What is the Rational-Price of 1 ETH?

What would Ethereum be worth in a rational world? This is not an estimate of its future market price, but an attempt to calculate what a purely rational market would price ETH at, given what we know today.

First, what is the point of owning Ethereum (other than speculation)? (1) because you need it to pay for a transaction on the Ethereum network, and (2) you need it to run a validator node, i.e., you get to collect profits (Ethereum fees minus costs of running a node).

Today, the top 15 apps on Ethereum consumed about 7,319 ETH, worth about $13.9 million at today’s ETH price of about $1,900.

Let’s suppose that the people who run Ethereum (the miners / validators) collect all of this money, every day, forever. And let’s suppose that they have $0 cost to run these servers.

Lets also suppose that Vitalik Buterin is able to deliver Ethereum 2.0 in all its promised glory, and that it’s wildly successful; fees drop by 100x, and usage increases by 100x. That is to say, fees go from being $10 per swap to $0.10 per swap, and usage goes from 450k daily users to 45 million daily users. That means that the $13.9 million daily profit figure we calculated above will remain constant.

That means that Ethereum is generating, for its holders, $5.07 billion in profit per year. How much should that be worth?

Currently Google, Facebook, and Apple have a price-to-earnings ratio of around 20–25. Let’s pick 25. That means that Ethereum should have a market cap of $126 billion, or a price of about $1,043 per ETH. Currently, Ethereum’s market cap is at $231 billion, or a price of about $1,900.

However, this is not the whole story.

ETH Pricing is Complicated

Our calculations are complicated some because ETH not only represents ownership of the network, but also the fees paid to use the network. If the price of Ethereum halves, then the fees (profits) collected by validators also halves.

This would be like “what if you could only buy Apple products using Apple shares?”; people would buy and hoard Apple shares in preparation of buying the latest iPhone next year. This would make Apple’s stock price explode, making the price of the iPhone also explode, making the revenues and profits of Apple also explode, making the stock further explode, in a self-reinforcing loop. This cascade would price out everyone who “didn’t get in early” from owning an iPhone. These late-comers would then be driven into the arms of Apple’s cheaper iPhone-clones, which would crash Apple’s market share, crashing their revenues, crashing their share price, crashing the iPhone price. It would be a bizarre way to run a business, but this is exactly the story of Ethereum.

Ethereum combining these two use cases into one ETH token was pretty stupid to be honest, although every proof-of-stake crypto network has since copied Ethereum’s model (except for xDai / Gnosis, which prices usage in its DAI stablecoin like a sane crypto-architect would do). Ideally, an ETH-gas token and an ETH-validator token would be traded separately.

Either way, a price of $1,043 is extremely optimistic for ETH. Most likely it will lose market-share to competitors, and profit from running a validator node will be driven down closer to the economic cost of running a validator node, since anyone can run a validator node.

Modeling Based on Cost of Running the Network

Let’s build a price-model based on the cost of running the network instead.

Suppose there are 10,000 powerful servers validating Ethereum, each costing $1,000 per month or $12,000 per year. That’s a total cost of $120 million per year. For AWS, their profit margins are around 30%, while Azure has a profit margin of around 40%. Let’s give Ethereum validators a generous monopolistic profit margin of 80%. Then their revenue would be $600 million a year in transaction-fees, and $480 million in profit. That’s worth a market cap of about $12 billion, or a price of around $99 per ETH.

That is to say, optimistically ETH should be worth around $100. Hoarding and speculating dynamics could push this price up considerably higher temporarily, but it’s hard to logically justify ETH being worth more than $100, unless Ethereum dramatically changes its business model and finds new revenues for profit.

If Ethereum is eventually surpassed by a faster, cheaper alternative crypto network, it is possible that ETH could go much lower. Either way, it is likely that 10 years from now almost all of the world’s financial transactions will occur on some (possibly government run) crypto-network.

All in all, Ethereum is grossly overpriced today versus what it would be valued at in a purely rational world. How did this happen? Mostly the usual stimulus-induced speculative bubble. Furthermore, 10 million ETH (worth about $19 billion) were locked up in the ETH 2.0 contract at the end of 2020, and these tokens cannot be sold on the market until ETH 2.0 launches.

Future Outlook

It is likely that ETH will collapse in price to around $400 — $600 before the end of 2022. This is because the price of Ethereum is dependent almost entirely upon market sentiment, and market sentiment is decisively negative currently.

This would be negative for the Ethereum NFT market as well; NFTs sell for hundreds of thousands of dollars on Ethereum, but this is mostly because the bull-run in ETH has made its early holders very wealthy, and these risk-seeking individuals have a “I’m playing with the house’s money” mentality.