Most common Arguments for why ETH is overvalued, with Counter-Arguments
Social media is usually crawling with bad arguments for why people think ETH is overvalued. Often people try to reply with good counter arguments, but it's not always easy to summarize these things into a few sentences. I thought I'd collect all of it in one place and condense them as best I could.
Argument: People bought because they assumed brand name companies would use Ethereum public chain, an assumption which has not been substantiated.
Counter-Argument: Remarks by EEA have suggested that private chains are a dead-end. The new EEA roadmap shows how they plan to transition most enterprise usage to the public chain over time. People's expectations for enterprises using Ethereum are not baseless. They're just too early.
Counter-Counter-Argument: Being too early is not much different from being wrong.
Counter-counter-counter-Argument: Wait till when we the EEA starts to bear fruit. Enterprises will connect to the public chain because private chains are useless (i.e. just inefficient databases).
Argument: ETH only usage was as a reserve currency for ICO shitcoin asset bubble speculation.
Counter-Argument: It's likely that this use case attracts significantly less ETH buying than during the ICO mania, but it's not accurate to say that legitimate projects can't use Ethereum for fundraising or token distributiions without being a shitcoin. ETH use case as a reserve currency still remains, even while the shitcoin situation has died. Presales for real projects with real use cases (e.g. Gods Unchained) are ongoing as we speak without selling yet another useless ERC20 token (they sell playable digital cards that also have some collector value).
Argument: ETH's rally was fuelled by the flippening narrative. 2018 has shot that to hell.
Counter-Argument: BTC dominance is based on the Lindy effect, market size and lots of successful memes. When fundamentals start to matter, even a little, it will become very difficult for BTC to maintain top spot. Even without fundamentals, ETH will eventually be seen as having similar Lindy effect, similar market size and (one hopes) a few good memes.
Counter-Argument: XRP could ruin the flippening by holding on to #2. Other incumbents too (e.g. EOS).
Counter-Counter-Argument: If XRP or EOS are worth more than ETH in five years, then everything we thought we knew about the value of decentralization was wrong.
Argument: SEC activity against ICOs create bad news and selloffs (e.g. refunds, fines and exit scams).
Counter-Arguments: As of Sept there was only 3,858,659 ETH still held by ICOs (see Bitmex research report). All these projects that have already sold enough to have massive runways. Any SEC challenge by can be taken to court and delayed for years. Refunds are also a joke for most of these, since refunds can only be given to those who provide passport info and proof they still control the original wallet where the original tokens are still present and were never traded. Refunds are also optional. And fines are TINY (a few hundred thousand compared the tens of millions these projects have in ETH). Only the bad headlines are legit concern. But just how much impact can bad journalism have on price?
Argument: Staking delayed (i.e. Casper FFG). Constantinople delayed (i.e. issuance reduction).
Counter-Argument: Sad indeed, but these delays are a normal part of software engineering. They don't imply that the project is doomed or that its capabilities will be diminished. What it does mean is that supply is higher and demand is lower right now. So price is effected. But this is not a great argument for why ETH is overvalued. It's a (partial) explanation for why there's been more sell pressure than buy pressure in the last few months.
Argument: No one uses Ethereum.
Counter-argument: If you limit usage to daily transactions of dapps, then yes, it's very low. But by that metric, you would have to say that no one used the internet until the mid 2000s when people started using ecommerce transaction regularly. The real metric for the web turned out to be page views, not credit card transactions. So why are we so fixated with transactions now? We should be looking at Infura metrics, which has over 6 billion requests per day!! Saying that no one is using Ethereum is bullshit. It's time to recognize that people who look-up information on the Ethereum network are users too, just like people who load a webpage are considered users of the internet.
Counter-counter-argument: When people discuss users, they are generally talking about people using applications that they can profit off of. Hence, the use of daily transactions as a main metric.
Counter-counter-counter argument: To say that you can only monetize users that produce a daily transaction is to completely ignore the last 20 years of internet business models. Google did not get to 110 billion in annual revenue by requiring its users to make transactions! How can people forget about the cornucopia of monetization models that already exist, let alone those that are being invented specifically for blockchain? There are lots of ways to monetize users without having them make transactions. For example, Gods Unchained gets players hooked by offering a free-to-play AAA game. No transactions required. It's only when the player wants something more that they need to make a transaction (e.g. the same as the freemium model we see elsewhere on the internet). The same goes with subscription services, that would not require transactions, but still use the benefits and security of the Ethereum blockchain. The point is that there's more ways to monetize a user than just taking a small fee out of user transactions. Fees might work well for exchanges and marketplaces, but the internet has shown us that there's so many more ways to do things online.
Argument: It doesn't scale.
Counter-Argument: Doesn't scale yet. L2 solutions are rolling out. Serenity is coming to a testnet near you in 2019.
Argument: Dapp UX is horrible.
Counter-argument: UX is legitimately horrible. But it's been receiving more visibility this year which has led to good progress on multiple technical solutions. Having more designers on the teams is also helping.
Barriers to Entry
Argument: High barriers to entry.
Counter-argument: This is a challenge for all crypto. It's also a challenge for any new technology. That's why you have waves of users that range from the early adopters and the late adopters. The very earliest adopters were gamblers, hackers and finance types. They were already comfortable jumping through hoops and dealing with complexity. The next cohort will probably be those tens of millions of PC gamers who are already comfortable with figuring out new tech and dealing with confusing software. After them, it'll be a more general audience. Finally, maybe in 5-10 years, your grandma might become a user (i.e. the late adopters).
Argument: Fees will drop. Since the main use of ETH is to pay for fees, there will be less need for ETH.
Counter-Argument: Fees in nominal prices will drop, but the amount of fee usage will increase dramatically. With Serenity, you'll see a large multiplication of network capacity. The amount of ETH being spent on fees will go up considerably even as the amount each user is spending per transaction goes down.
Alright. I think I've addressed what I consider to the weaker arguments. Here's the only argument that I think is worth debating, because it's the only one that asks questions we don't have answers to yet.
Argument: While ETH has multiple real use cases and the network sees billions of daily requests and hundreds of millions in economic activity, the total aggregate usage might turn out to be not enough to justify a really high valuation. How much fundraising do you need? If only a billion dollars is raised per year through ETH, will that be enough? If a hundred thousand users check their favourite dapps every day (e.g. the equivalent of page views, not transactions), is the ETH they initially bought and used going to be enough? How often do these users "top-off" their accounts? How often do they buy more ETH? How much are they buying every month to meet their needs? Are they doing several small transactions or a few large ones? Is that enough? Is the use of stablecoins eating into the use of ETH as a reserve currency? Do people think of their ETH wallets as savings or investments?
These are all the questions that I think about regularly. I don't have answers to them because it's still too early. I don't think we can know until after a whole bunch of high quality projects have built up reasonable user bases. Then if those bases don't provide the numbers required to keep buy pressure on ETH, well, then we'll have our answer.