Ethereum (ETH 0.64%) is starting its next big act. It's still growing and hosting a hotbed of cryptocurrency experiments in its ecosystem, but the case for buying it is getting clearer and clearer. It's becoming less like a purely speculative growth play and more like a network asset with identifiable cash-flow dynamics that feed through to its value.
The next three years will be an elaboration on that trend, with a lot of upside likely waiting for investors. Let's map out its most likely course during that period to see where it will be in late 2028.
Image source: Getty Images.
Scaling is fueling the flywheel
Perhaps the biggest part of the next three years will be the story of how Ethereum continues to scale.
If more transaction activity settles to Ethereum, even through its Layer-2 (L2) networks built on top of Ethereums blockchain, the base chain still collects the gas (user) fees. Now, part of every transaction's fee is a base fee that gets burned, which offsets new coin issuance, and which thus keeps the float limited, making its price more sensitive to purchases and sales.
The chain's L2s now process far more user operations than the main chain, which is a sign that demand is increasing where fees are lower. But the base chain still captures meaningful value, and Ethereum remains crypto's largest fee generator, with more than $6.7 million in fees generated in the seven-day period ended Sept. 5.
CRYPTO: ETH
Key Data Points
In terms of its supply dynamics, the net supply line has been little changed in recent months. So the coin's supply growth rate is not a major concern for investors right now.
Things are thus working as Ethereum's creators planned, despite a considerable (and for investors, painful) delay in reaching that state.
New inflows are accumulating while staking sets a floor
Ethereum's distribution in the financial system matters as much as its technology.
On the distribution front, U.S. spot Ethereum exchange-traded funds (ETFs) started trading on July 23, 2024. In the year since, cumulative net inflows have reached roughly the high single-digit billions, and one of the flagship funds quickly scaled to $10 billion in assets. That's the kind of persistent, rules-based buying that financial institutions deliver for an asset. And it's that behavior which will be a tailwind for the coin for the coming years -- as long as institutional investors are accumulating Ethereum instead of selling it.
ETFs cannot stake their coins under current rules -- locking up their coins to validate transactions in exchange for interest-like rewards. But ETFs still let investors hold Ethereum inside brokerage and retirement accounts. That might change soon, and will come with important implications.
Staking participation is now about 28% of total supply, and recent validator reward rates have hovered near 3%. The staking reward rate behaves like a cash yield for those who choose to stake. Protocol-level optimizations to staking are, after the latest upgrade called Pectra, more likely to rise slightly than they are to fall, which will serve to attract and retain more capital for the chain.
So, the base case for the next three years is that Ethereum keeps building out its tech, which helps to support investor sentiment, thereby encouraging ETF inflows to continue, and simultaneously encouraging staking to become a more popular and more rewarding activity. It is likely that the chain's L2s will keep onboarding new users and producing new decentralized apps (dApps) to expand the ecosystem even further. And the tight supply of Ethereum coins is also likely to provide a tailwind.
Does that mean it's a good time to buy this coin?
In a word, yes. Just be sure to hold it for long enough that its combination of favorable factors have time to generate value.
