Ether

Decentralised networks significantly bolster an application's security and resistance to censorship. Ethereum, a pioneering blockchain, exemplifies this by supporting apps that operate on such a network. Ether, the native cryptocurrency of the Ethereum network, plays a pivotal role in this ecosystem. It's not just any digital currency; Ether is unique as it's used specifically for transaction fees and computational services on the Ethereum blockchain.

Investing in Ether comes with a high risk level. Its adjusted beta is 80% higher than the market average (1.80 vs. 1), indicating a volatile investment landscape. However, potential rewards are noteworthy. If Ether's share in the money supply rises from 0.62% to 5%, Stockhub users predict a five-year return of 5x on Ether investments. This translates to an annual return of 39%. In practical terms, a £100,000 investment could yield £500,000 in five years.

For those considering investments with an annual return threshold of 39% or less, Ether, if it meets its projected returns, emerges as a viable option. This makes it a potentially suitable investment choice for certain investors, given its high-risk, high-reward profile.

Fun fact: Ether was notably launched through an Initial Coin Offering in 2014, raising over $18 million and marking one of the earliest successful examples of this fundraising method in the crypto world.

Operations

How did the idea of Ether come about?

The idea of Ether, the native cryptocurrency of the Ethereum network, emerged alongside the development of Ethereum itself. Ethereum, conceptualised by Vitalik Buterin in late 2013 and early 2014, was designed to be more than just a digital currency like Bitcoin. Buterin envisioned a blockchain platform that could execute smart contracts and support decentralised applications (DApps), expanding the scope of blockchain technology beyond mere financial transactions.

The concept of Ether arose as a fundamental component of this expanded blockchain framework.

What's the mission of Ether?

The mission of Ether is closely tied to the broader goals and vision of the Ethereum platform. Ethereum was conceptualised to expand the possibilities of blockchain technology beyond just a medium of exchange, like Bitcoin. Its co-founder, Vitalik Buterin, and other developers envisioned a platform that would enable decentralised applications (DApps) and smart contracts, thereby creating a more versatile and programmable blockchain.

Within this context, the mission of Ether can be understood as follows:

1. Facilitating Transactions and Smart Contracts: Ether's primary mission is to act as the fuel for the Ethereum network. It enables users to conduct transactions, execute smart contracts, and interact with DApps on the Ethereum blockchain. By requiring Ether for these operations, the network ensures that resources are used efficiently and helps to prevent spam transactions.
2. Supporting Decentralisation: Ether plays a critical role in maintaining the decentralised nature of the Ethereum network. By compensating miners (and, following Ethereum's transition to Ethereum 2.0, validators) for processing transactions and executing smart contracts, Ether helps to secure the network and distribute its operational workload across a global community.
3. Encouraging Innovation: By providing a platform for DApps and smart contracts, Ether fuels innovation in the blockchain space. Developers can build a wide range of applications on Ethereum, from decentralised finance (DeFi) to non-fungible tokens (NFTs), and Ether is used to power these applications.
4. Creating a Digital Economy: Ether also aims to be a key component in a new, blockchain-based digital economy. This economy transcends traditional financial boundaries, offering a more inclusive, transparent, and secure financial system.
5. Promoting Financial Accessibility: Ethereum and Ether are part of a broader movement in the cryptocurrency space that seeks to provide greater financial accessibility. By offering a decentralised platform free from the control of any single entity, Ethereum aims to lower barriers to financial services and empower individuals globally.

In summary, the mission of Ether is multifaceted, aligning with the broader objectives of the Ethereum network. It's designed to enable and secure a wide range of decentralised applications and financial transactions, fostering innovation, decentralisation, and accessibility in the digital economy.

What's Ether and what makes it unique?

Ether (ETH) is the native cryptocurrency of the Ethereum blockchain. It serves several key roles within the Ethereum ecosystem, making it unique in comparison to other cryptocurrencies like Bitcoin. Here's an overview of what makes Ether distinctive:

1. Fuel for the Ethereum Network: Ether is often referred to as the "fuel" for the Ethereum network. It's used to pay for transactions and computational services on the Ethereum blockchain. Every transaction or execution of a smart contract on Ethereum requires payment in Ether to cover the computational cost, known as "gas fees." This mechanism helps to prevent spam and allocate resources efficiently on the network.
2. Enabler of Smart Contracts and DApps: Ethereum was the first blockchain to introduce smart contracts – self-executing contracts with the terms of the agreement directly written into code. Ether is crucial for deploying and running these smart contracts. Developers use Ether to create and run decentralised applications (DApps) on Ethereum, spanning various sectors like finance, gaming, and social media.
3. Transition to Proof of Stake: Ethereum's transition from Proof of Work (PoW) to Proof of Stake (PoS) through its Ethereum 2.0 upgrade further distinguishes Ether. In PoS, Ether is used for staking – a process where users lock up their tokens to participate in network validation in exchange for rewards. This transition aims to make Ethereum more energy-efficient and scalable.
4. Economic Model Changes: Ethereum has introduced several changes to its economic model over time, affecting the supply and demand dynamics of Ether. Notably, the EIP-1559 update introduced a mechanism where a portion of the gas fees paid in Ether is "burned" or permanently removed from circulation, which can affect its scarcity and value.
5. Wide Adoption and Ecosystem: Ether benefits from the broad adoption of the Ethereum platform. It's the backbone of a burgeoning ecosystem that includes DeFi (Decentralised Finance), NFTs (Non-Fungible Tokens), DAOs (Decentralised Autonomous Organisations), and much more. This ecosystem supports a wide range of use cases and has a substantial developer community, contributing to Ether's value and utility.
6. Flexibility and Programmability: Ethereum, and by extension Ether, is known for its flexibility and programmability. This allows for continuous innovation and development, enabling the network to adapt and incorporate new features and improvements over time.

Market

Total Addressable Market (TAM)

The TAM for Ether is the global currency market. This includes all forms of money circulation worldwide — from fiat currencies held in banks and cash reserves to investments and digital transactions. This encompasses every potential user or entity that could theoretically adopt Ether, either as a means of transaction, a store of value, or for investment purposes. It represents the maximum possible market opportunity for Ether, assuming universal adoption and acceptance.

The global currency market, including fiat money and investments, is vast. As of 2023, the total value of all the money in the world, including broad money (M3), which covers cash, bank deposits, and money market securities, was estimated to be in the range of approximately $100 trillion USD. Ether's TAM, when considering the potential to replace or complement global currency usage, would thus be a fraction of this amount.

As of July 2023, the total value of narrow money globally, which includes all physical money (notes and coins) and money deposited in savings and checking accounts worldwide, was approximately $40 trillion. This figure represents the M1 money supply, a classification of money that covers the most liquid forms of currency in circulation​.

Serviceable Available Market (SAM)

The SAM narrows down to the global cryptocurrency market. This is the market segment that Ether is actually equipped to serve and includes all individuals and entities currently engaged in or open to engaging with cryptocurrencies. This market is more specific to Ether's capabilities and reflects the growing interest and acceptance of digital currencies for various uses, including remittances, investment, online transactions, and as a hedge against traditional currency fluctuations.

The global cryptocurrency market is a subset of the broader currency market. As of 2023, the total market capitalisation of all cryptocurrencies was fluctuating around $1 trillion to $2 trillion USD. Ether, being the second largest cryptocurrency by market cap, holds a significant presence in this space, but the SAM for Ether would include the total market cap of all cryptocurrencies, considering that these users are potentially open to using Ether.

Serviceable Obtainable Market (SOM)

The SOM further narrows down to the U.S. cryptocurrency market. This represents the segment of the SAM that Ether can realistically expect to capture in the near to medium term. It takes into account factors such as Ether's current market penetration in the U.S., regulatory environment, competition from other cryptocurrencies, technological advancements, and market trends within the United States. The U.S. market is particularly significant due to its substantial economic size, high level of technology adoption, and its influential role in global financial systems.

Estimating the U.S. cryptocurrency market is more complex, as it would involve considering the proportion of the U.S. population or financial sector engaged in cryptocurrency usage. As a rough estimate, if we consider the U.S. as accounting for about 20-30% of the global cryptocurrency market (a broad assumption based on its economic size and level of investment in cryptocurrencies), the SOM for Ether in the U.S. could be a proportion of the global market cap, roughly in the range of $200 billion to $600 billion USD.

Competition

Ether (ETH), the native cryptocurrency of the Ethereum blockchain, has several peers or competitors in the cryptocurrency and blockchain space. These peers offer similar functionalities, such as smart contracts and decentralised applications (DApps), or they compete in the broader cryptocurrency market as alternatives to Ether. Here are some of Ether's closest peers:

1. Bitcoin (BTC): Although Bitcoin's primary purpose is to act as a digital currency and store of value, it's often compared with Ether due to its prominence and role as the first and most valuable cryptocurrency.
2. Binance Coin (BNB): Initially launched on the Ethereum blockchain, Binance Coin now operates on Binance's own blockchain, Binance Smart Chain (BSC). BSC is known for its high transaction throughput and low fees, attracting many DApp developers and users.
3. Cardano (ADA): Cardano is a blockchain platform that, like Ethereum, focuses on running smart contracts. It aims to provide more advanced features than Ethereum, primarily through its emphasis on a research-driven approach to design and development.
4. Polkadot (DOT): Polkadot aims to enable different blockchains to transfer messages and value in a trust-free fashion; sharing their unique features while pooling their security. It is considered a competitor due to its focus on interoperability and scalability.
5. Solana (SOL): Solana is a high-performance blockchain supporting DApps and crypto-currencies. It's known for its fast transaction speeds and low costs, making it a competitive alternative for developers and users seeking performance efficiency.
6. Tezos (XTZ): Tezos is another blockchain that facilitates smart contracts and DApps. It has a unique self-amending cryptographic ledger which allows the network to upgrade itself over time without having to fork the blockchain.
7. Avalanche (AVAX): Avalanche is a blockchain platform that focuses on high throughput, low latency, and scalability. It's gaining popularity for DApps, particularly in the DeFi space.
8. Algorand (ALGO): Algorand is a blockchain platform that aims to deliver decentralisation, scalability, and security for a wide range of applications, including financial tools and services.
9. EOS (EOS): EOS is a platform for developing DApps. It's designed to be more scalable than Ethereum, with an emphasis on user-friendliness and efficiency.
10. Tron (TRX): Tron is another blockchain platform that enables the development of smart contracts and DApps, with a particular focus on digital content and entertainment.

These platforms are considered peers of Ether because they offer similar functionalities or compete for market share in the crypto and blockchain space. Each has its unique features and focuses, but they all contribute to the rapidly evolving landscape of blockchain technology and cryptocurrency.

Feature/Cryptocurrency	Ether (ETH)	Bitcoin (BTC)	Binance Coin (BNB)	Cardano (ADA)	Polkadot (DOT)	Solana (SOL)	Tezos (XTZ)	Avalanche (AVAX)	Algorand (ALGO)	EOS (EOS)	Tron (TRX)
Smart Contracts	✓	✗	✓	✓	✓	✓	✓	✓	✓	✓	✓
Decentralised Finance (DeFi) Support	✓	✗	✓	✓	✓	✓	✓	✓	✓	✓	✓
High Transaction Throughput	✗	✗	✓	✓	✓	✓	✓	✓	✓	✓	✓
Low Transaction Fees	✗	✗	✓	✓	✓	✓	✓	✓	✓	✓	✓
Proof of Stake (PoS)	✓	✗	✓	✓	✓	✓	✓	✓	✓	✓	✓
NFT Capabilities	✓	✗	✓	✓	✓	✓	✓	✓	✓	✓	✓
Large Developer Community	✓	✓	✓	✓	✓	✓	✓	✓	✓	✓	✓
Interoperability with Other Chains	✗	✗	✗	✗	✓	✗	✗	✓	✗	✗	✗
Advanced Scaling Solutions	✗	✗	✓	✓	✓	✓	✓	✓	✓	✓	✓
Established Track Record	✓	✓	✓	✓	✓	✓	✓	✓	✓	✓	✓

Note:

• The "High Transaction Throughput" and "Low Transaction Fees" rows are relative and may vary based on network conditions and ongoing upgrades. For example, Ethereum's transition to Ethereum 2.0 is expected to improve its scalability and reduce fees.
• "Advanced Scaling Solutions" refers to unique or innovative approaches to handling a large number of transactions, which goes beyond basic blockchain functionality.
• The presence of a tick or cross is based on the general capabilities or features of each blockchain as of my last update in April 2023. These aspects can evolve with technological advancements and network upgrades.

Risks

As with any investment, investing in Ether carries a level of risk. Overall, based on the Ether's adjusted beta (i.e. 1.80), the degree of risk associated with an investment in Ether is 'high'.

Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'high' risk, it must have a beta value of 1.5 or more. Further information about the beta ratings can be found in the appendix section of this report.

The key risks can be found below. For us, currently, the biggest risk to the valuation of the investment relates to the strong competition from other blockchain platforms and traditional platforms (i.e. competition risk).

1. Volatility: Cryptocurrencies, including Ether, are known for their high price volatility. Prices can rapidly increase or decrease within a short period, influenced by factors like regulatory news, technological developments, market sentiment, and broader economic factors. This volatility can result in significant gains or losses.
2. Regulatory Risk: The regulatory environment for cryptocurrencies is still evolving and can vary significantly by country. Changes in regulations, such as those related to trading, taxation, or the legality of cryptocurrencies, can impact the value and legality of holding or using Ether.
3. Technology and Security Risks: Ethereum, like all blockchain technologies, faces risks related to security breaches, hacking, or software flaws. While the Ethereum network is considered secure, vulnerabilities have been exploited in the past, particularly in DApps and smart contracts built on Ethereum.
4. Market Liquidity: While Ether is one of the most liquid cryptocurrencies, cryptocurrency markets can still experience liquidity issues. During periods of extreme market volatility, it might be difficult to buy or sell large amounts of Ether without affecting the market price.
5. Dependency on Ethereum’s Success: The value of Ether is closely tied to the success and adoption of the Ethereum platform. Issues like delays in network upgrades, scalability problems, or a failure to sustain developer and user interest could negatively impact Ether's value.
6. Competition: The blockchain and cryptocurrency space is highly competitive. The emergence of newer blockchain platforms offering similar or superior features could potentially diminish Ethereum's market share and impact the value of Ether.
7. Scalability and Network Congestion: Ethereum has faced challenges with network congestion and high transaction fees, particularly during periods of high demand. While the ongoing upgrades (Ethereum 2.0) aim to address these issues, there is a risk that these problems could limit adoption and use.
8. Environmental Concerns: Prior to Ethereum's transition to Proof of Stake (PoS), its Proof of Work (PoW) consensus mechanism raised environmental concerns due to the high energy consumption. Although PoS significantly reduces this concern, the perception and regulatory implications of environmental impact could still pose risks.
9. Macro-Economic Factors: Cryptocurrencies can be influenced by broader economic factors, such as inflation rates, interest rates, and economic downturns. These factors can affect investor appetite for risk and lead to increased volatility in the crypto market.
10. Lack of Traditional Investment Protections: Unlike traditional investments, cryptocurrencies typically do not offer dividends, voting rights, or other protections. The regulatory framework is still evolving, which means there might be less recourse for investors in cases of fraud or theft.

Valuation

What's the expected return of an investment in Ether?

The Stockhub users estimate that the expected return of an investment in Ether over the next five years is 5x, which equates to an annual return of 39%. In other words, an £100,000 investment in the asset is expected to return £500,000 in five years time. The assumptions used to estimate the return figure can be found in the table below.

Assuming that a suitable return level over five years is 39% per year or less, and Ether achieves its expected return level (of 39%), then an investment in Ether is considered to be an 'suitable' one.

What are the assumptions used to estimate the return?

Key inputs

Description	Value	Commentary
What's the estimated current size of the total addressable market?	$40,000,000,000,000	The total value of narrow money globally is estimated at $40 trillion as at 13th November 2023, according to The Money Project.
What is the estimated investment lifespan?	250 years
What's the estimated annual growth rate of the total addressable market over the lifecycle of the investment?	0.83%	We have assumed that the growth rate of the TAM is the same as global population growth, which is 0.83% in 2022.
What's the estimated investment peak market share?	5%	The Stockhub users estimate that especially given the key benefit of the asset, the peak market share of Ether is around 5.00%, and, therefore, suggests using the share amount here. As of 29th November 2023, Ether's current share of the market is estimated at around 0.62%.
Which distribution function do you want to use to estimate investment value?	Gaussian	Research suggests that the value pattern of investments is similar to the pattern produced by the Gaussian distribution function (i.e. the revenue distribution is bell shaped), so the Stockhub users suggest using that function here.
What's the estimated standard deviation of asset value?	50 years	Another way of asking this question is this way: within how many years either side of the mean does 68% of value occur? Based on Ether's current price (i.e. $2,044.88) and Ether's estimated lifespan (i.e. 250 years), the Stockhub users suggest using 50 years (i.e. 68% of all sales happen within 100 years either side of the mean year), so that's what's used here.
What's the current value of the investment?	$243,366,347,553	According to Yahoo Finance, the current value of Ether as of 15th November 2023 is $243,366,347,553. Ether currently trades at $2,044.88.
Which time period do you want to use to estimate the expected return?	Between now and five years time	Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years. Accordingly, Stockhub suggests that to account for general market cyclicity, it's best to estimate the expected return of the investment between now and five years time.
Which valuation recommendation method do you want to use?	Relative	There's two main types of valuation recommendation methods, relative and absolute. The relative method determines the investment recommendation relative to other investments (e.g. the investment is "suitable" if it's within say the top 10% of the investment universe in terms of investment returns), whereas the absolute method determines the recommendation based on a fixed return amount (e.g. the investment is "suitable" if it returns 50% or more). Assuming sufficient data, the Stockhub users suggest using the relative method.
Which top proportion of the investment universe constitutes a "suitable" rating?	10%	The proportion depends on the user's preference. That said, typically, the higher the proportion, the higher the risk associated with the investment.
Which universe of investments do you want to use?	All investments	If the main objective of the user is to maximise investment returns, then the Stockhub users suggest using 'all investments' as the investment universe.

Sensitivity analysis

The main inputs that result in the greatest change in the expected return of the Ether investment are, in order of importance (from highest to lowest):

1. The size of the total addressable market (the default size is $40 trillion);
2. Ether peak market share (the default share is 5%); and
3. The estimated Ether lifespan (the default lifespan is 250 years).

The impact of a 50% change in those main inputs to the expected return of the Ether investment is shown in the table below.

Ether investment expected return sensitivity analysis

Main input	50% worse	Unchanged	50% better
The lifespan of Ether	3x	5x	8x
The size of the total addressable market	3x	5x	8x
Ether peak market share	3x	5x	8x

Actions

To invest in Ether, click here.

Appendix

Ether adjusted beta calculation

Date	iShares MSCI World ETF unit price (USD)	Ether price (GBP)	iShares MSCI World ETF unit price change (%)	Ether price change (%)
01/11/2018	86.21	113.17
01/12/2018	78.87	133.3683	-8.51%	17.85%
01/01/2019	84.96	107.061	7.72%	-19.73%
01/02/2019	87.49	136.7462	2.98%	27.73%
01/03/2019	88.79	141.5141	1.49%	3.49%
01/04/2019	92.09	162.166	3.72%	14.59%
01/05/2019	86.76	268.1136	-5.79%	65.33%
01/06/2019	91.02	290.696	4.91%	8.42%
01/07/2019	91.86	218.6541	0.92%	-24.78%
01/08/2019	89.84	172.4698	-2.20%	-21.12%
01/09/2019	91.78	179.8722	2.16%	4.29%
01/10/2019	94.12	183.9669	2.55%	2.28%
01/11/2019	96.76	152.5397	2.80%	-17.08%
01/12/2019	98.78	129.6109	2.09%	-15.03%
01/01/2020	97.73	180.1602	-1.06%	39.00%
01/02/2020	89.67	219.8485	-8.25%	22.03%
01/03/2020	77.93	133.5936	-13.09%	-39.23%
01/04/2020	86.36	207.6021	10.82%	55.40%
01/05/2020	90.7	230.9757	5.03%	11.26%
01/06/2020	92.14	226.315	1.59%	-2.02%
01/07/2020	96.65	345.5547	4.89%	52.69%
01/08/2020	102.96	435.0797	6.53%	25.91%
01/09/2020	99.52	359.9379	-3.34%	-17.27%
01/10/2020	96.53	386.5903	-3.00%	7.40%
01/11/2020	108.94	614.8425	12.86%	59.04%
01/12/2020	112.41	737.8034	3.19%	20.00%
01/01/2021	111.49	1314.986	-0.82%	78.23%
01/02/2021	114.27	1416.049	2.49%	7.69%
01/03/2021	118.49	1918.362	3.69%	35.47%
01/04/2021	123.61	2773.207	4.32%	44.56%
01/05/2021	125.6	2714.945	1.61%	-2.10%
01/06/2021	126.57	2274.548	0.77%	-16.22%
01/07/2021	128.83	2536.21	1.79%	11.50%
01/08/2021	132.02	3433.733	2.48%	35.39%
01/09/2021	126.46	3001.679	-4.21%	-12.58%
01/10/2021	133.84	4288.074	5.84%	42.86%
01/11/2021	131.1	4631.479	-2.05%	8.01%
01/12/2021	135.32	3682.633	3.22%	-20.49%
01/01/2022	128.32	2688.279	-5.17%	-27.00%
01/02/2022	124.58	2919.201	-2.91%	8.59%
01/03/2022	128.16	3281.643	2.87%	12.42%
01/04/2022	117.42	2730.187	-8.38%	-16.80%
01/05/2022	117.94	1942.328	0.44%	-28.86%
01/06/2022	106.88	1067.299	-9.38%	-45.05%
01/07/2022	115.57	1681.517	8.13%	57.55%
01/08/2022	110.28	1553.685	-4.58%	-7.60%
01/09/2022	99.95	1327.979	-9.37%	-14.53%
01/10/2022	107.42	1572.714	7.47%	18.43%
01/11/2022	115.44	1295.689	7.47%	-17.61%
01/12/2022	109.25	1196.771	-5.36%	-7.63%
01/01/2023	117.01	1586.535	7.10%	32.57%
01/02/2023	113.98	1605.895	-2.59%	1.22%
01/03/2023	117.67	1822.022	3.24%	13.46%
01/04/2023	119.79	1876.924	1.80%	3.01%
01/05/2023	118.6	1874.13	-0.99%	-0.15%
01/06/2023	124.52	1933.189	4.99%	3.15%
01/07/2023	128.54	1856.162	3.23%	-3.98%
01/08/2023	125.7	1645.639	-2.21%	-11.34%
01/09/2023	120.17	1671.162	-4.40%	1.55%
01/10/2023	117.11	1816.459	-2.55%	8.69%
01/11/2023	122.84	2049.338	4.89%	12.82%

Ether beta and adjusted beta value

	Beta	Adjusted beta	Comment(s)
Consistent (monthly) intervals between data points	2.20	1.80

Beta risk profile

Beta value	Risk rating
0 to 0.50	Low
0.50 to 1.50	Medium
1.50 to 3.00	High
3.00 and above	Extremely high