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At Bitcoin Market Journal, we invest in crypto tokens as if they were stocks. While there are important differences between the two, we analyze crypto “companies” like traditional companies, and diversify our investments with a mix of both. More on our approach here.
Key Takeaways:
- Since its inception in 2015, Ethereum has maintained a dominant position as the leading smart contract platform, benefiting from its first-mover advantage, and now holds over 57% of the total value locked in decentralized finance (DeFi).
- Ethereum’s status is further reinforced by the growing adoption of layer-2 solutions such as Arbitrum, which significantly enhance its scalability and reduce transaction costs, making the network more accessible and efficient.
- The widespread adoption of Ethereum by developers and users has created a powerful network effect: more developers lead to more applications, which attract more users, and this, in turn, draws even more developers. This self-reinforcing cycle makes it difficult for competitors to displace Ethereum as its ecosystem continues to expand and strengthen.
In 2013, while most twenty-somethings were planning their weekend parties, a nineteen-year-old programmer named Vitalik Buterin was dreaming of revolutionizing the digital world.
Nestled in his modest apartment, surrounded by empty energy drink cans and the soft glow of multiple monitors, Buterin wasn’t just writing code—he was reimagining the future.
Buterin loved bitcoin, but he also saw its limitations. He yearned for a platform that could support not just financial transactions, but entire applications. But when he pitched the bitcoin core development team on the idea, they weren’t interested.
Vitalik formed a supergroup of developers, including Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin, to create the core of what would become the Ethereum founding team. Each brought unique skills and perspectives to the table, from Buterin’s programming prowess to Wood’s expertise in formal verification.
Their concept for Ethereum was a “world computer” that could run any program imaginable, limited only by the boundaries of human creativity. Bitcoin was designed as digital money, but Ethereum would be like an operating system for crypto.
Launching an initial coin offering (ICO) in 2014, they raised $18 million to fund their digital dream. A year later, on July 30, 2015, the Ethereum network roared to life, its genesis block marking the beginning of a new era.
By 2017 Ethereum found itself at the center of a digital gold rush. Entrepreneurs flocked to the platform, launching ICOs that turned lines of code into digital fortunes. Ethereum nearly buckled under the pressure, but emerged stronger and better, as it would through each boom-and-bust cycle to follow.
September 2022 marked Ethereum’s coming of age. In an event known as “The Merge,” the network switched from Proof of Work to Proof of Stake, one of the most technically ambitious projects in modern history, and vastly reducing its energy consumption.
Today, Ethereum stands as more than just a technological platform: it’s the backbone of much of the crypto industry. As new layer-2 solutions expand its capabilities and lower transaction costs, it’s clear that Vitalik’s vision has truly transformed the world.
But long-term leadership is not guaranteed, as new layer-1 competitors launch every month. So does ETH remain a good investment? Here’s our analysis.
Key Fundamental Data
What do the numbers say about the fundamental health of this company?
Daily Active Users (DAU): According to Token Terminal, Ethereum’s DAU has remained consistent over the past year, hovering around 300k. While the network has always been able to maintain its user base, other Layer-1s like Solana (993k) and Tron (1.9 million) are currently recording higher DAUs than the Ethereum mainnet.
Fees and Revenues: Ethereum generates revenue through network fees, commonly known as gas fees. However, these fees have historically been a challenge for the network, as high demand during peak periods lead to expensive transaction costs. Fortunately, the rise of layer-2 solutions is addressing this problem by offloading transactions from the main Ethereum chain, significantly reducing costs while still utilizing ETH for fees. This development is making Ethereum more accessible and sustainable for a broader range of users.
Market Cap: ETH has a market cap of $314 billion and has held the number two position for several years. Over the past year, ETH’s market cap has increased by 55%. When compared to other layer-1 tokens, ETH remains far ahead, with BNB at $78 billion, SOL at $66 billion, and TON at $17 billion.
Market Analysis
How big is the market, and is it growing? Who are the customers?
Problem that it solves: Ethereum is a smart contract platform that facilitates the building of decentralized applications (dapps). It addresses the need for a platform supporting a decentralized economy.
Customers: Ethereum’s customers include developers building dapps and tech-savvy users interacting with them. This also includes layer-2 users who require ETH to transact.
Value creation: Ethereum’s value proposition lies in enabling users to access a range of dapps that operate without intermediaries, from financial services to web3 games.
Market structure: The layer-1 space is relatively saturated, but Ethereum, with its first-mover advantage, remains the established leader in the space.
Market size: With a collective TVL of $71 billion, according to CoinGecko, the potential market size of this space is significant. As the largest and most popular layer-1, Ethereum is well-positioned to benefit from its growth.
Regulatory risks: As the largest layer-1 platform and one of the most widely known cryptocurrencies, Ethereum faces ongoing regulatory risks, though the U.S. SEC has definitively ruled it is not a security, and approved ETH ETFs to be sold.
Our analysts rated ETH a 4 out of 5 for market analysis. Download the complete scorecard here.
Competitive Advantage
How big is the company moat? Can they defend against competitors?
Technology/blockchain platform: Ethereum has proven to be one of the most robust blockchains and is widely perceived as the standard for other layer-1 platforms.
Lead time advantage: Ethereum initially had a significant lead time advantage, but this has diminished as they now face strong competition from other projects. However, none of these competitors have come close to Ethereum, which still holds a 67% dominance in terms of TVL.
Contacts and networks: Vitalik Buterin has one of the best networks in the market, not to mention an enormous developer community that regularly meets in person at events around the world.
Our analysts rated ETH a 4.3 out of 5 for competitive advantage. Download the complete scorecard here.
Management Team
Does the team have the experience, intelligence, and integrity to make the company great?
Entrepreneurial team: Ethereum has some of the most experienced developers in the industry and its frontman, Vitalik Buterin, is considered by many as a blockchain Wunderkind.
Industry/technical experience: The team has thousands of hours of experience, considering they launched in 2015.
Integrity: The infamous 2016 DAO hack, which led to a fork of Ethereum to recuperate stolen funds, did not go down well in the crypto community: it suggested a degree of centralization and "a few people" in charge. However, over the long haul, Ethereum's leaders have largely demonstrated clarity of their vision for Ethereum and how they will achieve it.
Our analysts rated ETH a 4.3 out of 5 for the management team. Download the complete scorecard here.
Token Mechanics
Is the token design favorable to long-term investors?
Is a token necessary? In order to interact with the Ethereum economy, you must use ether (ETH) to pay fees, known as gas. The token is like the fuel to the blockchain, ensuring that the motor keeps running.
Value added: The Ethereum token adds value in that it is required to interact with the blockchain network.
Decentralized: Ethereum has a very high level of decentralization compared to many of its peers.
Token supply: Ethereum currently doesn't have an issuance limit, but a token burn was introduced in mid-2021 to help reduce supply.
Public exchange: Ethereum can be found on nearly any major exchange in the world. It remains one of the most accessible tokens on the market.
MVP: Ethereum has been up and running for nearly a decade.
Our analysts rated ETH a 4.3 out of 5 for token mechanics. Download the complete scorecard here.
User Adoption
How easy will it be for the company to grow users?
Technical Difficulty: Ethereum is likely the go-to platform for users wanting to interact with dapps. However, despite its ability to attract users easily, it still faces challenges related to the technical complexities of blockchain technology.
Halo Effect: Ethereum has a strong halo effect due to its reputation as a pioneering platform in the blockchain space. Ethereum's established success in dapps, smart contracts, and DeFi creates a positive perception that extends to related projects built on or associated with it.
Buzz: Ethereum is one of the most talked-about projects on social media (and in mainstream media). It is also one of the most followed blockchain projects on social media with over 3.4 million followers on Twitter and 3.3 million members on its subreddit.
Our analysts rated ETH a 4.7 out of 5 for buzz. Download the complete scorecard here.
Potential Risks
What risk factors might cause intelligent investors to stay away?
Team: Ethereum's team risk is considered low due to the platform's transparency and its leadership in the blockchain space. The team is known for its open development process, with regular updates and discussions shared publicly. Ethereum has built one of the most successful and widely adopted platforms, serving as the foundational layer for many layer-1 and layer-2 blockchains.
Financial: The financial risk for Ethereum is relatively low due to the Ethereum Foundation’s substantial holdings, but concerns about diversification remain. The Ethereum Foundation's latest report reveals that the foundation holds around $1.3 billion in ETH, which makes up roughly 80% of its total $1.6 billion assets. The other $300 million (or 20%) are primarily non-crypto assets and investments.
Regulatory: Ethereum is based in Switzerland, which has clear and favorable cryptocurrency regulations. However, as Ethereum leads in layer-1 blockchains, it is under significant regulatory scrutiny due to its widespread use and high visibility.
Smart Contract: Ethereum carries out regular audits by well-established cybersecurity firms such as Hacken. Additionally, it has a proactive bug reporting system through its Bug Bounty Program, which incentivizes users to report potential vulnerabilities, offering rewards up to $250k.
Traction: Ethereum’s traction risk is considered low due to its established dominance and extensive use across the blockchain ecosystem. It has maintained its large user base over the years and generates a considerable amount of buzz on social media.
Behavioral: Ethereum is one of the few established cryptocurrencies with significant user demand. It can feel like a safer long-term investment, as opposed to newer and riskier cryptocurrencies.
Our analysts rated ETH a 1.8 out of 5 for risk (Note that for this section lower = better). Download the complete Risk Scorecard here.
Investor Takeaway
BULL CASE: Ethereum benefits from its first-mover advantage in the layer-1 space, which has enabled it to build a robust ecosystem and attract a large, active developer community that continuously drives innovation. This extensive community strengthens Ethereum’s market position, creating significant network effects that are difficult to replicate. Additionally, the development of layer-2 solutions is helping Ethereum scale and reduce transaction costs, keeping it competitive with newer blockchains.
BEAR CASE: As the largest platform for dapps, Ethereum is still likely to face regulatory scrutiny, which poses significant risks. Additionally, Ethereum continues to struggle with scalability, often leading to network congestion and high gas fees during peak periods. The network also faces increasing competition from faster and cheaper blockchains like Solana and Tron, which could gradually erode its market share over time.
Overall, our analysts rated ETH a 4.3 out of 5, based on its strong ecosystem and first-mover advantage while acknowledging the challenges it faces with scalability, regulatory risks, and growing competition. Download the complete scorecard here.
This analysis is to help make you a better-informed investor; it is not financial advice. The future may look different than the past. All investing involves risk; see our investing approach for how we manage risk through diversification. Never invest more than you’re willing to lose, and see losses as learning.