Michael Novogratz: We should be valuing Ethereum like Wall Street values Facebook

With cryptocurrencies, there are no cash flow statements or balance sheets an investor can analyze to get a good sense of their intrinsic value. This makes it hard for conservative Wall Street players like Warren Buffett — who analyze their investments by discounting cash flows — from dipping their toes into Bitcoin and cryptocurrency.

According to hedge fund manager Mike Novogratz, though, Ethereum’s dollar value is predicated on the concept of a network effect — which is an economic concept that the value of a network (be that technology or money) is predicated on how many people use it.

What’s behind Ethereum’s $20 billion market cap?

Over the past decade, cryptocurrencies have formed market capitalizations in the billions and billions of dollars.

But that raises the question: what is behind these high valuations? How could projects just years old be worth so much?

For Ethereum, at least, it’s a simple network effect.

Speaking on a panel at the Ethereal Virtual Summit — the latest virtual crypto conference — former Goldman Sachs partner Mike Novogratz shared this sentiment with Ethereum co-founder Joseph Lubin and Forkast.news’ Angie Lau.

He argued that Ethereum garnering a $20 billion market cap is based on a confluence of different use cases of the blockchain — such as decentralized finance, enterprise applications, or stablecoins — garnering a vast amount of users, which then create a network effect that increases prices exponentially.

This contradicts the belief that Ethereum is only valuable because it facilitates initial coin offerings, which was a popular sentiment in 2018.

Novogratz explained further:

One of the things for the Ethereum narrative is valuing the network kind of like we do with Facebook — the more network effects you get, [the better]. Like getting Tether to migrate its coins to Ethereum brings people using that to the network.

What he’s saying is that attracting new individuals through new use cases for Ethereum and the ETH token itself, not just using the cryptocurrency as an investment, is how the network has and will continue to gain value.

Ethereum might be a store of value too

Novogratz’s main idea was that Ethereum is a network effect, yet he did argue that the cryptocurrency may also derive a portion of its $20 billion value from it potentially acting as a store of value:

“All the other cryptos — of which Ethereum is the most important — need over time to provide real use cases. [… Then, their value] will be store of value plus something,” Novogratz explained.

On this, he didn’t elaborate, but analysts say that ETH has its own scarcity mechanisms that may make it a long-term store of value and potentially money-esque.

David Hoffman of tokenized real estate platform RealT and Ryan Sean Adams of crypto fund Mythos Capital identified three such scarcity mechanisms:

ETH locked in DeFi: As DeFi grows, more and more ETH will need to get locked into smart contracts as a form of collateral.
ETH staked: Once Ethereum 2.0’s first phase (phase zero) goes live, investors will be able to lock up their coins and receive interest on their stash over time. This will decrease the circulating supply of coins, something that analysts say will cause a large economic shift.
ETH burnt: A popular Ethereum Improvement Proposal says that there should be a small portion of ETH burned, meaning destroyed forever, for every transaction sent.

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