Reasoning: There are a number of upgrades planned in the next few years. The biggest problem for cryptocurrencies in general is the low through-put of transactions (leading to high fees due to high demand for a scarce resource). The Ethereum project has long-term plans to improve this with sharding and zero-knowledge proofs, but the sharding upgrade is not planned until 2023 and it’s not clear how much of the value of zero-knowledge proofs will be captured by Ethereum as opposed to the Layer-2 chains that build on top of Ethereum.
The stronger case for ETH in the next 12 months is the proof-of-stake upgrade planned for later this year. This upgrade is a pre-requisite to the later sharding upgrade. It will both decrease the amount of new ETH that is created as part of running the network and change who it’s awarded to. Instead of rewarding miners, who have a capital investment in compute and upkeep costs of electricity, it will reward stakers, who have a staked capital investment of ETH and minor upkeep costs of compute. The Triple Halving thesis by SquishChaos (original was previously summarized on LW) claims that this will cause a great reduction in supply (mainly because ETH won’t be sold to pay for electricity), comparable to the halving of Bitcoin rewards iterated three times, and that this should push the price up to around $30k~$50k (i.e. around 10x the current value of around $3k). This could certainly be an overestimate, but even if you want to (someone please do a pessimistic calculation here) adjust the numbers down for overly optimistic calculations I think you would find that this still looks promising
Risks: If all of crypto loses a lot of value this would impact ETH and could lead to a net loss. An alternative version of this would be to go long ETH and short BTC in order to distinguish this from movements of crypto in general. However, I haven’t thought through if all the assumptions of this thesis are still likely to hold in such scenarios.
Ethereum upgrades have been delayed in the past. Proof-of-stake has been on the Ethereum roadmap for years, and was previously planned to be merged late 2021. However, they’ve now merged the Kiln merge testnet which is the last merge testnet before upgrading existing public testnets.
Some assumption of the analysis, or an inference step, could be wrong. I don’t claim to have verified anything here beyond the most superficial level.
I’ll also point out that the vast majority of fees paid by crypto users are paid to Ethereum, which seems fairly close to allowing us to perform a fundamental value analysis:
Suggestion: Ethereum (ETH)
Reasoning: There are a number of upgrades planned in the next few years. The biggest problem for cryptocurrencies in general is the low through-put of transactions (leading to high fees due to high demand for a scarce resource). The Ethereum project has long-term plans to improve this with sharding and zero-knowledge proofs, but the sharding upgrade is not planned until 2023 and it’s not clear how much of the value of zero-knowledge proofs will be captured by Ethereum as opposed to the Layer-2 chains that build on top of Ethereum.
The stronger case for ETH in the next 12 months is the proof-of-stake upgrade planned for later this year. This upgrade is a pre-requisite to the later sharding upgrade. It will both decrease the amount of new ETH that is created as part of running the network and change who it’s awarded to. Instead of rewarding miners, who have a capital investment in compute and upkeep costs of electricity, it will reward stakers, who have a staked capital investment of ETH and minor upkeep costs of compute. The Triple Halving thesis by SquishChaos (original was previously summarized on LW) claims that this will cause a great reduction in supply (mainly because ETH won’t be sold to pay for electricity), comparable to the halving of Bitcoin rewards iterated three times, and that this should push the price up to around $30k~$50k (i.e. around 10x the current value of around $3k). This could certainly be an overestimate, but even if you want to (someone please do a pessimistic calculation here) adjust the numbers down for overly optimistic calculations I think you would find that this still looks promising
Risks: If all of crypto loses a lot of value this would impact ETH and could lead to a net loss. An alternative version of this would be to go long ETH and short BTC in order to distinguish this from movements of crypto in general. However, I haven’t thought through if all the assumptions of this thesis are still likely to hold in such scenarios.
Ethereum upgrades have been delayed in the past. Proof-of-stake has been on the Ethereum roadmap for years, and was previously planned to be merged late 2021. However, they’ve now merged the Kiln merge testnet which is the last merge testnet before upgrading existing public testnets.
Some assumption of the analysis, or an inference step, could be wrong. I don’t claim to have verified anything here beyond the most superficial level.
I’ll also point out that the vast majority of fees paid by crypto users are paid to Ethereum, which seems fairly close to allowing us to perform a fundamental value analysis:
CryptoFees.info
Post-merge, these fees would go to holders of the currency.