The moat and investment value of Ethereum

In the previous article, I cited on-chain data to examine Ethereum's cash flow in the past and present.

A reader asked the following question in the comments:

Since Ethereum's cash flow is zero, why should one invest in Ethereum?

This involves what kind of model should be used to assess Ethereum's intrinsic value.

Ethereum's attributes are quite complex; on one hand, it is a platform/project, and on the other hand, its income and expenses are mediated by the "goods" it produces.

In real life, a somewhat comparable example is oil. However, we do not see any oil company's revenue being priced in oil; oil companies strive to obtain fiat currency, and to acquire as much fiat as possible, they also control the amount of oil extracted. Therefore, the example of oil is not very similar to Ethereum.

Another analogy could be a country, where the income and expenses are priced in the "goods" (fiat currency) it issues. We measure a country's fiscal condition by looking at its revenue. The more revenue (fiat currency) it has, the more fiat remains in the treasury, and the more surplus the country can generate. At this point, we consider it to be better.

But Ethereum is not like that. Although it is also better when its revenue increases, a significant portion of that revenue is ultimately burned, resulting in fewer "goods" (Ethereum) remaining in the entire system, potentially leading to deflation. In this situation, we actually consider it to be good. Thus, the example of a country is also not very similar to Ethereum.

Therefore, in real life, it is difficult to find an object that can be compared to Ethereum. So whether to measure Ethereum's intrinsic value from the perspective of goods or from the perspective of a platform/project, I am still in the exploratory stage.

I have tried to examine its cash flow from the perspective of a platform/project, focusing on deriving a rough estimate: when the amount of Ethereum burned daily reaches a certain level, what price might it achieve.

From the perspective of a platform/project, I believe Ethereum can generate substantial free cash flow in the future.

In previous articles, I have often written about the criteria for assessing a company's intrinsic value:

It is the total discounted future free cash flow of the company.

In this evaluation criterion, there is a very key term that I suspect some readers may have inadvertently overlooked.

What is this key term?

It is "future" free cash flow.

Note, it is future, not present, and certainly not past.

This is the key core to assessing a company's intrinsic value.

Since it is future, all past historical data is merely a reference. If past data can help assess its future cash flow, then past data has reference value; otherwise, the reference value of past data is very limited.

If the reference value of this data is limited, then what other factors can be used as a reference to assess the intrinsic value of the project?

I have repeatedly shared the views of Buffett and Duan Yongping in my articles: business model and corporate culture.

Regarding this, there are two typical cases in Duan Yongping's investment career.

The first case is his investment in NetEase.

In 2001, due to the burst of the internet bubble and operational reasons, NetEase fell into a severe financial crisis, with its stock price dropping below $1 and facing delisting risks.

At that time, NetEase was not only unprofitable but also had problems maintaining basic operations; where would it find net profits to generate substantial free cash flow?

Duan Yongping decided to buy at this time because he was optimistic about NetEase's gaming business, believing that NetEase's games would definitely be profitable and generate substantial cash flow in the future.

He later recalled that during that period, he was almost the only big buyer in the market, with him alone taking on a large volume of selling from sellers every day.

The second case is his investment in Pinduoduo.

When he invested in Pinduoduo, it was still in a phase of burning a lot of money. Even when it went public in 2018, it was still in a state of losing over 10 billion RMB. It wasn't until the third quarter of 2021, four years later, that Pinduoduo finally turned a profit.

From 2018 to 2021, Pinduoduo was continuously losing money, with no net profit at all. Why did Duan Yongping still invest in it? In a Q&A, he said: because he was optimistic about Pinduoduo's moat, especially its founder.

Why did Duan Yongping dare to invest in these two companies when they were purely losing money and most people saw no signs of profitability?

The core reason boils down to one point: he was optimistic about the business models and moats of these two companies.

He believed that despite the dire conditions of these two companies at that time and even in the past, their futures would definitely be bright, believing that they would certainly generate substantial free cash flow in the future, thus he had no doubt about the intrinsic value of these two companies and dared to buy boldly when others hesitated.

Returning to the discussion of Ethereum, my viewpoint is also very simple:

I believe Ethereum has a very good moat and a great team culture, so I believe its future, even from the perspective of a platform/project, will have very good free cash flow.