[lavrov]

When discussing how crypto-assets should be valued:

> In that case, you can take the simple model and say a cryptocurrency’s valuation is the net present value of the transaction fees that it’s getting. This, by itself, surprisingly does give fairly decent valuations.

> For example, Ethereum’s transaction fees tend to be about $500,000 a day recently, which is about $180 million a year. If you tried to value the ether market cap as some kind of corporation, then the “P/E ratio” is only somewhere in the low 200s, which is high for a company, but not off-the-charts absurdly high.

Isn't this completely circular? He's saying that the value of the transaction fees per year measured in dollars equates to some reasonable fraction of the market cap measured in dollars... but wouldn't this be true if the market cap were much higher or much lower? It's just a comparison of the total supply to the amount being circulated, rather than a substantive claim about how each token (or the market cap) should be valued in dollars.

[DennisP]

No, because transaction fees are an ongoing negotiation between miners and the people issuing transactions. That market can adjust to change in the ether price, and keep the real-world transaction cost the same. Or the fees can wildly fluctuate due to variations in traffic, even when the ether price is stable.

[lavrov]

That position isn't supported by volatile transaction fee data - excepting spikes for spam or high traffic, the transaction fee denominated in dollars generally tracks the price of ETH. Probably because the overwhelming majority of ETH activity is speculative (60% of ETH held on exchanges), and traders view transaction fees as simply a percentage of gains/losses and are more amenable to paying higher fees.

[lavrov]

For example, if the market cap were 1/100 of its current value, then the transaction fees per year, denominated in dollars, would be $1800000, yielding the same "P/E" multiple, and justifying the valuation at 1/100 the current market cap.

[tlrobinson]

If people are paying transaction fees in exchange for some real utility then you'd expect them to pay the same dollar amount for them even if the price went up or down (ignoring second-order effects like increased trading activity).

That's a big "if" though. I'm not sure what portion of transactions are related to trading/speculation vs. something more useful.

[lavrov]

Sure, I'm assuming that most of the transactions are trading/speculation, given that 60% of ETH is held on exchanges, and if the question is how we should value ETH, a measure that depends on the current market value of ETH seems flawed. Plus, the base transaction amount is denominated in ETH: .00042, and is fixed (though I think that the gas conversion changes?).