Why does VanEck predict that ETH could reach $50,000 by 2030?

Original Title: "Podcast Notes: Why VanEck Predicts ETH Could Reach $50,000 by 2030?"

Original Source: "Shenzhen TechFlow"

In the recent episode of Bankless Shows, Bankless host Ryan discussed the important asset ETH with VanEck's institutional analysts Matthew Sigel and Patrick Bush.

In VanEck's valuation report, they made a prediction about the price of ETH. By 2030, the price of ETH will be $11,800, and ETH will become a major competitor to US Treasury bills. During this podcast, VanEck's analyst stated that the $11,800 price is based on a normal standard, and if it is a bull market, the price will be $51,000. Where did this prediction come from? DeepTechFlow summarized the core content of the podcast and shared it with readers.

VanEck's bold claim: ETH will compete with US Treasury bonds

Ryan first introduced Matthew Siegel and Patrick Bush from VanEck, a leading investment company globally.

Matthew joined VanEck in 2021 and is currently the Head of Digital Asset Research, leading a team dedicated to researching cryptocurrencies. Patrick was his first employee and is an analyst responsible for identifying profitable cryptocurrency tokens and conducting financial modeling around crypto assets.

Ryan mentioned the report titled "Ethereum Price Prediction: $11,800 in 2030" by Matthew and Patrick. Ryan was particularly interested in their bold statement in the report that ETH could become a major competitor to US Treasury bills. He asked Matthew about this daring assertion.

Matthew first reviewed VanEck's history. VanEck is a macro investment company established in 1955, known for its innovative products that capture investment trends, especially in the 1970s when they succeeded in the gold rush. At that time, gold appeared as a legal asset after being banned for 30 years.

Matthew explained that the same spirit prompted Jan VanEck, the current head and founder's son of VanEck, to recognize in 2017 that Bitcoin was a potential competitor to gold. This led VanEck to invest its profits from gold directly into Bitcoin, Ethereum, and cryptocurrency startups.

About Ethereum, Matthew said:

"VanEck re-examined their predictions for Ethereum after the 2021 ETH hard fork to POS and the 'Shapella upgrade'. Following this upgrade, the staked ETH can be withdrawn, giving VanEck the confidence to significantly increase their investment in ETH."

Ethereum and other cryptocurrencies represent a significant shift in the future of finance, and are considered the Gordian Knot of finance (an item from Western mythology, with the prophecy that whoever can unravel the knot will become the king of Asia).

VanEck's valuation method is based on the utility of Ethereum, rather than simply viewing it as a high beta Nasdaq stock. The currency premium associated with Ethereum changes its valuation multiple, rather than the value accumulated from its use cases.」

Ethereum revenue model, price prediction, and uncertainty of value accumulation

Ryan shared VanEck's report on Ethereum revenue and price target models, including predictions for 2030. Currently, the trading price of ETH is about $1900. By 2030, VanEck predicts that ETH may have three price scenarios: the base case is $11849, the bear market is $343, and the bull market is $51000.

Ryan asked, how is the revenue predicted for these models based on income and cash flow?

Matthew said that they divided the entire potential market into three parts and studied the existing business models and their revenue in these parts. He further pointed out that based on this, assumptions were made about how much percentage of revenue opportunities can be captured by open source blockchain. For finance, they assume only 5% can be captured, for the metaverse space it is 20%, and for infrastructure it is a moderate 10%.

In order to determine the potential market share of Ethereum at these penetration levels, Matthew said they conducted a line-by-line estimate. The concept is that these end markets (finance, metaverse, and infrastructure) will see cryptocurrencies as an opportunity to reduce costs and find new sources of revenue. The bulk of the costs for businesses deployed to blockchain payments are proportional to their revenue.

Patrick believes that this may be a reasonable method for determining rates (fees charged by service providers for transactions in the market). One challenge their model faces is that if there are a large number of applications running on Ethereum, there may be a significant amount of ETH burned. In some years, with the large-scale growth of adoption, ETH may burn 20-30% of its supply, bringing uncertainty to the value accumulation of the blockchain. However, transactions appear to be the best value accumulation point for Ethereum.

Ethereum Revenue: Transaction Fees, MEV, and the Potential of SaaS

Ryan inquired about the current revenue situation of Ethereum, pointing out that many people are not aware of the revenue potential of Ethereum.

Patrick explained that they used Ethereum's gas usage data from the past year and Artemis data to segment Ethereum's different use cases. They estimated the percentage of Ethereum's current usage by looking at finance and payments. By analyzing the burn rate, base fee (the basic cost of a transaction), and TIF fee (time in force fee), they were able to generate transaction revenue, but estimating MEV revenue was difficult and required using methods similar to traditional finance, assuming long-term asset occupancy rates.

Ryan questioned the current annual income of Ethereum and the report predicts that it will surge to $51 billion by 2030.

Matthew said that the income generated by Ethereum can be treated as traditional cash flow equity, which means that the income should be taxed and then discounted back to present value using a weighted average cost of capital (WACC) of 12%.

Patrick talked about Ethereum's high cash flow and profit margins. He believes that this makes Ethereum an exciting asset class because it does not involve the high management fees that traditional companies often have.

Matthew expects that by 2030, the market will give a free cash flow valuation of about 30 times, equivalent to a 3% yield, which seems normal.

Ryan asked, "How does Ethereum compare to stocks?" Matthew replied, "It is comparable to growth stocks like Netflix or Amazon, possibly slightly higher."

Matthew believes that in a speculative, leverage-driven bull market, free cash flow of 30 times could increase to 300 times. He compares this to gold, which has almost no free cash flow. He mentions that their model does not assume a leverage-driven bubble condition, but rather focuses on cash flow.

Ryan stated that the current annualized total revenue of Ethereum is 2.5 billion US dollars, mainly composed of transaction fees (1.9 billion US dollars). In addition, MEV revenue and Ethereum Security-as-a-Service (SaaS) also contribute to Ethereum's revenue.

Patrick commented on the difficulty of estimating MEV revenue, stating that 500 million US dollars is a reasonable rough estimate, reflecting the sale of Ethereum blocks, congestion, and competition in the model's transactions and MEV. Regarding Ethereum SaaS, he suggested that Ethereum can be used to protect new blockchains, oracle networks, or contract protocols, so Ethereum's new value should be included.

Ethereum's Potential: Valuation, Investment, and Regulation

Ryan compared Ethereum's valuation model with the discounted cash flow model of stocks. VanEck's report predicts that Ethereum's annual revenue will reach $50 billion by 2030, which could lead to an ETH price of $12,000.

He raised a question about how VanEck's Ethereum model can attract institutional investors who traditionally evaluate commodities or assets without cash flow, such as gold.

Matthew agrees with Ryan's assessment of different valuation models for commodities and cryptocurrency assets, emphasizing that Ethereum's shift towards proof of stake enables analysis of underlying cash flows and attributes Ethereum's positive performance to this shift.

Matthew believes that institutional investment in the US cryptocurrency market is limited due to regulatory challenges, with the main obstacles coming from the US Securities and Exchange Commission.

Ryan asked whether the lack of institutional investors is a global issue or specific to the United States?

Matthew said that although this issue is most evident in the United States, it is a global trend, such as banks typically not participating in the cryptocurrency market.

Matthew discussed the potential of countries adopting Ethereum and Bitcoin. He believes that countries with abundant intellectual capital may prefer Ethereum due to its smart contract functionality. However, adopting Ethereum at the national level may require more time than Bitcoin.

Ryan said that institutions are hesitant to invest in cryptocurrencies not because of a lack of understanding of the assets, but due to unclear regulations. Clarity in regulation, especially at the banking level globally and particularly in the United States, could encourage institutional interest. Family offices and high net worth individuals may be more willing to participate in cryptocurrencies given a comprehensive report or understanding of the assets.

Ethereum's future bear and bull market scenarios: Model variables and assumptions

Ryan reviewed the possible bear and bull market scenarios that may occur by 2030. The bear market scenario suggests that Ethereum's annual income will grow relatively steadily to $2.5 billion, and Ethereum's price will drop to $343. On the other hand, the bull market scenario envisions annual income skyrocketing to $136 billion, with Ethereum's target price at $50,000. He asked Patrick about the variables and assumptions driving these different results in the model.

Patrick explained the model's considerations for the market's adoption of cryptocurrency. The base scenario assumes that 5% of bank revenue is allocated to cryptocurrency and public blockchain, adjusted to 10% in a bull market scenario and 1% in a bear market scenario. These adjustments reflect regulatory changes or changes in adoption curves.

The value obtained from second-layer settlement in Ethereum is important in transactions. They assume that there will be many indistinguishable L2s, leading to Ethereum acting as a monopolist, while MEV is related to the adoption of underlying business and on-chain activities.

Based on the nature of winner-takes-all on digital platforms, Matthew assumes that ETH will occupy 70% of the market share in the open-source blockchain industry.

Ryan summarized the main levels of the model: global adoption of cryptocurrencies, Ethereum's market dominance, and L2 structure. Ethereum's position is expected to increase with the addition of more decentralized L2 solutions.

Patrick clarified the third point in their model: Ethereum is estimated to account for 3% of the basic banking revenue. The fourth layer considers the split between L2s and Ethereum, with Ethereum becoming the settlement layer and L2s handling transactions, the split depending on the dynamics between L2s and Ethereum.

Decrypting Ethereum: Layer 2, Bitcoin, and Monetary Value

Ryan asked for opinions on potential risks in the Ethereum industry, such as Layer2 solutions becoming too dominant.

Matthew believes that promoting diversity in Layer-2 solutions is beneficial for Ethereum. The concern is seeing potential value capture situations, such as Arbitrum's acquisition of Prysmatic Labs.

Ryan asked if they have analyzed the L2 token?

Matthew said that their focus is more on Layer-1 or specific application projects, and there is more uncertainty around L2. They are waiting to observe the development of on-chain cultivation and human activity before making significant bets on L2.

Patrick expressed interest in studying the migration of users from Ethereum to L2s, which is also part of the analysis being conducted by VanEck.

Ryan asked if their modeling of Bitcoin is similar to Ethereum?

Matthew stated that they view Bitcoin as a unique asset and compare it to gold. He mentioned that if the cash flow situation changes due to the development of L2 based on Bitcoin, they may need to reevaluate this viewpoint.

Ryan proposed comparing Bitcoin and gold, as well as Ethereum and the bond market. Matthew responded by saying that ETH is more like a high-yield stock.

Ryan asked about the potential of Ethereum as a gold model, whether there could be a hybrid model that combines Ethereum's fundamentals with gold currency premiums.

Matthew explained that by introducing a staking business line for Ethereum, they have incorporated some monetary factors into their ETH valuation. However, he doubts whether a nation-state would purchase $ETH in the short term, as this would significantly increase the currency value of Ethereum.

Patrick responded that the execution of Ethereum and even Atom mainly occurs on L2 chains, which raises a question: how much value will flow to Ethereum? If multiple L2s compete for Ethereum's block space, they may have to share a significant amount of revenue with Ethereum.

Matthew pointed out that it is important to remember that this is an asset class that still requires capital inflows. He emphasized that Ethereum is an exception in the inflationary cryptocurrency ecosystem. Due to insufficient investment in reliable energy and politics, Matthew issued a warning to the current market. Investors focus on cash flow and are unwilling to purchase speculative assets without a large amount of cash flow. Alternative L1 without cash flow is therefore at a disadvantage. Matthew prefers profitable blockchains, but remains cautious about macroeconomic changes that may affect investment in speculative chains.

Ryan asked about the impact of these models on their strategies at VanEck and their views on the reliability of these models.

Matthew explained VanEck's two strategies. The Beta strategy aims to outperform the Layer-1 index, with about 50% of the portfolio invested in ETH; VanEck's Alpha strategy focuses on the top 20 tokens with clear value accumulation and product-market fit, where ETH may have a smaller proportion because its upside potential is smaller compared to more volatile tokens. This strategy also emphasizes the use of stablecoins, traditional companies' NFTs, and DeFi themes.

Ryan asked for their views on the future of the cryptocurrency market, particularly regarding the possibility of another bull market.

Matthew explained that they left traditional finance jobs because they believe decentralized systems offer tremendous upside. While acknowledging challenges related to politics and inflation, he expects these challenges to diminish soon. He anticipates a different political landscape in the US next year, which will lead to a shift in the environment for Bitcoin and adoption cycles driven by non-US countries.

Patrick added that the current market stage is testing investors' beliefs and revealing some of the initial beliefs' hollowness. However, he remains optimistic about the future due to the continuous development and enormous potential of the cryptocurrency space. Despite expecting more challenges, he maintains a high level of optimism for the future of cryptocurrencies.

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