Recently, an analyst at Fidelity was quoted as saying that the value of Ethereum (CCC:ETH-USD) will see substantial growth next year. Jurrien Timmer, a macro strategist at financial giant Fidelity, was quoted by The Daily Hodl magazine as saying that ETH crypto was at a big discount to Bitcoin (CCC:BTC-USD).
This is based on the analysts’ estimate of the growth in the Ethereum network. That includes all the nodes, users and apps that back up the growth in the network of the Ethereum blockchain.
As a result, expect to see ETH crypto rise substantially over the coming year. This is based on the concept that as the Ethereum network and its uses grow, the value grows exponentially.
ETH Crypto and Network Value Effects
The value effect from a network is due to the fact that a network gains from the interaction of all its nodes or points of presence. So while a network may grow sequentially, the value of a network will grow in proportion to the square of the network growth.
This is known as Metcalf’s law, based on Bob Metcalfe, who was an early founder of the ethernet (a precursor to the internet), and 3-Com. (3-Com was sold to Hewlett-Packard (NYSE:HPQ) in 2010).
The law states that a network’s value is proportional to the square of the number of nodes. So, if for example, there are 10 nodes, its value is 100. But with the 11th node, a 10% gain, the value rises 21% to 121. This essentially means that as Ethereum’s value grows steadily its price and market value will shoot up quickly.
This is what the Fidelity analyst was referring to when he said that the ETH crypto price was at a discount to Bitcoin. This is because he expects the Ethereum network to grow substantially faster than the Bitcoin network.
Ethereum to Catch Up With Bitcoin Earlier
About a year ago I wrote a similar article for Medium.com, where I projected that the Ethereum value will begin to overtake Bitcoin’s value. In my article, I postulated that Ethereum would catch up to Bitcoin within 7 to 8 years.
This was based on Bitcoin rising 100% annually and Ethereum rising 200% annually. In other words, Ethereum would rise twice as fast as Bitcoin.
So far this year, as of Dec. 20, BTC tokens have risen 59% year-to-date, according to Google Finance. But ETH crypto is up 431% in the same timeframe.
So Ethereum has risen 7.3 the rate that Bitcoin has YTD. If this keeps up, Ethereum will catch up to Bitcoin’s price well before the mid-point of 7 to 8 years, as I previously projected.
The reason is that Ethereum’s value is growing exponentially as its network grows sequentially. Bitcoin is much more of a store of value and has less growth as a network. As a result, Ethereum’s exponential network growth is much faster than Bitcoin’s network value growth.
Where This Leaves Investors in ETH Crypto
According to the Fidelity strategist Timmer, Ethereum’s faster growth rate may not yet be reflected in ETH’s valuation. He says that investors value Bitcoin more on its scarcity economics and Ethereum is presently at a lag, despite its faster network value growth.
Investors in Ethereum can take comfort that this clearly seems to have played out during 2021. The likelihood that ETH crypto will move closer to catching up with BTC crypto during 2022 is very high.
Moreover, there is some evidence, according to Coin Telegraph magazine that traders in Bitcoin started treating Ethereum as a “hedge” or “haven” against Bitcoin. When they sold out of Bitcoin, for example, they bought into ETH crypto. That might be expected if they think that in the long run, ETH crypto will outperform Bitcoin.
That should give some comfort to investors in Ethereum, even as it is in the middle of a slump right now.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions 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.
Mark Hake writes about personal finance at mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.