Is Ethereum Overvalued at $4k?
Ethereum (ETH) has seen a massive rise in value during 2021. It started the year at a price of around $1,300 USD per ETH. It subsequently saw an unprecedented rise to above $4,000 during the year.
This has led to a lot of speculation that Ethereum is actually overvalued at $4,000.
We find the notion that Ethereum is overvalued at $4,000 a little ridiculous for a few different reasons that we will explain in this article. The short of it is that Ethereum adoption is still low and Ethereum has a lot to offer users.
Why Ethereum is Not Overvalued at $4,000
There are a lot of different reasons why Ethereum is certainly not overvalued at $4,000. In fact, we find it likely that the price of ETH will never be three digits (ie. $999 or less) ever again.
There is simply too much in the pipeline for this project to be overvalued at the current moment. Here are some of the reasons it’s not overvalued.
We’re Still Early
The biggest reason Ethereum is not overvalued, in our opinion, is that it is still a new technology.
We know this sounds strange to cryptocurrency enthusiasts because the technology is not new to them. But cryptocurrency enthusiasts are early adopters and not representative of the general public.
This is especially true with a cryptocurrency like Ethereum that people can “own” on their Coinbase account without realizing the full potential of it with smart contracts.
We will put it this way to easily understand it – the DeFi market cap measured by total value locked (TVL) is only $147 billion.
The total value of the centralized financial system is not known, but it’s estimated that it’s around $2 trillion USD in value.
Ethereum can completely consume the entire centralized financial system.
With that in mind, Ethereum still has a very long way to go with adoption and price. To further this point, there are ~99 million unique Ethereum addresses. Some of those are duplicates, inactive addresses, and used by holders, which means the number of people actually using the blockchain for its intended purpose is far lower.
The world population is ~7 billion.
Again, Ethereum has a very long way to go before it’s too late to use it.
To summarize, Ethereum is not nearly as popular as you probably think amongst the general population. People might know about it and even hold some, but the numbers show that very few people are actually using the more sophisticated features of the project.
DeFi 2.0 Is Here
The more sophisticated features of the project we mentioned in the previous point are too numerous to list out.
However, the one that you should know about is something called decentralized finance. This is a broad term used to describe the nascent financial system emerging on blockchains that have smart contracts.
Basically, smart contracts are lines of code that automatically execute when certain conditions are met. Entrepreneurs have figured out ways to build lending protocols, crypto marketplaces, insurance goods, and other financial institutions using these smart contracts.
The best part is that it’s decentralized, so no censorship is possible and it’s impossible to operate in the shadows because all transactions are recorded publicly. Most importantly, the fees to use these DeFi protocols are extremely low because the overhead is nothing more than a few programmers to maintain the code.
Now, DeFi is extremely new (see above point) and in a consolidation phase. There are a lot of new protocols popping up every day with most of them being scams.
This is a bad thing, but it’s not something to worry about. The number of scams in DeFi are a symptom of the rapid growth and fragmentation of the industry. They will disappear at some point in the future.
Anyway, this relates to Ethereum because approximately 90% of DeFi value is locked up on the Ethereum mainnet or a layer 2 protocol built on Ethereum.
In fact, a lot of the price pressure on Ethereum is a direct result of DeFi users needing to purchase Ethereum to interact with DeFi protocols.
Ethereum 2.0 and Sharding
Another huge point in favour of Ethereum being undervalued is the planned release of Ethereum 2.0 and sharding sometime in late 2021 or early 2022.
Ethereum 2.0 is when Ethereum will become a proof of stake blockchain, which will drastically reduce fees. Sharding is part of this because it will increase the transactions per second while lowering gas fees.
For those that don’t know, Ethereum has a transaction fee problem. It is rare to have a more complicated Ethereum transaction (ie. one that involves a smart contract) cost under $100 in fees.
It is actually crazy that Ethereum has gained so much popularity with its ridiculously high gas fees. And the gas fees are only going to get lower in the next year, which will almost certainly lead to an increase in the price of Ethereum.
Layer 2 Protocols Coming Onboard
Layer 2 protocols are another thing that has emerged on Ethereum due to the high gas fees. Layer 2 protocols are basically a separate blockchain that runs on the Ethereum blockchain.
These protocols have significantly lower gas fees and more transactions per second than Ethereum.
They have gained a lot of popularity in 2021. The thing with layer 2 protocols is that getting onto and off the protocol still requires Ethereum.
That is a positive pressure point on the price of Ethereum.
Now, these layer 2 protocols are not going anywhere when Ethereum 2.0 is released. They will also lead to an increase in demand for Ethereum.
It’s a win-win situation for the price of ETH.
NFTs Coming Onboard
Finally, non-fungible tokens are a fairly new trend in cryptocurrency (read: Ethereum). These are unique tokens typically associated with artwork.
We will not go into detail about NFTs in this article. But it is important to note that NFTs exist almost exclusively on the Ethereum mainnet and are a huge driving force of the price of Ethereum because gas fees must be paid in Ethereum at a minimum. NFTs are typically paid for in Ethereum as well, which further drives the price of ETH.
It’s difficult to put a true value on Ethereum. That said, the amount of utility that the tokens have on the blockchain are astounding.
We have just started to see the many uses of the Ethereum blockchain and the price of Ethereum has already skyrocketed. This is already including the exorbitant gas fees on Ethereum at the moment and the fact that the main industries on Ethereum (NFTs and DeFi) are still in their infancy in terms of projects, development, and users.
This culminates in the only conclusion possible – Ethereum is not overvalued at $4,000. In fact, it is likely undervalued at $4,000 once you account for the future growth of the use cases of the Ethereum blockchain.