Jenna Dagenhart: Bitcoin's share of total cryptocurrency market cap has been falling and fluctuating. Joining us now to talk about another digital asset that VanEck thinks could climb to a valuation of 10 times higher than its current one is Matthew Sigel, Head of Digital Assets Research at VanEck. Matthew, Ethereum is kind a mystery to a lot of people. What is it and why should we pay attention to it?
Matthew Sigel: Thanks Jenna. Well, think of Ethereum as kind of a Linux for money, an open-source software platform on top of which anyone can program instructions into money very cheaply. So that's a very compelling use case. If Ethereum were a software company, it would be the fifth largest in the world after Microsoft, Oracle, SAP and Salesforce. So there are already tens of thousands of developers who are building decentralized applications to send and receive money, and the Ethereum stakeholders are benefiting from this to the tune of, we estimate, $18 billion this year in revenues that Ethereum ecosystem participants will earn for providing their computing power to this global open-sourced project.
Matthew Sigel: So, in our view, this is a deflationary platform that threatens existing profits of both traditional Wall Street intermediaries and Web 2.0 platforms whose market share has been so focused on by regulators and policymakers. So Ethereum, think of it as a software company without any employees, making $18 billion this year.
Jenna Dagenhart: Wow, and you think Ethereum has the potential to go up 10x from where it is right now. What would need to happen to make that bull case a reality?
Matthew Sigel: Yeah, a 10x increase sounds so fantastical, but when you're starting from such a small market share, we don't think it's such an implausible scenario. For context, we estimate that Ethereum currently has about a half a percent market share of the total addressable disruption that it may cause. So that math is based on $3 trillion worth of banking and payments revenues that are still done quite inefficiently and expensively. So this is not even the total market, this is just the proportion that Ethereum currently addresses. And so if they could just increase their market share from that less than one half a percent to five percent, given the winner take all characteristics that we've seen in many network-based businesses in the last decade., And then apply the same multiple that Ethereum trades on now, you can value block chains and cryptocurrencies in much the same way that we value software companies, and apply a multiple to their revenues or to their earnings. In the case of Ethereum, since there are no headquarters or employees to speak of, it's basically pure profit. So we would apply 20 times to that 5% market share potential and that would be a 10x from current level. So it sounds like a lot but 5% market share is still pretty small and leaves plenty of room for banks and traditional internet companies as well.
Jenna Dagenhart: Mm-hmm. It sounds like there's a lot of potential here. What are some of the catalysts as well as some of the risks that we need to be aware of going forward?
Matthew Sigel: So we saw in the first half of this year, when the Ethereum price rose so dramatically, is that the costs of doing business on the network, so the transaction fees, also rose very quickly and that deterred a lot of entrepreneurs and businesses from performing transactions on the network. The bull case for this protocol is that it's a deflationary disruption to existing intermediaries like Web 2.0 companies that charge 15-50% take rates of the entrepreneurs who build businesses on their platforms. And theoretically Ethereum should be able to provide that service at a much lower fee, maybe 50 basis points. What we saw this spring is that the network became so congested, it's a good problem to have, lots of people wanted to launch projects. Fees got expensive and that deterred some activity. So Ethereum is in the process of revamping its network, a new product update so to speak, that should alleviate some of those bandwidth constraints and make it more economically attractive for businesses to transact. But there is risk around that transition, there is a lot of competition with products that claim to be cheaper, faster, better, and that speaks to just the general pace of innovation in this space. So, competition and execution are the things to watch.
Jenna Dagenhart: Well Matthew, great to have you. Thanks for joining us.
Matthew Sigel: Thank you.
Jenna Dagenhart: And thank you for watching. Once again, that was Matthew Sigel, Head of Digital Assets Research at VanEck, and to receive regular experts from VanEck's experts, please visit vaneck.com/subscribe. I'm Jenna Dagenhart with Asset TV.
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