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Author: Bao Yilong, Wall Street News
Citi predicts Ethereum’s target price at the end of the year is $4,300, but the value of L2 is foggy.
On September 15, Citibank released its latest research report, setting a year-end target price of US$4,300 for Ethereum (ETH), which is lower than the current spot price.
The report uses the same prediction model as previously targeted at Bitcoin.Take into account the three major factors of fundamental value, capital inflow potential and macroeconomic environment.The report also gives the forecast range of $6,400 in bull markets and $2,200 in bear markets:
Fundamental value: Citi’s model display,Current Ethereum prices have exceeded the level that their network activity can support, and may be driven by recent ETF capital inflows and market overexciting use cases such as tokenization, with the risk of overvaluation of short-term prices.
Fund inflow potential: Although the price-driven effect of funds flowing into Ethereum ETFs (which pushes up the price by 6% per $1 billion) is twice that of Bitcoin,Citi expects its overall traffic to be much smaller than Bitcoin, and new investors will still choose Bitcoin first.
Macroeconomic environment: Citi pointed out that in the current forecast, the macro economy has little impact on Ethereum.butOnce an economic recession occurs, macro factors will become the key force driving Ethereum’s decline.
The challenge of value anchors vs. L2: 30% value conductivity is the key assumption
Citi believes that unlike Bitcoin’s “digital gold” positioning, Ethereum’s value is more closely linked to its network activity (i.e., use as a smart contract platform).
However, the report pointed out incisively that the recent growth in the activity of the Ethereum ecosystem mainly occurs on the second layer (L2) network above the Ethereum network, and the prosperity of L2 has not been directly and completely transformed into the value of Ethereum..
Due to transaction costs and throughput limitations, applications and users have moved to L2, but the market is full of doubts about how much value can L2 bring back to the Ethereum main network.Although the Cancun upgrade of Ethereum network last year reduced the fees paid by L2 to the main network, while promoting L2 adoption, it also intensified market concerns about Ethereum’s value capture capabilities.
The Citi model assumes that the value conductivity of L2 activity to the Ethereum mainnet is 30%.Even under this assumption, the current price of Ethereum is still higher than the valuation based on the combined activity of L1 and L2.
This part of the premium is attributed to recent market purchasing pressure and the “boom expectations” for future use cases such as tokenization and stablecoins, etc..
Stronger but smaller ETF capital flow: significant leverage effect, but the total amount is difficult to compare to Bitcoin
Capital flow is another key factor affecting Ethereum prices.
The report observes that the large amount of buying of digital asset treasury companies and the influx of ETF funds are important driving forces for Ethereum’s performance over the market in recent times.
Citi emphasizes that Ethereum has a strong leverage effect on capital flows.The weekly inflow of ETF funds of $1 billion can drive Ethereum price to rise by about 6%, while the same amount of funds has only 3% impact on Bitcoin price..
However, Citi expects the amount of funds flowing into Ethereum to be smaller than Bitcoin.The logic is that Ethereum’s market value ratio of about 25% compared to Bitcoin may be the upper limit of new funds allocation in the short term, because new investors prefer to start allocating from the most well-known Bitcoin.
Macro factors have limited impact in bull market situation
The macroeconomic environment, especially the stock market and the US dollar, is a traditional force that affects the price of cryptocurrencies.
Ethereum is similar to Bitcoin, with its price positively correlated with the stock market and negatively correlated with the US dollar.
However, in Citi’s benchmark scenario, macro factors are not decisive forces.The report pointed out that although the Citigroup U.S. stock team predicts that there is a slight upside potential for the stock market before the end of the year, with the S&P 500 target of 6,600 points, this is based on Ethereum’s historical beta coefficient, which only contributes a slight upside drive of 35 basis points to its price forecast.
But investors must note that macro factors will be crucial in bear market scenarios.The report emphasizes thatThe main driving force for the bear market of $2,200 will be the macro factors triggered by the recession, especially the sharp decline in US stocks.
Citi predicts a target price of $4,300 by the end of the year
Citi finally constructed its price prediction model by combining the above three core factors—network activities, capital flows and macro environment:
Baseline scenario ($4300): Assuming moderate capital inflows before the end of the year, market excitement for Ethereum network use cases will be maintained, supporting prices slightly below current levels.
Bull Market Scenario ($6400): Assuming that network activity is significantly increased (probably driven by the outbreak of stablecoins or tokenized applications), while demand for ETFs and treasury companies continues to be strong.
Bear market scenario ($2200): Mainly dominated by recessional macro factors, especially the decline in the stock market, which led to a reversal of market sentiment and prices fell to a level that was only supported by current network activities.
In short, this report from Citi provides investors with a clear analytical framework.It affirms the value of Ethereum as an application platform, but it also points out its core shortcomings in L2 value capture.
In the short term, there is a risk that prices will be pushed up by market sentiment.In the long run, whether Ethereum can fulfill its promise of “world computers” depends on whether it can effectively capture the value of the prosperity of the L2 ecosystem..
