Thread by @ShaanVP

I think ETH is undervalued by 4x - and here’s the math that shows why.

Usually when someone says “ETH is going to $10k!” its driven by:
- Hopes and dreams
- Clickbait
- Or weak logic (“if 1% of the world uses it..”)

But @ryanallis (crypto quant investor) came out w/ a discounted cashflow model that values ETH at $10k TODAY (trading at ~$2.6k)

Let me try to explain his model - in a way that doesn't require a PHD.

There are 3 key points:

#1 - ETH has REAL REVENUE

Every transaction in ETH has a fee.

Those fees add up, in january it was ~$1.3B in fees.

The fees get split into two parts:

1) The Base fee - like ordering steak at a restaurant
2) The Tip fee - like tipping your waiter

Where does the revenue go?

70% of the revenue (the “base fee”) is BURNED.

They take ETH and burn it. Supply goes DOWN, prices go UP.

Companies do this all the time. It’s called a share-buy-back. They buy stock, get rid of it, and it drives the stock price up.

Google “ETH watch the burn”

There's a great website that shows you how much ETH supply is being reduced everyday.

Last 24hrs, $36M worth of ETH was burned.

Long term, this is why ETH believers created the term “ultra sound money” bc ETH supply goes down over time

OK got it. 70% of the revenue is used for a buy back. so what about the other 30%?

This will be paid to long term ETH holders (stakers).

This is like a dividend, paid to ETH holders.

(*note, this will happen when ETH 2.0 launches 'this year')

#2 - We Know How to Value Companies with Cashflows

Ryan went to Harvard Business School (great school, never been..)

so he knows how to do a Discounted Cash Flow (DCF) model.

quick pro-tip:

if you like to learn this kinda stuff, you should read the email newsletter called the Milk Road. @MilkRoadDaily

I'll put a link at the end of this thread so you can get it (it's free)

You can play with @ryanallis model yourself (it’s a google sheet)

The model conservatively puts the present value for ETH at ~$10k.

assumptions:
* the model assumes a 25% annual growth rate
* and a 35x P/E ratio (the average of the SP500)

So - do I think he's right?

well...

1) I do think ETH is undervalued
2) But… I have a saying, “there's more fiction in excel than in the library"

A model is only as good as its assumptions.

Here's the risks I see in the model

#3 - Models are only as good as their assumptions

right now, most of the transactions happen on ETH, and fees are high.

users don't like this. devs don't like this.

so the risks are:

1) What if majority of txns move to L2s?
2) What if another L1 chain (eg. solana) wins?

But a bigger point is - we've heard for years that crypto is:

“Rat poison”
“It’s just speculation”
“Not an investment. No fundamental value”

From value investors like Warren Buffet

That's wrong now. ETH now has real cashflows to use in fundamental analysis.

so yea. let's all get rich, hold hands, and drink caprisun from the bottom of the pouch.

and if you like to learn stuff like this - get the Milk Road
daily email (it's free)

milkroad.com/subscribe?ref=…