BitMEX Founder Promotes Viewing ETH as a Bond Rather Than Currency, Aiding in Attracting Traditional Investors, Predicts Price to Reach $10,000 by Year End

In his latest article, BitMEX co-founder Arthur Hayes shared his latest thoughts on the classification of ETH products, suggesting that viewing them as bonds would help with valuation and attract more investors. Additionally, he also discussed the appropriate timing for entry and his own crypto investment portfolio, believing that reducing BTC exposure and increasing ETH allocation would lead to higher profits.

This article provides a summary, for any uncertainties, please refer to the original article.

Introduction

Before diving into the main points of the article, Arthur Hayes expresses his disdain for global financial trustees. He believes that these trustees, who graduate from business schools, deceive the public through complex financial jargon, making them believe they are competent fund managers. Their purpose is to extract funds from clients, whether individuals, companies, or governments, through management and performance fees. However, despite trustees reaping substantial economic benefits, the performance for clients is lower than stock or bond indexes.

Furthermore, when it comes to cryptocurrency, trustees generally do not recommend adding it to their clients' portfolios. This is not because they believe in the potential of cryptocurrencies but rather because there are no products related to cryptocurrencies that they can sell to clients to earn commissions.

However, trustees also have their uses, and this article aims to explain the importance of categorizing investment products recommended to individuals, companies, and governments.

What is ETH?

If you say ETH is a commodity, it will attract a certain type of investor; if you say it is a currency, it will attract another group. However, Arthur Hayes believes that viewing it as a bond is the most profitable approach.

After Ethereum completes its merger this year, its consensus mechanism will transition to PoS. The rewards validators receive in ETH and the network fees paid to validation nodes will turn ETH into a type of bond. If trustees can convince clients that ETH is a bond rather than a currency, ETH will appear in more investment portfolios.

In addition, with the ESG label of ETH 2.0 and protocols that are more attractive compared to other Layer1 solutions, ETH will be severely undervalued when competing with Bitcoin, fiat currencies, and other L1 rivals.

Note: ESG stands for Environmental, Social, Governance, a concept related to corporate responsibility and sustainable investing.

Valuing ETH

According to ETH researcher Justin Drake's estimation, after the Ethereum merge, staking ETH's APR will range between 8-11.5%. Arthur Hayes will use this data and view ETH as a bond for valuation.

Since running a node requires a minimum stake of 32 ETH, this analysis method initially assumes selling an equivalent amount of USD to purchase ETH. Then, using the yield to maturity of 5, 10, 20, and 30-year US Treasury bonds as the discount rate, and taking the estimated ETH staking APR as bond interest.

Below is the detailed process:

1. Borrow USD for a period and purchase ETH at the current exchange rate
2. Stake 32 ETH and receive rewards in ETH
3. After a certain period, sell ETH and convert it back to USD
4. Repay the USD loan

The table below shows the present value of an ETH bond priced in ETH:

The calculated result is priced in ETH and includes the initial 32 ETH investment. It is common market practice to evaluate in terms of a percentage of the bond's face value, but to highlight the quantity difference, the result is directly in terms of ETH quantity. Additionally, the ETH earned from staking is not reinvested. If reinvested continuously, the bond would be more valuable.

The table below presents the breakeven prices for ETH/USD, assuming all ETH cash flows are converted to USD at a fixed rate. If the ETH price does not fall below the breakeven prices when the bond matures, there will be no losses incurred.

The following image shows different versions of the previous chart, presenting the percentage change in ETH/USD prices with the current price of $3,320 as the base. In the case of a 5-year ETH bond with an annual yield of 11.50%, the ETH/USD price must drop by 29.35% for investors to incur losses in USD after 5 years.

Arthur Hayes states that if the idea of ETH as a bond is acceptable, every individual should buy ETH as an investor considering its long-term interest rates.

Best ETH Staking Pool

Currently, to purchase an ETH bond, one needs to lock the funds indefinitely because once staked on the beacon chain, it may not be possible to unstake. Even after the merge, where the consensus mechanism shifts to PoS, stakers' ETH cannot be freely withdrawn.

To avoid liquidity issues, various staking pools can be used. The three largest pools currently are Lido, Binance, and Rocketpool. Taking Lido as an example, if 1 ETH is deposited into the Lido pool, you will receive 1 stETH, which can be converted back to ETH in the market.

The chart below shows the premium and discount curves of the ETH certificates of various staking pools, where Arthur Hayes believes the token price premium = Rug Pull risk + implied ETH rewards + liquidity preference.

Among these 3 pools, Lido holds the largest market share at around 85%. The stETH obtained from staking ETH can be used as collateral for other DeFi protocols without affecting the accumulation of ETH rewards and without a set staking limit. Arthur Hayes believes that under various conditions, stETH is the best approximation of the present value of an ETH bond. If the market agrees with the view of ETH as a bond, the value of stETH relative to ETH will gradually appreciate over time.

stETH as Collateral

As mentioned, stETH obtained from staking ETH can still be used in other DeFi protocols. Platforms like Aave and MakerDao allow stETH as collateral to borrow assets, increasing users' capital efficiency through leverage.

How Entrepreneurs Can Use ETH Bonds

Here is Arthur Hayes' recommended approach, assuming an ETH price of $3,320:

1. Borrow funds at an average payment rate of around 3.41% for US corporate junk bonds and repay after five years
2. Purchase 32 ETH and earn 8% interest

After calculation, the present value of the ETH bond is approximately 41.28 ETH, with a breakeven price of $2,573, a drop of 22.48% from the current level. Besides the bond's returns, the significant purchase of ETH by these companies will label them as DeFi, Web3.0, and metaverse, increasing Reddit meme enthusiasts' interest in their stocks.

Ethereum Killers

In this era where everyone has a public chain, emerging public chains have also captured billions of dollars in market value. In such a competitive environment, can Ethereum continue to hold its position?

Arthur Hayes first looks at the number of developers. Currently, Ethereum has around 4,000 developers, three times more than the second-highest, Polkadot. He believes that more developers can bring higher value to a blockchain.

Secondly, he calculates the ratio of public chain market value to total addresses. A lower number indicates more addresses at the same market value level, indicating higher health. Ethereum tops this indicator, with Solana coming in second.

Lastly, let's look at the ratio of market value to TVL. A lower number indicates higher TVL at the same market value, representing a chain's attractiveness to users. Ethereum ranks third in this indicator, following Terra and Avalanche.

When is the Right Time to Enter ETH

The chart below shows the correlation between ETH and Nasdaq100 from last year to now, indicating a gradual increase in correlation, exceeding 0.8. In this scenario, Arthur Hayes believes that ETH, like large US tech stocks, is a risky asset. Under the continued rate hikes of the Federal Reserve and the dual bearishness of the inverted yield curve of the two-year and ten-year US Treasuries, ETH will fall alongside the US stock market.

Only after the collapse of the risk asset market, or when the correlation with Nasdaq100 or S&P 500 starts to decline, will it be the right time to enter ETH again.

Bitcoin and ETH: Complementary Growth

At the beginning of 2022, Arthur Hayes allocated 50% to BTC and 50% to ETH. However, in the current context, BTC is no longer seen as a store of value or a hedge against currency inflation, significantly reducing its value. With actual negative global interest rates, from the perspective of interest differentials, holding ETH will be more beneficial in terms of returns.

Furthermore, due to the frequent incidents of cross-chain bridge vulnerabilities, if traders become tired of worrying whether the cross-chain bridge they use will be the next victim, it will help to flow back TVL and bring higher value to Ethereum.

Therefore, Arthur Hayes aims to transition his portfolio from a 50/50 split to 25% BTC and 75% ETH.

"I've weathered the current ups and downs and am very pleased with the scale of my ETH allocation in my crypto investment portfolio. The remainder of 2022 will belong to ERC-20 angels, led by Lord Vitalik. When the dust settles at the end of the year, I believe the price of ETH will exceed $10,000," Arthur Hayes concludes.

Translator's Note

While valuing ETH as a bond according to Arthur Hayes may seem profitable, it all hinges on ETH not experiencing a significant drop. If other trading tools can be used to hedge against a decline in ETH prices, locking in staking interest returns, the operation will resemble more of a bond-like model.