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Grayscale measures cryptocurrency value in new report

Ethereum undervalued?: Grayscale measures value in new report

Grayscale has evaluated the value of Ethereum in a new report. The report examined the cryptocurrency using three approaches.

The crypto year 2021 has already got off to a more than encouraging start for Ethereum. Due to the boom in the decentralised financial sector (DeFi), which is based on the Ethereum blockchain, the second most valuable cryptocurrency is Bitcoin Trader currently at a new all-time high. At the time of going to press, the price was over 1,762 US dollars. Grayscale took this development as an opportunity to determine the value of the asset more precisely. The largest asset manager for digital assets examined the cryptocurrency using three approaches: Ether as a monetary asset, Ether as a consumable asset and Ether as an interest-bearing asset.

The first part of the report dealt with the money aspect of Ethereum. Ether is, in many ways, the money of the modern era. This is because every time a user closes a smart contract on the Ethereum network, provides liquidity to an application or enters a trade on a decentralised exchange, Ether would be needed to pay the network fees, the report said. While there are no capacity limits, as with Bitcoin, the network tries to use only the most necessary amount of ETH to secure the network. Competition comes from alternative assets and stablecoins, which are becoming increasingly popular. The increasing use of Ethereum as a settlement network, on the other hand, is a positive trend.

ETH as a consumer good

The fact that fees are charged for every transaction on the Ethereum network, and that the fees even increase as usage rises, could create problems for Ether. For example, investors could only hold the minimum amount of ETH necessary to pay these fees. While this would increase the speed of settlement, it would also mean a drop in the price of Ether.

The cryptocurrency counters this by using „EIP-1559“ to try to „burn“ (destroy) Ether that is created from transactions. According to the Grayscale report, this process would then completely transform Ethereum from a crypto-asset into a digital commodity.

In general, the „combustion mechanism“ can also take on a deflationary function if, for example, too many ETH are in circulation. This shortage would then lead to an increase in the price of Ethereum, as each unit would have to cover a larger share of economic activity.

According to Grayscale, price fluctuations are still very likely, but the transparent tracking within the blockchain protocols makes it relatively easy to analyse or interpret the intensity of activity. More specifically, the report states:

We can examine the total daily transaction fees collected on the Ethereum network as a measure of demand. Since Ether is the commodity that pays these fees, high fees drive demand for Ether, just as an increase in travel might drive demand for gasoline.
Phil Bonello, Grayscale Research „Valuing Ethereum“

Currently, he said, it is worth noting that transaction fees in January 2021 increased fivefold compared to the same period in 2018, while the price remained roughly the same. Another way to look at the value of Ether is to compare the historical price to sales (fees) on the network. A low price-to-sales ratio suggests that Ethereum may be undervalued.