Why Ethereum could rise 4x, this model says

Ethereum has recently experienced a market pullback after bitcoin. While the market remains in a downtrend, the digital asset is holding up reasonably well. Ethereum is trending above $2,800, nearly 50% lower than its all-time high. But one model suggests that three is a 4x move in the near future of the digital asset. Let’s take a look at this model.

Ethereum to 4X?

In a recent Twitter thread, a crypto investor known as Shaan Puri explains the model that could bring Ethereum up to four times its current price. It starts by stating that the digital asset is currently up to 4 times undervalued meaning they expect the price to be much higher than it currently is.

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Referring to a base prepared by Ryan Allis, another crypto investor, Puri explains how the first model puts ETH at $10K. Rather than just going through “hopes and dreams” or the usual broader adoption argument, it uses three key characteristics to place the cryptocurrency at such a high price.

ETH Recovers Above $2,800 | Source: ETHUSD on TradingView.com

The first of these is the income generated by the asset. As with many crypto projects, sending the tokens incurs a fee from the sender. This fee is then paid to the miner for providing the computing power needed to confirm these transactions. Puri points out that $1.3 billion in transaction fees was generated in January alone, which is then broken down into the base and tip costs.

With the implementation of the EIP-1559 last year, the ethereum fee burn was implemented. Over time, more ETH is burned than is created, making digital assets deflationary.

The second point was valuing companies that have cash flow. Something the makers of this model understand well, since they went to business school. It continues with a photo that explains ethereum’s discounted cash flow valuation and how it fits into this model.

ETH discounted cash flow valuation | Source: Twitter

Last but not least, the assumptions behind the model, which are, “the model assumes 25% annual growth and a P/E ratio of 35x (the SP500 average.” Puri explains that the high gas rates are a cause for concern for developers and users alike, leading to two major risks: moving all transactions to L2s to manage transaction fees or some other smart contracts platform that ultimately wins.

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In short, since ethereum has real cash flow, it can be used in the fundamental analysis of the asset, Puri added.

Featured image of NullTX, chart from TradingView.com

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