The $640 Billion Dollar Question

As a short term crypto bear, it’s fascinating to watch Ethereum rise. You couldn’t really want a more bullish chart.

Talk about going up in a straight line.

Here is a selection of charts for context:

The long term picture:

I have written for a long time that the price of Ethereum is pre-shadowed by transaction costs and that rising transaction fees are soon followed by a rising price for Ethereum.


Here, courtesy of bitinfocharts.com, are those transaction fees:

The recent ‘London’ fork meant to crimp miners fees has backfired. As a very minor miner I can tell you mining is still nicely profitable, and while the level of returns doesn’t seem to have changed by much, per hash power, the transaction fees have gone mad.

If you use Ethereum, you will be presented with fees from tens of dollars to hundreds of dollars for quite ‘normal’ transactions. This has invalidated lots of applications for all but whales. For example, I appear to be in for a $400 airdrop from Convex. ‘Nice,’ you might say, but to claim it and move it and sell it will cost about $400. This isn’t what a crypto ‘distributed computer’ is meant to work like. It’s meant to be cheaper than banks, not massively more expensive.

Sure, but that is not stopping Ethereum heading past $500 billion in market cap.

It is Pareto to the rescue, because in the end it is the 1% whales driving the traffic and value, where a few hundred bucks a transaction is not an issue. Meanwhile the ‘sardines’ are forced onto the centralised crypto channels, kept away from a large group of applications because of the cost or must take big haircuts to use layer 2 solutions like Polygon/Matic. Layer 2 is not an ideal solution for avoiding Ethereum’s monster fees because getting from Ethereum to Matic or other Level 2 solutions requires using a bridge and that step is costly too.

So if transaction fees keep rising, does the price of Ethereum keep rising too? Does the network reach a point where it is just too expensive to transact which creates a price top or some kind of damaging disruption?

This is where the key Ethereum price call comes into play.

Ethereum 2 is meant to solve all of this. Transaction prices are meant to fall to the sort of levels enjoyed on the Level 2 solutions.

If transaction costs drive the price, what then?

The utility of a transaction is what drives the ceiling of the transaction cost when the channel is full and appears to drive a vicious circle of value and price. What happen when this circle is broken?

Crypto bulls will just say that huge value will be released by Eth2 and up will go the price. The price of a transaction will drop, the pace of transactions will explode, Eth will pour into ‘proof of staking’ shrinking supply. Up will go the price.

Bears will say, the top 2 most valuable cryptos are ‘Proof of work’ and that’s for a reason. Proof of work creates the vicious/virtuous circle of a cost/price arms race, but ‘proof of stake’ not so much. Break the loop of mining and transacting and the magic is over.

To me the answer is, Ethereum is a massive brand which is unlocking the revolutionary potential of crypto. As a token I would want to hold it after the final Ethereum 2 fork has happened. Crypto seems to be incredibly bullish with no amount of bad news able to dent its advance. I might be bearish but the chart says Ethereum is going straight up.

This is good news even for a bear because the trend is so tight, it will be clear when it breaks.

How to trade the current situation?

Let BTC and Ethereum do their thing and look for value in the top 200, perhaps even top 1,000, when suddenly a great but unloved crypto is due a rerating, worth a x1 or a x5. Scale your positions down to give yourself the sort of percentage upside you might get with ETH or BTC without the need to put gut-wrenching positions on and sit back and watch it unfold. With plenty of capital spare to catch more opportunities.

If BTC and ETH are going to the moon then the ‘also rans’ are going up a lot more in percentage terms. Whether Ethereum zooms or dooms, the advent of contenders like Avalanche, Matic mean that either way token projects can ride or escape the consequences of the Ethereum 2 hard fork and that is worth considering as one less risk in a risk-packed environment.