is that the Ethereum blockchain, based on this model, is fairly valued plus or minus 15%. That’s not the most exciting conclusion, but this exercise is important.”

Model weighted average of the Ethereum blockchain. Source: Brian Russ

Russ concludes that while the model’s ETH price valuation might not excite investors who expect ETH price to rise much higher than its current value, the use of quantitative-based models gives more “accurate and conservative estimates for a project’s true value. The use of multiple valuation models can also help investors “identify arbitrage opportunities.”

For investors, Russ says his model allows the creation of deep convictions about Ethereum’s current value and its potential future valuation.

“Through this rigorous, quantitative approach, we’re able to determine that the valuation of the Ethereum blockchain is actually fair. We think it is fairly valued, and the reason that’s important, especially as investors, is because it gives us the conviction that we are investing in something at fair value, and with that conviction, we can hold on to it for the long haul. For 3 years, 5 years, 10 years. Imagine if you had done this exercise and determined that Ethereum had this upside potential back in 2016, or 2017.”

Related: How will Ethereum price react to Bitcoin ETF approval?

Can Ether price do a 17x return?

Russ hinted that Ether could possibly do a 17x return from its current valuation. Referring back to the 33% per year growth of Ethereum wallets/profits, Russ said that using simple compounding and a 10-year view of this trend holding means that $1,000 invested in Ether today would be worth $17,319 by 2033.

Possible ETH value in 10 years. Source: Brian Russ