I was recently browsing questions on Quora regarding Cryptocurrencies, and one group of questions that particularly stood out and made me think for a bit were “What are some predictions for the Ethereum price by 2018”? How can you come up with an educated estimate or a forecast for a price of a given cryptocurrency and back it up with logic and data? Unlike stocks or bonds where one can use financial models and formulas to derive the intrinsic value of an asset, there are no reliable models or data points for forecasting the prices of cryptocurrencies. In this post, I’m going to go through a few drivers and how I think each of them would impact Ethereum and the price of Ether.
ETH is issued in a set fixed amount every year (capped at 18 million per year). While the absolute number of coins issued is fixed per year, the relative % inflation is decreased every year gradually. At some point the rate of new tokens created every year would reach the average amount of yearly tokens loss (by misuse, key losses, the death of holders etc.) and reach a steady state where the net amount of ETH no longer grows. ETH token issuance is at a far lower rate than Bitcoin in its first 4 years. As Ethereum adopts Casper Proof-of-Stake (POS), the inflation rate would be a relatively low single digit range per year, making the supply side of the equation a moot factor for forecasting the price.
2. Demand Side and Use Cases
Beyond a tradable cryptocurrency, ETH is used to enable the launch of a variety of applications on Blockchain. Over the past year, there has been an obvious increase of these projects through ICOs (total funding $3.2Bn+ YTD 2017 vs. $90M in 2016) most of which are based on the Ethereum platform. ETH is often required to participate in these ICOs which implies the demand is supported by the favourable ICO climate for the time being. This may change next year if some countries ban / regulate ICOs. It’s anticipated that the Ethereum economy will outpace the growth of the supply of ETH, which could lead to an increase in the value of ETH relative to BTC and other cryptos.
3. Investment Demand
ETH price will also be impacted through investment demand as a digital currency. While ETH has enjoyed a great rise over the last two years, at the market cap of ~$28Bn, I don’t think there have been significant traditional investment dollars flowing into the space (and other digital currencies for that matter). There are an increasing amount of crypto hedge funds, however not a lot of institutional dollars on a relative basis, invested in digital currencies. To illustrate, Apple’s market cap is ~$850 Bn which is over four times larger than the overall cryptocurrency market cap combined. With the stocks currently at all-time highs, investors are increasingly looking to diversify their portfolios and limit the exposure to a potential stock market correction. Accordingly, over the next year, I think more investment will be flowing into this new asset class, including into Ether.
4. Number of Transactions
Looking at the chart here, the number of transactions has experienced tremendous growth in 2017 and as of this writing is over 520,000 per day, up from ~40,000 at the beginning of 2017. This is a 12.5x increase in 10 months. While we can’t expect to see such exponential increases in the future, we believe as the adoption of ETH continues to increase, this will be reflected in its value.
Competition is an important factor which would impact the price of ETH, more importantly in the longer term. While there are already emerging competitors to Ethereum, such as the China-based NEO ( See Also: Head To Head: Neo vs. Ethereum ), Lisk, Waves and EOS; Ethereum is the most advanced of the platforms on the market today. Significant time and resources would be required for any of these competitors to build capabilities and scale to challenge Ethereum in the short term; so Ether is favourably positioned in the market in the short term. In the long term; however, the competitive dynamic would be impactful.
In summary, I believe Ether is well positioned for growth. It’s worth keeping in mind that Ether is not just any other digital currency, but a unique cryptocurrency, given Ethereum powers a platform for developing the next generation of decentralized apps. The introduction of Casper, their new Proof of Stake algorithm will revolutionize the space. I won’t be sharing my prediction of the Ether, since past experience has proven to be fairly inaccurate and we would be prediction the pace at which Ethereum will be adopted as a platform. Only time will tell. Share your thoughts in the comments below.