Why Ethereum is (Still) Undervalued (And Going Much Higher)

Oversold.

Ethereum is nearly at an oversold level on the daily RSI, its lowest level since September 2020 during the crypto market’s compression following a rampant post-halving summer rally. Given that we are in a bull market, a deep RSI retracement like this almost always warrants an oversold or low-risk high-upside long opportunity.

Compared to 2017:

ETH/BTC Near Historic Lows.

ETH/BTC is currently just above the 0.03 level, only about 0.015 away from its historic multi-year low. In fact, historically you can see that ETH spends a lot of time trading sideways between 0.04 and 0.08. Alas, we can determine that ETH is very low and has disproportionately more upside than downside from current prices. This is typical as Bitcoin tends to dominate crypto market dominance early-mid crypto bull cycles, and ETH typically tends to gain against the satoshi late in the bull cycle. Comparatively, you can see that ETH tends to peak in bull cycles around 0.1 ETH/BTC, meaning that ETH is at least a 3–4x from a cycle high.

Rising Investor Inflows.

Grayscale continues to acquire ETH en mass to meet investor demand for its #2 ranked Grayscale Ethereum Fund (ETHE), recently adding over 50,000 ETH under $1,600 during this recent correction. Grayscale now owns almost 3.2 million ETH, up nearly 20% since December 1, 2020.

Top Performing Currency.

Growing Active Addresses.

Network activity, users, and wallets continues to grow, showing increasing demand and adoption by the network for users and dApps alike. Active addresses tend to increase during bull markets when more people are buying, trading, and using the asset and dApps that use the asset.

More Staked ETH = Lower Supply.

Since the ETH’s beacon chain launched in December 2020, an increasing amount of ETH has been deposited on the beacon chain’s deposit contract, locked away safely for once ETH 2.0 launches its new Proof of Stake consensus mechanism.

Majority of Cryptos are ERC-20 (Built on ETH).

Statistically, crypto is largely a two-horse race: Bitcoin and Ethereum. “ETH Killers” have come and gone, meanwhile ETH continues to gobble up market share and crypto projects build on top of ETH’s network. In fact, Ethereum now processes more daily transaction fees than Bitcoin.

DeFi (mostly built on ETH) is Exploding.

Decentralized Finance applications (dApps) are surging in popularity, with investors moving to decentralized exchanges that run autonomously and do not require any counterparty risk such as third-party trust, custody, or discretionary account or asset restrictions. Most DEXes (and dApps) are built on ETH. Ethereum provides market exposure to all DeFi developments since Ethereum will receive transaction fees when staked after Ethereum finishes the migration to Ethereum 2.0. Exchanges and lending dApps have grown over 100x since the beginning of 2020, and many dApps use Ethereum as collateral.

EIP-1559 Not Priced In.

EIP-1559 (Ethereum Improvement Protocol) 1559 will provide 4 core features:

  • Burns transaction basefees instead of rewarding them to miners, dispels the popular criticism that ETH issuance is “infinite.”
  • Reduces ETH issuance without compromising network security.
  • Increases difficulty for mining pools and others to front-run trades.
  • Reduces network spam.

ETH 2.0.

If ETH 2.0 successfully ships functional ETH 2.0 phases on or near schedule, it will change the crypto ecosystem and entire financial system forever.

For now, any ETH deposited to stake on the beacon chain is safely locked away, inaccessible by investors until a later date TBD when staking goes live, expected sometime in the next 1–2 years. This takes ETH out of circulation (>3.3 million ETH to date) that is now being HODLed indefinitely. The implication is obvious: when PoS is live, investors will stake or buy to stake their ETH, locking it away and thus decreasing any selling in order to receive passive staking rewards for their ETH. This should be a huge boon for price going forward.

ETH very well could become a deflationary asset that earns fee revenue, used to pay fees, and used as collateral. These properties for an asset as valuable but all of them combined make it truly unique as an investment asset.

Investment Outlook.

ETH’s implied price-earnings ratio on current transaction fees is about 79. For an asset where the underlying usage is multiplying 25–100x (DeFi total value) YoY, ETH’s price seems very low compared to assets in traditional markets.

Bitcoin dominance has been north of 70% recently or the higher end of its range in recent years. As the bull cycle progresses, it should be expected that people will rotate some of their Bitcoin gains into Ethereum. Ethereum is currently down ~25% from its ATH of just over $2,000 and based on the above data points, I believe ETH to be relatively undervalued against Bitcoin (from an investment returns perspective; they are obviously different asset types with different functionalities).

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Originally published at https://www.publish0x.com.

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