Earlier this month I wrote an article about the extremely unlikely and near-impossibility of Ethereum reaching zero. The article came about as a response to a publication on TechCrunch in which the author, using a series of questionable assumptions, predicted a $0 value of Ether. Its timing couldn’t have been better; in the past few months, the mainstream narrative of Ethereum has begun to change, moving from pages upon pages of bullish language to its complete opposite. Of course with so many smaller coins and investors looking for Ethereum-level riches, these dissenting opinions are amplified and the reality is obscured.
This new narrative was bolstered when Ethereum co-founder, Vitalik Buterin, agreed that Ether would go to zero based on the TechCrunch article’s assumptions. While Vitalik’s response was followed up with clarification that such an outcome would only exist if Ethereum were not to continue on its development roadmap, the cat was out of the bag and the pitchforks already brandished. Despite all the hubbub that followed, I am a firm believer that software speaks for itself, and while the speculative froth may ebb and flow, the long-term outcome can be discovered early on simply by cutting through the bullshit.
Will Ethereum Go Above $1000?
In light of this skepticism, what factors may come into play to send the price of Ethereum climbing again?
Ethereum’s Inflating Supply
Bitcoin, with its long-term supply cap of 21M coins, has managed to achieve a $1000+ price, which it seems unlikely to ever drop below in the future. Ethereum, on the other hand, currently has 102M coins with 3 new Ether (soon to drop to 2) “minted” every 15 seconds. This forever-inflating supply has been a major criticism of Ethereum’s investment case, yet those who dig a little deeper will find that Ethereum’s supply inflation is not all it seems.
I definitely do increasingly think that in the long run, dropping issuance to zero is a good idea.
– Vitalik Buterin, 11 September 2018
The quote above received almost no attention at all.
Given that the supply inflation rate of Ethereum and Bitcoin today is very similar, with Bitcoin trending towards zero over the long-term and Ethereum with a significant chance of doing the same, we can now compare the two assuming a capped supply. On the basis that Ethereum does end up capping the supply of Ether to – let’s say – 110M, what implications does that have on the price? Given equal demand to Bitcoin, with this supply cap we can expect ETH/BTC to sit roughly at 0.2 – or $1300 at today’s prices. Should there be greater demand for Ethereum (which I will argue for below), then the price could well exceed that amount given a fixed supply cap.
Ethereum has been rightly criticised for its poor user experience (UX) and high transaction costs; these are two factors which have certainly stifled demand of the platform. However, for the purposes of looking at the price of Ethereum over the long-run, these factors can be largely ignored given their decreasing marginal effect (these problems are organically solved over time). This leaves us looking at the demand of Ether with respect to its applications – are they solving a problem and to what extent? Can decentralized apps bring about a level of demand that would justify a $1,000 Ether?
The main application types that can be built on Ethereum today cover:
- Decentralized Governance
- Digital Asset Storage
- Decentralized Exchange
Within each of these categories are a handful of early-stage apps. For Decentralized Governance we have MakerDAO, where users can create the stablecoin DAI by putting up collateral. With Digital Asset Storage we have CryptoKitties and others including the soon to launch GamerToken for storing and trading in-game items. Decentralised Exchange has the likes of IDEX, LocalEthereum and ForkDelta, all providing non-custodial exchange services that provide a clear benefit over their centralized counterparts. And for the Gambling category, the list of apps is the longest; after all this was one of the first obvious use-cases for a decentralized computer like Ethereum.
The reason why these applications aren’t driving demand through the roof comes back to the two issues that I said had very little weight in the long term: cost and UX. Another stranglehold on the market is the speed at which businesses and users can transition to Ethereum. Ethereum makes markets more efficient, which in lay terms means that profit margins are slashed – the above use-cases are all less profitable than their centralized alternative. As such, the move to Ethereum will be a user-driven one, which means that the cost and UX problems must be solved before we’ll see any real signs of mainstream adoption.
The best route for an investor to interpret this future demand is to get hands on with some dApps: breeding a CryptoKitty, generating some DAI or making a trustless bet. It is those investors who can look through the awkward UX to envisage the platform in 5-10 years who stand to make the best long-term decision.
The Ethereum Foundation is a well-funded group of core developers whose job it is to improve Ethereum at the protocol level. But while the EF exists, the largest opportunity for solving Ethereum’s problems comes from second layer solutions, for which there is a large developer community surrounding it. One of the best metrics for determining the size of the developer community is to look at the number of users on each platform’s StackExchange site (a highly popular Q&A platform for developers).
The current number of Ethereum StackExchange users stands at 40,000. To provide some context:
- Bitcoin – 62,000
- Ethereum – 40,000
- EOS – 2,400
- IOTA – 2,100
- Stellar – 1,700
- Cardano – soon to launch
- NEO – didn’t receive enough interest to launch
- Bitcoin Cash – never attempted
- Tron – never attempted
You have to ask yourself, why does the developer landscape look like this? Given the problems facing blockchains as a whole (scalability, user experience, cost etc), which platforms are most likely to solve these issues first? While the number of developers in each of these communities is just one metric in a complex measurement, it does help build a picture of reality. When we’re dealing with technology, it’s advisable to follow the people who are building it and not those selling it. This idea could not be made more apparent than in comparing the Ethereum Foundation’s introduction to Ethereum with that of Tron’s (TRX). Investors who are more excited by the latter are doomed.
For those interested in the amount of development effort going into Ethereum, I encourage you subscribe to the Week In Ethereum newsletter.
Proof Of Stake
Ethereum will – in the next 2 years – launch Proof of Stake, enabling users to earn “interest” on their Ether by staking it on the network and validating transactions. Proof of Stake also moves the network closer to zero supply inflation, as stakers do not require large rewards given the low cost of running a validating node. In the case of Proof of Work, miners have to expend a significant amount on electricity and hardware, requiring a greater reward for the service.
As discussed in the previous article, burning gas is a proposal that may gain some weight among the developer community. For every transaction that happens on Ethereum, we might expect that a small amount of Ether will be burned. The demand and supply effects of PoS and gas burning on the price of Ether should be clear.
Why does Ethereum have to be valuable?
This is a question that is often asked about public blockchains. Why do we even need a cryptocurrency of any value, let alone a $1,000+ one? The two most pertinent answers to that question would seem to be:
- Security – Users will not secure a network unless they are rewarded. Cryptocurrencies are an essential incentive for securing a decentralized network.
- Developer Interest – A rising price attracts publicity and signals greater value than a network whose value is falling. Developers want to create software that is used, and therefore a healthy network value is important. This element has proven so important that the EF have discussed enshrining Ethereum into the blockchain to protect its value.
When will Ethereum reach a new all time high?
Many failed projects and literal scams have tarnished the industry, leading to a perceived drop in the underlying value of Ethereum when fundamentally the platform has only improved. This overreaction and the subsequent panic (ETH/BTC dropped to 0.03) has led me to believe that we’ve now seen the bottom of this year’s bear market. My original concern that the price may not recover for multiple years has somewhat dissipated, and at the rate of development occurring today I would expect ETH to cross $1,000 USD and near new highs in the next 18 months. As with all predictions, they can be wildly inaccurate and there are plenty of unknowns that cannot be accounted for. For a more reliable prediction, check out our Ethereum price predictions which use data from the Ethereum-based Augur prediction market.