Ethereum (CCC: ETH-USD) could still have substantial upside despite its well-known transaction issues, including high fees and slow speeds. The main reason is that the blockchain has such a dominant position in smart contracts and NFTs. As a result, the demand for Ethereum remains very high.
And it’s not as if Ethereum is having any kind of problems in terms of its recent price performance. Since bottoming out on Sept. 20 at $2,676, it has risen 78% to $4,765.
And that is just its recent performance. For example, in the last 6 months, Ethereum is up 22%, even though this is near when Ethereum peaked in the spring of 2021.
Why Ethereum Will Likely Stay Strong
The simple reason why Ethereum is likely to keep rising is that its fundamentals are still very strong. One reason is that its huge market share in the NFT (non-fungible tokens) space is attracting huge interest from major players.
One analyst recently pointed out that a number of Hollywood studios are getting into the NFT market. After all, they have huge collectible assets that can be monetized or exploited in the metaverse world.
A recent Hollywood Reporter story reported that the studio will produce 100,000 avatars themed around its upcoming movie The Matrix Resurrections:
“The Matrix NFTs will be released in partnership with the social NFT platform Nifty’s, which will create 100,000 avatars, and will sell them for $50 each starting Nov. 30. The avatars will represent characters living in the Matrix. On Dec. 16, all buyers will be able to choose to take a “Blue Pill,” which will keep their avatar in the Matrix, or a “Red Pill,” which will transform it into a resistance fighter. In coming months there will be other challenges and options, letting users upgrade their avatars, or earn new NFTs.”
Nifty’s does not use the Ethereum platform directly, but it uses the Palm Network. However, the Palm Network is an NFT-optimized network blockchain network for culture and creativity, built by and for the open Ethereum ecosystem.
This is indicative of the popularity of NFTs by many studios today. Many NFTs are written on the Ethereum blockchain platform or, like the Palm Network, NFT-optimized blockchains based on Ethereum.
Where This Leaves Ethereum Holders
The point is that many institutional and now commercial/strategic investors are turning to Ethereum to power their entry into the crypto world. They clearly now see NFTs as a means of being able to monetize their assets in virtual space.
And given Ethereum’s huge market share in the NFT arena, this is likely to lead it significantly higher over the next several years.
This means that Ethereum effectively has no limit on its upside. Presently its market cap is $534 billion. But given how fast NFTs are likely to grow, this market cap could easily double over the next year or two. One analyst says that the NFT market could reach a value of $25 billion in the “very near term.”
Let’s say that Ethereum maintains its greater than 50% market share in the construction of NFT assets. Let’s also assume that that the NFT marketplace multiplies 50% over the next 3 years to $37.5 billion.
That implies that Ethereum could gain $6.25 billion in market value over this period. But that assumes a 1 to 1 relationship between Ethereum market value gains and NFT’s market value gains. Given that this involves many transactions, let’s say that there is a trickle-down effect on Ethereum’s valuation.
Therefore, using 20% of this $6.25 billion value gain, Ethereum could pick up $1.25 trillion in market value over the next several years. That will effectively increase its market cap to $1.784 billion, or a 234% gain over today’s price.
That works out to a price of over $15,000 per ETH token. If we assume that it could take 3 years for this to happen, the average annual return on a compounded basis is 49.5% per year. That is a pretty good ROI for most investors.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.