- The transition from Ethereum’s Proof of Work to Proof of Stake will take place in the second quarter of this year.
- This change will allow investment analysts to evaluate ethers using discounted cash flow (DCF).
- Using DCF, we analyze how an analyst sees an increase in ether in the 90% to 220% range.
The transition from Ethereum’s Proof of Work to the Proof of Stake consensus mechanism is set to bring many exciting developments to the network, including reduced energy usage, lower gas prices, and faster transaction speeds.
However, one of the lesser-known benefits is that investment analysts will be able to evaluate the second most traded cryptocurrency, ether, using a reliable cash flow analysis method.
In Bloomberg Intelligence’s latest Cryptographic Outlook Note, their strategists explain how switching to Proof of Stakes makes it easier to build a rating scale for the Ethereum network.
“Discounted cash flow (DCF) analysis shows that Ethereum can be undervalued as it approaches an upgrade,” said Mike McGrone, senior commodity strategist at Bloomberg Intelligence, in a note in April. Stated.
In the proof of stake model, individuals provide their own cryptography to validate transactions, and when the blockchain is updated with data, they are rewarded in return.
“Traditional investors may find that the rules of the game have changed with Ethereum. Ethereum has evolved into a crossover asset with a unique blend of equity, commodities, and financial traits.” Said McGrone.
The next step in that process is “merging,” which will take place in the second quarter of this year.
merge
According to Simon Morris, chief strategy officer at ConsenSys, a blockchain technology company founded by Ethereum co-founder Joseph Lubin, “merging” is an “event that fails in a blink of an eye.”
In a recent interview, Morris said the event was just a switch where block production was redirected from one source to another. After the switch, he added that Ethereum began using the Proof of Stake consensus mechanism and relied on a beacon chain that had already been in production for over a year.
“The next merger to move Ethereum from a proof of work model to a proof of stake will turn Ethereum into an equity-like instrument with elegant supply-demand dynamics that can drive a great deal of interest in assets.” Said McGrone.
Individuals who choose to bet Ethereum to assist in the verification of the blockchain are entitled to a portion of the revenue generated by the network.
According to McGlone, about 70% of the commission is burned, which is similar to a buyback, but the rest is distributed to the stacker as a reward or dividend.
“If the demand for block space and the total price paid increase, stackers will enjoy both higher payments and reduced issuance, and vice versa,” McGrone said.
“Because blockchain has no direct cost (only indirectly in the form of token issuance), revenue represents revenue (profit) and traditional financial ratios such as price-earnings ratio can be used,” he said. I added.
Cash flow valuations determine the value of money over different periods of time. Discounted cash flows are best known and estimate the value of an investment based on expected future cash flows.
Changes in the consensus mechanism have made it possible to apply a similar method to the evaluation of Ethereum.
Ether Cash Flow Analysis
In the report, the strategist uses three different discounted cash flow analysis methods to come up with an Ethereum valuation range.
They use both basic and preferred transaction fees to estimate cash flows. However, it excludes transaction fees or staking fees resulting from new issuance, as well as deflationary burning from the EIP-1559 repurchase that should occur after the merge is complete.
The core scenario is a permanent growth method that assumes that the growth rate of free cash flow in the final year of the first forecast period will continue indefinitely. Using this method, the current level is about $ 3,300, while the ether value is $ 6,128.
The second, more conservative estimate uses the “H model”. In this model, we can see that the ether value is $ 5,539, which is 90% higher than when the report was published.
The final approach is to use the price-earnings ratio exit method, which estimates cash flow using a set of multiples. Like Apple, based on a 25x exit, ether should be valued at $ 9,328, about 220% higher than it is today. And given that Ethereum has a higher growth profile than Apple, this multiple is modest.
“The three DCF triangulations provide an average of $ 6,998, 140% higher than current levels,” McGlone said.
However, merge delays can affect price changes. In particular, McGlone states that the main risk of revaluation is substandard total transaction fees.
Morris of ConsenSys said that merging alone does not mean that the Ethereum blockchain can suddenly accommodate all new uses of the network.
“This merge doesn’t introduce scalability, it introduces extensible prerequisites, but it doesn’t introduce scalability in itself,” Morris said in a recent interview.
Bull market trend
The Bloomberg Intelligence team believes that structural trends in decentralized finance, social experiences and games will support Ethereum’s strong growth period, with prices rising over the next 12 months.
“The network is on track to generate $ 12.7 billion in 2022, and our base model is that cash flow will increase by 30% annually over the next three years before it declines to final growth in 2035. Predict (against the 212% trend), “McGloan said.
“As the merger improves visibility in the coming months, Ethereum may close the valuation gap and outperform other assets in 2022,” he added.
One of the promising signs is the strong recovery of altcoin last month. Many of them, including Solana, Terra and Avalanche, posted 1.5 to 2 times higher returns than Bitcoin in March.
Volatility
According to the report, take into account.
“This improvement in technology is a healthy sign that risk appetite is returning,” McGrone said.
