Ethereum, the “baby brother” of Bitcoin, is in the news again, because its price has tripled since April.

Ethereum is variously described as “the world’s leading programmable blockchain,” and a “revolutionary global software platform” but what seems to attract most buyers is the “native cryptocurrency” known as ether and traded under the ticker ETH.

It is the price of ETH, and its recent rocket-like trajectory, that is attracting interest recently.

The total market capitalization of ETH, as of late August, is over half a trillion dollars. This puts ETH, in market cap terms, among publicly traded companies such as Oracle, Eli Lilly, Visa and Walmart.

Recent Price Drivers

The price of ETH has neared $5000, rising from the mid-$1000s in the spring. The following graph shows daily closing prices for ETH.

One of the leading arguments in favor of Bitcoin is the claim (we don’t challenge it, but we can’t verify it either) that the supply of Bitcoin is fixed forever at a maximum supply.

ETH does not claim to have a fixed supply. Instead, the total quantity of ETH varies with issuance and usage. Without going into the technical explanations (which I don’t understand and could not do justice to), the claim is that ETH has a “deflationary supply” because, supposedly, the more successful it is, more of it gets “used up” than gets created.

However, it seems probable that the recent price movements have been driven by  conventional demand.

ETFs and ETH

In what is probably an unintentional exhibit for the confusing power of acronyms, the recent demand for Ether (the name of the stuff that trades as “ETH”) has been driven by recent approvals allowing Exchange Traded Funds (ETFs) to buy Ether (ETH).

This has given rise to people (or is it bots?) writing things like “ETFs Drive ETH Higher.” I find it much easier to understand the same concept when it’s written as “Exchange Traded Fund buying drives Ethereum to new high prices.”

According to various reports, since spring spot (as opposed to futures) Ether Exchange Traded Funds have attracted nearly $3 billion in net inflows, much greater than comparable inflows to Bitcoin products.

In addition, some corporations are also buying and holding ETH. Reportedly, U.S. companies now hold more than $17 billion in ETH reserves, with BitMINE Immersion Technologies accumulating upwards of $7 billion.

Speculation vs. Investment

Investors like Warren Buffett define investment as buying an asset for less than the present value of the future cash flows that the investment will produce. If an asset will not produce future cash flows, that asset cannot be an investment according to this cash-flow definition.

Can Ether produce cash flows? According the fans of ETH, the answer is yes. Through a mechanism that is too complicated to explain here (and which I don’t understand!) users “burning” ETH to accomplish “on-chain” tasks create an offtake which somehow generates cash flows (though it’s not clear to me to whom).

So maybe ETH can be valued like an investment.

Profit Taking?

Assume that ETH can generate cash flows. We can estimate what those cash flows would have to be.

In a standard discounted cash flow model, we would assume that the cash flows grow at some rate for some period, then reach a terminal level at which we simply put a “market multiple” on them.

It is hard to do this with ETH because ETH does not report accounting like a normal company (because it isn’t one). Here, for example, is how a site called bitleaf explains a discounted cash flow approach to ETH:

We apply DCF to Ethereum which has calculatable cash flows through its business model.
1.     All users pay fees in ETH when interacting with applications on Ethereum.
2.     For each fee, a portion of ETH is burned and removed from circulation. Fee burning, like a share buyback, reduces circulating supply and increases long-term value for current ETH holders, representing revenues.
3.     The portion of the fee that is not burned is paid to validators and Ethereum also issues new ETH to validators for their work (like stock-based compensation). This dilutes existing ETH holders, constituting an expense.
4.     The difference between the daily value of the burned ETH and newly issued ETH represents the daily earnings for existing ETH holders.[1]

When these guys apply the above, they come up with low current numbers (some negative as of 2024).

I think it’s safe to say that for ETH to be justified at its current price on a discounted cash flow basis, enormous future growth would have to occur, in relatively short order.

What to Do if You Want to Sell ETH

If you’re thinking about taking profits on Ethereum, selling outright could mean a large capital gains tax bill. Our Asset Diversification Trusts let you sell appreciated assets like ETH tax-free, so you can reinvest the full value into a diversified portfolio. For more information, please email us at [email protected] or call us at 703-437-9720.

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[1] https://thebitleaf.com/a-dcf-for-ethereum/#:~:text=Discounted%20Cash%20Flow%20Modelling%20for,earnings%20for%20existing%20ETH%20holders.