21Shares Research Newsletter – Issue 98
Ethereum is scheduled to have a network upgrade in July, leading to transaction fees on the network to be permanently removed from the supply. Under this new paradigm, Ethereum can be valued similarly to other commodities, and this new deflationary pressure will likely lead to a repricing of the asset.
What Is Ethereum?
Ethereum is the second-largest cryptoasset by its market value of approximately $200 billion, after Bitcoin ($1 trillion), and represents the largest single innovation within the cryptoasset blockchain industry since the creation of Bitcoin in 2009.
While Bitcoin is the world’s first decentralised, peer-to-peer digital currency and is considered the world’s first digital gold, Ethereum is the first form of digital oil, serving as a fuel to use a world’s computer, the Ethereum blockchain. For example, entrepreneurs build on Ethereum decentralised financial services standing for Decentralized Finance (DeFi), which disrupt conventional finance such as market making, trading and lending, to name a few.
Ethereum’s key feature is smart contracts, which are computer programs that exist on the blockchain to automate financial activity and, to some extent, reduce intermediaries we know in traditional finance such as brokers, market makers, etc. Demand for Ethereum as a digital oil and smart contracts has helped Ethereum (AETH | ISIN: CH0454664027) return 1,318% since the start of 2020, compared to 642% for Bitcoin, and 18% for the S&P500.
Decentralised finance refers to a technology effort to recreate existing financial services such as saving, lending, and investing in a decentralised manner using the Ethereum blockchain’s power.
What is the network upgrade?
Ethereum’s next network upgrade in July will revamp the network’s economic model and create a deflationary supply shock as demand for decentralised financial services has significantly increased over the past months, with over $40 billion in total assets across applications.
The network upgrade, called EIP-1559, aims to make it easier for users of Ethereum to calculate the transaction fees they need to pay to interact with decentralised financial services. It does this by assigning a minimum and dynamic fee that users pay and permanently removed from Ethereum’s supply. This means that there will be deflationary pressure on Ethereum as demand increases, in the same way as many other heavily-coveted commodities such as oil function.
Bitcoin’s value is predicated on its fixed supply cap of 21,000,000 bitcoin. Ethereum will take a similar approach where, over the long-term, the asset may see a deflationary supply as demand for decentralised finance increases. The upcoming network upgrade will enable investors to rethink Ethereum as a digital oil or commodity and, therefore, price it.
What is the likely outcome?
Ethereum’s upcoming network upgrade will likely see a repricing of the asset as investor expectations shift away from viewing Ethereum as a speculative currency to viewing it as a digital commodity. Ethereum will be priced based on demand (for transaction fees) and supply (amount of ETH created and burned) in a similar way to how gas and oil are valued. This fact will likely greatly expand the types of investors who are comfortable seeking exposure to the asset. In recent weeks, we’ve heard of businesses allocated to Ethereum as a buffer for its future need for their decentralised finance use cases — it would not be surprising to see banks in the future do the same.
Investors who are already comfortable with making investments in other commodities will take advantage of getting exposure to the world’s most popular digital commodity and the fuel for decentralised finance. Investors can already access Ethereum exposure through our 21Shares Ethereum ETP (AETH | ISIN: CH0454664027). Today, we are proud to have listed our Ethereum ETP on Deutsche Borse, effectively becoming the first-ever Ethereum ETP listed on this regulated venue. “After the immensely successful launch of the first Polkadot ETP just a month ago, we are working on several more launches in the second and third quarter,” said Hany Rashwan, CEO 21Shares.
The performance of other smart contract competitors in 2021 is a signal of how well we can expect Ethereum to perform as it reclaims its lead. As the chart below shows, Ethereum competitors have performed between 289-868% compared to 148% for Ethereum since the start of the year. Based on the fundamental paradigm shift from the upcoming network upgrade, Etheruem is well-positioned to outperform.
The returns of the top five crypto assets over the last week were as follows — BTC (7.83%), ETH (22.57%), BNB (-0.14%), DOT (-3.30%), and ADA (-8.71%).
The performance of our line of ETPs over the last 30 days is as follows: ABTC (22%), AETH (10.9%), ABCH (10.9%), AXRP (4.9%), ABNB (147.6%), AXTZ (26.1%), HODL (28.1%), ABBA (20.3%), KEYS (15%), SBTC (-18.6%), and ADOT (60.7%).
You can learn more about our products here.
How to value an emerging store of value that has grown by more than 5 billion percent since its first-ever trade of $0.0009 in 2010? Our team delved into the topic of Bitcoin valuation in both the short and long run. If you missed the exclusive webinar session hosted by Swissquote with the 21Shares team composed of our CEO, Hany Rashwan and our Senior Research Associates, Eliézer Ndinga and Lanre Ige, here is the recording. You can also read the report on valuing Bitcoin in the long run, here.
Morningstar, the leading provider of independent investment research in North America, Europe, Australia, and Asia — published an article “Best and Worst Performing ETFs in February”, which featured our ETPs. Give it a read here. In the same vein, FlowBank, a Swiss online bank, published a similar article here.
Coindesk published a data-driven article on the rise of Bitcoin adoption in Egypt. On this occasion, our CEO, Hany Rashwan, appeared in this piece of research, available here. “There are no easy ways of purchasing crypto in Egypt. So any volumes that we see of people actively buying bitcoin is even more memorable given how difficult it is to acquire it … they’re buying it in this really painful way,” — Hany Rashwan.
Our Head of Southern Europe, Massimo Siano, appeared on national television at Sky TG24, Italy's second all-news channel, owned by Sky. Massimo discussed Bitcoin, the state of the crypto market and gave snippets of information about our product suite. Watch the recording from 19:52, here. Massimo also featured in Investire Mag regarding the outstanding performance of our 21Shares Binance BNB ETP; give it a read here.
Our Research Associate, Lanre Ige, featured in Risk.net and commented on the differences between Grayscale’s products inherently leading to premiums and discounts to NAV and institutional-grade products tracking 1:1 the performance of underlying cryptoassets like our ETPs. Give it a read here. We also published a report available on our website here.
What Happened?
Yesterday, Billionaire Kjell Inge Røkke, Chairman of Norwegian energy giant Aker, published a 23-page shareholder letter to announce the launch of Seetee, a business unit founded to invest in the Bitcoin ecosystem and keep their liquid investable assets in Bitcoin starting by adding 1,170 Bitcoins to their treasury. In today’s price, this is about $63 million. For the record, Aker is an engineering company providing integrated solutions to the global energy industry in the quest to create a cleaner, safer and more sustainable future. As such, in their efforts, Seetee will seek to leverage this expertise to mine Bitcoin with renewable energy sources — wind, solar energy as well as hydro power.
“*Bitcoin is, in our eyes, a load-balancing economic battery, and batteries are essential to the energy transition required to reach the targets of the Paris Agreement. Our ambition is to be a valuable partner in new renewable projects.*” — Kjell Inge Røkke.
Why Does It Matter?
It's been documented and established that Bitcoin shares many characteristics of gold, and for this reason, Bitcoin is usually described as digital gold. By relying on the market-sizing method, we can estimate the total addressable market (TAM) for Bitcoin, which in this specific case is the market capitalisation of gold valued at approximately $10 trillion. Note, there are other key elements to consider, such as strong network security and decentralisation preventing attacks, and the growing use of renewable energy sources for mining Bitcoin, just to name a few.
In theory, if Bitcoin reaches the market value of gold, the price per bitcoin will be more than $500,000. To be more specific, by dividing the market cap of gold by the outstanding number of bitcoins — hence 10 trillion divided by 18.6 million, we get a Bitcoin price of roughly $535,000.
At 21Shares, we believe that Bitcoin has the chance to exceed the market value of gold. Bitcoin is a digital native asset, accessible anywhere in the world with an internet connection. The asset has a fixed, predictable supply of 21 million units ending in approximately 119 years, which since inception is programmatically-declining every four years (i.e., the halving). More importantly, in the context of social distancing, closed borders, and fear of virus transmission — unlike gold, Bitcoin is easily transferable like emails and billions of dollars worth of BItcoin could be stored in a USB key also called storage in the industry (though as a rule of thumb, it’s recommended to wait an hour or roughly six blocks, added to the blockchain approximately every 10 minutes, to make sure a transaction is confirmed). Finally, the Bitcoin blockchain is tamper-resistant, open-source, and verified by anyone; give it a look here.
All the points above make the case as to why Bitcoin is better than gold. Note this analysis does not take into account the incredible innovations atop of Bitcoin such as the Lightning Network and Stacks, which could expand the potential total addressable market by orders of magnitude and also the use cases documented by the Human Rights Foundation, proving that Bitcoin serves as an alternative and censorship-resistant monetary system to protect human rights.
Gold, unlike Bitcoin, is shiny and benefits from the test of time with thousands of years under its belt. Also, gold has significantly more liquidity and is less volatile than the cryptoasset because Bitcoin is an emerging store of value that has increased by more than 5 billion percent ever since. For the record, the first-ever exchange rate recorded was about $0.0009 per Bitcoin by Martti Malmi, an early Bitcoin developer, who transferred $5.02 for 5,050 BTC via PayPal to seed a then bitcoin exchange called New Liberty Standard.
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