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Will ETH close the deal with TradFi investors?

Investors, being people, love stories.

Even among professional money managers, not many do the hard work of financial modeling and forecasting.

Instead, we make most of our investment decisions based on themes and elevator pitches — the shorter, the better. 

The very greatest investing pitches, for example, were often distilled down to as little as a word or two — or even just a letter or two: railroads, the Nifty Fifty, the internet, SAAS, AI.

For a short while in about 2021, it seemed like “crypto” would take its place in that pantheon of thematic investing.

But then came the annus horribilis of 2022 (Luna, FTX, etc.) and, even though bitcoin has returned to its all-time highs, crypto generally has otherwise failed to re-engage investors’ attention.

Could next week’s introduction of spot ETH ETFs change that?

If so, ETH will need a slightly expanded elevator pitch — “crypto” is no longer sufficient to get TradFi interested. 

Fortunately, there are a lot of contenders.

Unfortunately, a lot of elevator pitches might be a bad thing — to appeal to TradFi, we’ll have to pick just one.

But do we even know what ETH is?

ETH’s identity crisis

Crypto natives have been workshopping Ethereum elevator pitches for years, but have so far failed to settle on a winner.

“The world computer” was the first to catch on back when Ethereum’s defining feature were the smart contracts that differentiated it from Bitcoin.

As computers go, however, Ethereum is not a very powerful one.

The founder of a competing chain dismissively calls Ethereum “the world calculator” and I suspect TradFi investors would agree — and therefore be disinclined to invest.

After Ethereum’s switch to proof-of-stake in 2022, the elevator pitch for ETH became “ultra-sound money,” highlighting the expectation that Ethereum’s burn mechanism would make it a deflationary asset (in contrast to still-inflationary bitcoin).

So far, though, ETH has deflated at an annualized rate of just 0.13% — this won’t impress TradFi investors who are generally unmoved by share buybacks 20x that size.

ETH is also sometimes pitched as “the internet bond” based on the yield it pays — but ETF holders won’t have access to that yield because it’s paid to stakers and the SEC will only allow the ETFs to hold regular, unstaked ETH. 

Asking investors to buy the ETH ETF on the basis of yield would therefore be like asking them to forego dividend payments on a value stock (or, even worse, donating the dividend to other investors).

TradFi investors don’t always require yield, of course — growth stocks usually don’t pay dividends and even Berkshire Hathaway, the epitome of value investing, hasn’t paid one since 1965.

But if a productive asset can’t offer yield, it has to offer growth — which brings us to the most recent elevator pitch for Ethereum: “Crypto’s app store.”

The idea here is that ETH takes a cut of the revenue generated by all the applications that run on Ethereum in the same way that Apple takes a cut of the revenue generated by all of the applications in the App Store.

That doesn’t add up to a whole lot at the moment (ETH currently trades at 369x price-to-fees, according to Token Terminal), but the App Store thesis could make ETH appealing to TradFi investors as a one-stop way to index the future growth of the crypto ecosystem.

But TradFi investors have been spoiled by the profitability of Apple, whose App Store is a walled garden with a 30% take rate.

By comparison, Ethereum is an open garden with a take rate of, what? 1%? 0.1%?

Even 0.1% can add up, of course, but you have to be very bullish on crypto to think there will be enough Ethereum-based activity to justify its current $411 billion market capitalization.

Some people are!

VanEck’s $22,000 price target for ETH is based on its forecast that Ethereum’s take rate will generate $66 billion of annual revenue in the year 2030.

That’s a big number, so I’m sure VanEck’s note will make a substantial number of buyers for the ETF. 

I wonder, however, how many big buyers it will make.

Because here’s an investment pitch a large money manager would never want to hear: This company will turn into one of four very different things....

When you get to the fork in the road, take it

In his presentation at EthCC earlier this month, Vitalik said he expects the blockchain he co-invented to develop in one of four directions:

1. A platform only for layer-2 blockchains.

2. A “radically simplified” layer-1 chain (“kick the EVM out of Ethereum”).

3. A layer-1 with “somewhat” more functionality for layer-2s (reduced confirmation times).

4. A platform only for applications — no layer-2s!

On this spectrum of modular to monolithic outcomes, Vitalik’s personal preference is “somewhere between the second and the third” options.

I think that’s correct (entirely because he thinks it’s correct), but I also think that “between two and three” might be the most difficult thing to pitch to investors.

TradFi investors listening to Vitalik’s presentation might feel that Ethereum is stuck in a purgatory of innovator’s dilemma — neither an ultra-cheap platform (option 1) nor an ultra-profitable app store (option 4), but something in the messy middle.

Most investors don’t want to think that hard — and no investors like messy.

Almost closing time

There’s a saying in college football: If you have two quarterbacks, you have no quarterbacks.

That’s because if a team is alternating between two quarterbacks, it means that 1) neither was good enough to win the job outright and 2) the offense has to constantly adjust between two playing styles. 

I think this applies in investing, too: If you have two elevator pitches, you have no elevator pitches.

Ethereum has about 15 elevator pitches.

Will any of them be able to close the deal with investors?

We’ll soon find out: TradFi’s salesforce starts pitching investors from next Tuesday.

— Byron Gilliam

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