eth investment thesis

Jul 27, 2021

Investment Thesis: Ethereum (ETH) December 2020

This document aims to highlight Ethereum as an investment opportunity. It was written back in December 2020 but thought it would be good to share it to the public. Even though ETH launched in July 2015, the assets have got little traction among institutional investors. One main challenge has been to understand what is ETH and how it can be valuable if it is not a scarce asset with a limited supply. The advent of ETH 2.0 is the catalyst that could see ETH becomes a productive asset with a limited supply. This document aims to highlight some of the background, current challenges and opportunities of the monetary updates of ETH 2.0.

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Bitcoin, an inflation edge with a Tech stock kicker

“Bitcoin has a lot of the characteristics of being an early investor in a tech company…I’ve never had an inflation hedge where you have a kicker that you also have great intellectual capital behind it. I came to the conclusion that bitcoin was going to be the best of inflation trades, the defensive trades, that you would take.” Paul Tudor Jones, May 2020

Bitcoin has always been easy to describe, it is a digital currency. What has been more difficult to explain is that it is a decentralized digital currency; in other words, it is not controlled by governments and central bankers and that is based on faith in an algorithm and a network instead of the “full faith and credit” of a country.

As its technology mature and its adoption has gone from early adopters to mainstream users reaching today over 35m users only on Coinbase, Bitcoin is now accepted as an alternative asset, a sort of digital gold combining scarcity, portability, fungibility, divisibility, durability and broad acceptability.

The recent Covid-19 market turmoil has triggered a one-of-a-kind policy response globally. Investors such as Paul Tudor Jones have been vocal in their interest in investing in inflation hedges and described Bitcoin as potentially the best inflation edge.

Other features including digital, censorship-resistant, programmability and being universal are starting to be understood and seen as differentiators by the broader investor community.

With a $500bn market cap (BTC: $23.9k) and the narrative of being an inflation edge aka digital gold, most investors understand the significant upside potential if this is correct.

What seems to happen is that individuals, and increasingly institutions, purchase Bitcoin to start their crypto portfolios and journeys and then ask themselves what to do next.

As the second largest digital assets ranked by market capitalization with $71bn, Ethereum is the next asset that investors are thinking to invest. However, very few institutional investors fully comprehend what Ethereum is and what is the value of investing in this asset.

If Bitcoin is investing a new monetary asset, then Ethereum is investing in the infrastructure of Web 3.0.

Bitcoin is a programmable asset meaning that within each Bitcoin transaction there is the ability to write a program. For instance, you can write a program saying that a transaction is not valid until a certain date. This feature is probably one of the least understood of Bitcoin but also one of the most powerful as it allows anyone to move money automatically with computer codes and rules that are transparent to anyone.

However, more than 10 years after being launched, the main use cases of Bitcoin are payment, store of value and speculation and all of this without much programs on top of Bitcoin. This is mainly because the scripting language in Bitcoin is intentionally extremely restrictive.

Ethereum was created as an alternative protocol to Bitcoin with the aim to make it easy to build decentralized applications. Ethereum’s programming language is described as being Turing complete. In other words, it allows developers access to a fully programming functionality with a great ease of use.

Bitcoin is aimed to only be money, compared with Ethereum where its goal is to become the ultimate backbone for processing decentralized applications or so called Web 3.0.

Ethereum can be described as an open-source, public, blockchain-based distributed computing platform and operating system featuring smart contract functionality. An alternative is to describe it as a decentralised version of Amazon Elastic Compute Cloud (Amazon EC2).

In layman terms, Ethereum is a decentralised engine to run decentralised applications.

In Web 2.0, applications such as Spotify, Google and Facebook control access to disparate silos of information created by user’s data. For instance, you cannot export your music history from Spotify to another music streaming service. Spotify owns your data even though you create this data.

Web 3.0 can be described as the next generation of the internet where user data is replicated and stored across an open and decentralized network rather than by individual application. In a web 3.0 music streaming service, you could control and transfer your music history to any providers.

In web 3.0, protocols issue utility protocol tokens that are used to access scarce network resources such as processing power, memory or bandwidth. These tokens are also very helpful to bootstrap early liquidity and strengthen the early adopter community.

For instance, Ether (ETH) is the native cryptocurrency of the platform Ethereum. In essence, it’s a large pay-as-you-go computer, with ether — computational power — the currency that brings these computerised functions to life. The more you need the computer to do, the higher the fee. The miners responsible for maintaining the blockchain by providing computational services are remunerated for their services in ETH.

Ethereum, the pillar for Web 3.0 investing

Ethereum was proposed in 2013 by programmer Vitalik Buterin and in 2014 raised 31,529 BTC ($18.4m at the time) via an initial coin offering. It officially launched in August 2015 trading at $2.83 per token. Coinbase added Ethereum in May 2016 on GDAX.

As a smart contract platform, Ethereum allows entities to leverage blockchain technology to create numerous different digital ledgers and can be used to create additional cryptocurrencies that run on top of its blockchain.

For example, Ethereum can be used to create tokens that are pegged 1:1 with the value of the United States dollar (called a stablecoin) if a user wants to transfer or hold the value of dollars on the blockchain. If users want to transact this USD pegged currency on top of Ethereum, they would need to pay a gas fee. Note, Ether itself can also be sent, received and held as digital money.

The first product market fit for Ethereum was to be a crowdfunding platform, In 2017, the so-called ICO boom was made possible by Ethereum ERC20 smart contract, allowing anyone to launch a token in a few lines of code and to raise millions from users all around the world.

ETH is to Ethereum is what equity is to a corporation — ownership unit. You’re purchasing a piece of an operating system for crypto applications that doesn’t have a clear business model yet.

Right now network revenues go exclusively to miners. So ETH holders own the upside in the network but not the cash flows. ETH 2.0 redistributes revenue between miners and ETH holders. More on this in the later section.

Ethereum holds the crypto developer mindshare

The value of Ethereum and its token ETH is derived from the expectation that people will want to acquire ETH to use Ethereum to run applications built on top of Ethereum. Thus, having a vibrant developer ecosystem building applications used by a large number of users is what will drive value to the Ethereum network.

It is important to note that developers building open source applications on top of Ethereum are rarely employed by the Ethereum foundation but instead operate independently either in a small team or on their own. This is common for other open source projects.

What differentiates Ethereum from other protocols is its vibrant developer community. Let’s look a bit further with some recent statistics first on the active developer community:

There 8,739 monthly active crypto developers of which 75% contribute only 10 days per month.
These enthusiasts are the core of the open source community.
These are also the hardest to find and incentivize as they often do not seek monetary compensation but are interested in the technical challenges.
Ethereum has seen its total monthly active developers growing by 215% since 2018 reaching 2,325.
To put Ethereum total monthly active developer in perspective, Ethereum represents 26% of all monthly active crypto developper.
This further highlights the fact that Ethereum is seen as a great platform to try and tinker new applications
The second most active community is Bitcoin with 361 developers as of December 2020.
Though the Bitcoin dev community has grown by 70% since 2018, Ethereum growth was 6x+ greater.
Looking at the other communities, the third and fourth largest monthly active developer communities are Polkadot and Tezos, respectively with 390 and 240 monthly active developers
90%+ of the other protocols have less than 100 active monthly developers working on their project
Almost five years after Ethereum launched, there is no other fastest growing developer community in the crypto developer community. Ethereum is the clear leader

Ethereum applications

Ethereum dominance in the developper community is further supported by the number of applications built on top of the protocol and total transaction volume.

The largest application built on top of Ethereum is USDT, a USD stablecoin, representing $20bn of market capitalization. The DeFi ecosystem is still relatively small with a today total of $18bn for all DeFi projects, however, it is the fastest growing segment and has produced multiple billion dollar protocols companies (e.g. Uniswap, Compound, etc..) . The total market cap of applications built on top of ethereum exceeds $50bn.

The total transaction fees or gas fees of Ethereum reached an annualized revenue of $1.1bn. Since the summer 2020, the gas fees have spiked 10x+ due to on-chain trading on derivatives exchanges such as Uniswap. Unlike 2017 where applications had no traction and produce no transaction fees, we see a number of applications today with annual revenue in excess of $26m per month and with the largest being Uniswap with $370m.

In the previous points, we saw that Ethereum has the most active crypto monthly developer community, the largest applications built on top of its protocol and the largest translation fees outpacing Bitcoin by almost twice. New applications such as decentralized finance are pushing the boundaries of the Ethereum network to the maximum due to on-chain transactions.

In 2020, Ethereum really found a product market fit as seen by the growth of its transaction volume. In 2020, it is estimated that Ethereum will become the first public blockchain ever to settle $1 trillion in transactions over a twelve-month period. This further accentuated the point that developers are building applications on top of Ethereum that users are ready to pay for.

Despite all this, Ethereum is valued c. 15% of the Bitcoin valuation.

Let’s look into some of the main challenges that potential investors may have currently with Ethereum:

A. Narrative Complexity

Digital asset is a niche asset class ($680bn total market cap) and opaque for most investors.

It took about ten years for Bitcoin to go mainstream and accepted by institutional investors. Despite the fact that its mission, algorithm and narrative has not changed much since its creation.

Very few investors understand what is a smart contract and that Bitcoin is simply a very niche use case of smart contract for money and that Ethereum is a smart contract platform with the goal to power an entire decentralized economy and to become a world computer. In other words, Ethereum is the settlement layer for Web 3.0 applications, e.g. you want to create a decentralized lending platform? You settle the transaction on Ethereum!

When VCs shy away from Bitcoin, family offices, hedge funds and more recently pension funds appreciated the digital gold narrative and started to invest supporting Bitcoin in its path to become mainstream.

Ethereum lacks a clear narrative. The closest may be “oil to power the Ethereum computer”. This is not great.

The upcoming launch of ETH 2.0 may finally create a new narrative. More on this in the next section.

B. Lack of Institutional investors and wall street & SF evangelists

Institutional investors always start with the largest crypto asset, Bitcoin and then they look at what they should buy next.

Bitcoin has always had a group of evangelists that are not “crypto kids”, the most well known group is led by Wences Casares, an established Fintech entrepreneur. He is the one that first introduced Bitcoin to the Silicon Valley community at the famous Allen & Co conference and today sits on the board of Paypal.

Other well known investors include the Winklevoss Brothers, Reid Hoffman (founder of Linkedin), Chamath Palihapitiya (Early Facebook) among others. Wall Street had Pete Briger and Michael Hourigan of Fortress Investment Group investing $20m in 2013 in BTC.

The problem with Ethereum is that there has not been such an evangelist group outside of crypto kids or early ETH investors. The most well known evangelists are Vitalik Buterin and Joseph Lubin, founders of Ethereum.

The lack of prominent figures able to explain in plain English what Ethereum is and why it is a good investment has been a major hurdle.

To put this in perspective, neither Bakkt nor Fidelity support ETH in their custody. CME will launch a futures contract on ether in February 2021, almost 4 years after the BTC version. Grayscale BTC manages $13bn while Grayscale ETH manages $1.7bn.

C Lack scarcity

As described in the first section, Bitcoin exhibits the seven properties of monetary assets (store and transfer value) ranging from scarcity, durability, divisibility, portability, fungibility, recognizability and programmability.

The one property ETH has lacked to date is the perception of scarcity.

Ethereum’s monetary policy opts for perpetual issuance and an uncapped supply because it prioritizes security over monetary idealism. Unlike deterministically issued and fixed supply cryptocurrencies, whose security budgets have been arbitrarily set is pursuit of “perfect money”, Ethereum aims to issue enough ETH to ensure Ethereum remains secure now and into the future.

At the time of the genesis (first) block, 72M ETH was distributed to initial contributors. Since genesis, 39.2M ETH has been distributed to ETH miners via a proof-of-work (PoW) consensus mechanism similar to that of Bitcoin. ETH inflation with PoW has been roughly 11.20% per year since July 2015, roughly double BTC’s inflation of 5.58% per year over the same time period.

This is probably the most challenging feature of Ethereum as investors do not see a reason to own an asset with unlimited supply. However, this will change with ETH 2.0, more on this in a later section.

D. ETH 1.0 not a productive assets

ETH investors do not currently benefit from the increase of total transaction volume and related gas fees.

The table below highlights a basic profit and loss statement of the ETH 1.0 economy. In this current state, Revenue from gas fee / transaction fee are earned by the miners / node validators. Meanwhile, the inflation is paid by the token holders.

As ETH 1.0 uses a proof of work chain, ETH possesses more a store of value and commodity properties from its use as money and gas and lacks productive features — dividends. However, this will change with ETH 2.0, more on this in a later section.

Stablecoin, Wrapped Assets competing as a reserve currency

In 2017, ETH famously almost flipped the market cap of Bitcoin. This was short lived and driven by the ICO boom where investors needed ETH to invest in new projects.

ICOs are dead and stablecoins — cryptocurrencies peg to some external reference e.g. USD — have become the first product market fit for the Ethereum smart contract. The largest USD stablecoin is USDT — issued by unregulated exchange Bitfinex — and has a $20bn market cap.

The success of stablecoin has impacted the narrative for ETH as a reserve currency — why owning a highly volatile asset like ETH when you can own a synthetic USD. In addition, the trend of wrapping synthetic Bitcoin (and other assets) on top of Ethereum is growing. This is likely to further impact ETH collateral demand.

Having said this, the recent DeFi trend with liquidity pools and need for collateral saw a rise in the demand of Ethereum. This trend is likely to continue with ETH 2.0, more on this in a later section.

Scalability challenges and risk from Layer 2

Since 2017, the Ethereum network has been congested. Currently, Ethereum is

only capable of handling a mere 15 transactions per second, making it unable to serve as globally scalable decentralized financial infrastructure. All it took was an uptick in on-chain

activity spurred by the small scale speculative boom this past summer to push Ethereum to its limits.

Ethereum is not ready for mainstream adoption under its current architecture.

The solution to the scalability problem is Ethereum 2.0 or ETH 2.0. This is the most important upgrade since the launch of Ethereum and will impact scalability, security and energy efficiency without compromising on accessibility or decentralization. More on this in the later section.

However, Ethereum transition to ETH 2.0 will happen in stages including ETH 1.5 and rollups (layer 2). In other words, every transaction that moves to “layer 2” rollups essentially moves to new blockchains that could include new tokens.

The use of layer 2 protocols may lead to leakage of the Ethereum network while ETH 2.0 is launched. This is something that it is yet to be seen but important to monitor.

D. Competition from other smart contract platforms VS branding and switching cost.

In summer 2015, Ethereum was the first protocol to launch the idea of a smart contract platform. Since then many competitors appeared and most of them formally launched in 2020.

Most of these platforms were heavily funded by ICOs such as EOS: $4bn, Tezos: $2bn or by VCs such as Dfinity: $200m, Polkadot: $140m.

As described in the first section, none of the protocol competitors have the developper mindshares, developer tools nor infrastructure of Ethereum. Hence they do not represent real competitors at the moment.

It is possible that some platforms become leaders in niche use cases such as Gaming with Flow. However, it is unlikely that Ethereum loses its crown as the smart contract leading platform.

The main risk is that ETH 2.0 transition takes longer than expected and roll-ups or cross-chain gain product market fit in specific areas and start to compete against Ethereum.

However, one important feature that is very much underestimated is branding and the relative high switching costs.

Let’s start with branding.

If you are developers you want to work on exciting technology, with other developers and applications. That’s why when the Uniswap founder started iterating on the idea of Uniswap it chose Ethereum. The community and brand of Ethereum gave him the tools to build something that will be used.

The branding is similar to lindy effect. The longer you have a strong brand, the longer it will continue to be important.

Finally, most Financiers look at open source smart contracts as a commodity where developers and users will look for the smart contracts with the lowest fee associated with its platform and with low switching costs.

In reality, smart contracts have a high switching cost ranging from branding and other goodwill aspects but also developer tools, risk of switching to a new platform among others.

In addition, early adopters who benefit from token appreciation are less likely to switch to a competing platform as they often have a strong sense of community and will likely want to see their tokens increase in the long term.

There has been very few migration from ETH to a new smart contract platform by established applications. This is something that needs to be monitored but is likely not too much to be a risk.

We have now discussed the current challenges of ETH 1.0 ranging from narrative complexity, lack of Institutional investors and wall street & SF evangelists, ETH lacking scarcity and productive assets features as well as the scalability challenges. In addition, to technical challenges ETH has seen competition from stablecoin and wrapped assets reducing the need of ETH as a reserve assets and smart contract and layer 2 platforms that may compete with ETH while it migrates to ETH 2.0.

ETH 2.0 is more than just a scalability upgrade; it will transform the monetary policy of ETH.

Staking Economics — ETH becomes a productive assets

One major update in ETH 2.0 is the shift from PoW (proof of work) to PoS (Proof of Stake) architecture where validators are rewarded for ensuring the security of the Ethereum network.

The cost to become a validator included 32 ETH minimum and the infrastructure needed to run the staking service. In exchange, validators will receive interest rates depending on the level of participation from ETH holders (the more ETH stake, the less interest). In theory, validators will be compensated between 4 to 20% per year to stake their ETH.

In this new architecture, ETH will possess capital asset properties from its use in PoS. ETH will function as a hybrid-perpetual bond with debt and equity like characteristics.

The ETH yield will be derived from new issuance and transaction fees (gas fee) that used to be only rewarded to miners.

The above tables give a summary of the economics from ETH 1.0 to ETH 2.0. In the latter, ETH holders are rewarded with network fees including both staking reward from securing the network and gas fees. This is a major change from the current state. ETH will become a productive asset.

transaction fee burns (EIP 1559).

Monetary policy — Reducing supply via PoS and burn fees

A major component of Ethereum’s shift to PoS is about lowering its issuance while maintaining the same level of network security.

Monetary policy & staking

ETH 2.0’s monetary policy will be dynamic, adjusting according to how much ETH is being staked and expected to be below 1%. Staking will also have the mutual benefit of making ETH a more productive asset, providing ETH with a native yield in addition to its store of value and commodity properties.

The combination of new monetary policy and staking will push ETH inflation from 4.5% to c. 1.8% in the first year (similar to Bitcoin inflation).

EIP 1559 is a proposal to restructure how users bid for Ethereum blockspace. It is expected to go live in summer 2021.

It will burn ETH transaction fees which is expected to reduce issuance for ETH 1.x when implemented, and thus will offset the incremental issuance from staking.

Burning transaction fees could cause the inflation rate to approach 0 much sooner than 2140

At the moment, ETH miners capture all of the fees associated with Ethereum network transactions. This transaction activity is growing rapidly and has been in excess of $120m+ per month last Fall 2020.

With this new update, most transaction fees will be burnt rather than paid directly to miners. Hence if transaction fees burnt exceed new issuance, the net inflation rate could be negative.

The Bitcoin inflation rate will reach 0% post 2140 when reaching the total supply of 21M. Achieving scarcity in digital form has been Bitcoin’s great technical breakthrough.

ETH lacks this fixed supply and scarcity which has been detrimental to ETH. However, ETH 2.0 will change this.

In summary, in ETH 2.0, ETH holders will be able to stake their ETH and receive yield from securing the Ethereum network. Furthermore, the combination of new supply schedule and EIP 1599 burning transaction fees will reduce the inflation rate and make ETH more scarce than ever. This is likely to improve ETH features as a monetary asset.

I am invested in Ethereum for similar reasons that I am invested in Amazon Web Services, Microsoft Azure, and Shopify. I want to own the platforms that internet businesses are built on top of. One of the reasons I am attracted to these types of platforms is that customer stickiness is very high. When a company has built their business on Amazon Web Services, switching to a competitor is risky, time consuming, and expensive.

Just as important though, the businesses built on Shopify have a vested interest in making Shopify better and more successful. And this same dynamic is seen with Ethereum. Ethereum is by far the most popular blockchain in the crypto economy, and thus has the most projects and people working to make it successful.

[ As a quick disclaimer before I go on, the point of this writeup is not to convince readers on the benefits of crypto/web3. If you think crypto is stupid, nothing in this writeup will convince you otherwise. ]

The below chart from Electric Capital shows that dominance that Ethereum has with developers in terms of contributor growth from 2020 to 2021. No other blockchain is even close. Ethereum has the most developers, and they are attracting the most new developers.

In addition to looking at number of developers, there are a handful of other ways to measure market share among blockchains. Total value locked (TVL) measures the value of assets deposited in decentralized finance protocols. Ethereum currently holds 65% of all decentralized finance assets at $72 billion. Binance is #2 with 8% share and $9 billion. Ethereum had been gradually losing market share from 2020 through early 2022 due to so many new blockchains launching. However, Ethereum’s share has increased ~10% just in the past couple months as the downturn and many issues with other blockchains has reminded users how valuable the most secure and most stable chain is.

Of the 17 decentralized finance apps that currently have over $500 million of assets, 15 are on Ethereum. Binance has three, Avalanche has two, and Solana has zero (for those counting, three of the apps are on multiple blockchains).

Ethereum also dominates non-fungible token (NFT) collections. The top 25 collections by trading volume over the past 30-days are all on Ethereum. Out of the top 50 NFT collections, only three are not on Ethereum.

Looking at all types of apps on each blockchain , Ethereum has by far the most volume and activity. Over the past 30-days, Ethereum has 33 apps that have done over $100 million of volume. Binance has 14, Solana has nine, and Avalanche has five.

Next, decentralized autonomous organizations (DAOs) are analogous to limited liability companies (LLCs) but for crypto. Of the 50 largest DAOs in crypto today, 45 are on Ethereum. Solana has the second most with four.

Finally, let’s look at what blockchain makes the most money . Over the past week, Ethereum has earned 11x what Binance has at #2 and 21x more than Bitcoin has at #3. Now, some people might say this is a bad thing: Ethereum is too expensive! I will dive deeper into this below, but for now, I think a good analogy is Apple vs Android smartphones. Apple only sells around 16% of all smartphones globally but creates far more value than the larger Android ecosystem. Apple is a premium product that users pay more for. Likewise, Ethereum has the most secure and most decentralized block space. It is a good sign that people are willing to pay up for that. And if Ethereum has so much demand despite its high gas fees, imagine how much demand there will be when those fees come down significantly over the next couple years.

In summary, Ethereum is by far the most popular blockchain. Ethereum has the most apps and the most users. As seen above, these strong network effects attract the most developers who want to build apps that can connect with other apps and reach the largest audience of potential users. All of these developers are working every day, competing with each other, to make their own apps better—which makes Ethereum better. This results in more apps, more competition between apps, and thus better options available for Ethereum users. This combination of being the largest blockchain with the strongest network effects creates strong barriers to scale for Ethereum’s smaller competitors attempting to catch up.

These network effects are strengthened by the high switching costs of protocols built on Ethereum. For a protocol, the blockchain that runs their app is critical to their business. And those switching costs should increase over time. The longer a protocol uses Ethereum, the more familiar their developers become with it, the more intertwined their app becomes with the Ethereum ecosystem, and thus the more disruptive it would be to switch. Again, this is analogous to AWS or Azure: mission-critical business-to-business software that is used by employees on a daily basis to run the business is very hard to rip and replace. And the more successful a traditional business or a crypto protocol becomes, the riskier it is to switch to a new underlying infrastructure.

Above, I wrote “Ethereum had been gradually losing market share from 2020 through early 2022 due to so many new blockchains launching.” I think it is easy to look at crypto from a high level, see a bunch of blockchains with seemingly little barriers to entry, and conclude that Ethereum cannot have a big competitive advantage. While the barriers to entry for a new blockchain are low, I believe the barriers to scale are much larger. Part of this is the network effects I discussed above, but the other part requires understanding how Ethereum was designed from day 1.

The Blockchain Trilemma dictates that blockchains can only optimize for two of three important properties: decentralization, scalability, and security. Technical limitations do not allow a single blockchain to optimize for all three.

Ethereum was designed to optimize for decentralization and security. Many of Ethereum’s problems are directly related to this design decision. By not optimizing for scalability, the Ethereum network can be slow and expensive to use when congested, which has become the norm since early 2021. However, Ethereum is on the verge of becoming the first fully modular blockchain over the next couple of years.

Transitioning from a proof-of-work chain to proof-of-stake will increase the decentralization and security of Ethereum. Specific hardware will no longer be needed to validate the Ethereum blockchain—ETH tokens and any internet-connected computer will do.

Next, rollups are basically a way for Ethereum users to pool their activity together to get discounted gas fees. Rollups make transaction executions on Ethereum modular, so that transactions no longer have to be done directly on Ethereum mainnet. Rollups built on top of Ethereum will be able to process transactions faster and cheaper than directly on the main chain.

Finally, sharding splits Ethereum’s massive and ever-expanding database across many shards, as opposed to all data being on one monolithic blockchain.

Importantly, the above three changes all reinforce each other. Validating a proof-of-stake network requires no specific hardware, so the number of validators should increase significantly. When sharding is implemented, more validators mean more shards can be supported (as each shard needs validators). More sharding will mean rollups can execute more transactions because all rollups will not be settling to the same Ethereum main chain—they will settle to many shards.

As the scale of rollups increases, they will be able to handle more transactions and execute them faster. More transactions through the same rollup will drive gas fees per user transaction down. This is how micro-transactions valued at a penny or less can someday be viable on Ethereum. Driving down gas fees for users should substantially increase the activity and use cases operating in the Ethereum ecosystem. And more activity and more total fees funneling back to the Ethereum mainnet will mean more people want to be validators to earn a portion of those fees. And the flywheel continues.

Next, let’s talk about Ethereum’s fees. All blockchains require third parties to validate and approve transactions. These validators have to be paid. If a blockchain charges sufficient fees per transaction, like Ethereum does, validators can be paid from those fees. However, if a blockchain does not charge sufficient fees, then validators are paid by issuing them native tokens of the blockchain. This is when problems arise.

By paying for network security via issuing tokens, more token supply leads to a decreasing token price over time. A lower value network token means more tokens need to be issued for security. This is a vicious cycle.

On the other hand, Ethereum block space is at a premium, and Ethereum charges handsomely to use it. Those fees partially will go to pay proof-of-stake validators. Having a healthy fee market means Ethereum does not have to inflate its token supply to pay validators, which means the supply of Ethereum tokens stays lowers. Less supply means Ethereum’s price will be higher than it would be if its security was paid via issuance. High fees and a scarcer token add to Ethereum’s monetary premium.

ETH that is more valuable incentivizes more people to buy ETH and stake it, which decentralizes the network more and feeds right back into the above flywheel of Ethereum’s coming modular infrastructure. More validators result in more sharding, which means more rollups, which means lower fees for users and thus more demand. More activity means more fees to Ethereum and then more people wanting to buy ETH and stake it to earn a portion of those fees.

Importantly, when I talk about high fees in this discussion, I am referring to the main Ethereum chain, which most users will not be using in a few years. Users will pay very low fees on rollups, and rollups and other large entities that operate directly on Ethereum will pay the higher mainnet fees.

This entire Ethereum flywheel is rooted in one of the core tenets that Vitalik founded Ethereum on: decentralization. Ethereum has designed a modular infrastructure that will be more scalable and faster and cheaper and more secure the more decentralized it becomes.

With that being said, Ethereum is not the only blockchain pursuing a modular architecture. Many of their competitors are starting to realize that a single, monolithic blockchain that tries to do everything will not be able to compete in the future.

However, Ethereum is far more popular than any other blockchain, and Ethereum is also the furthest ahead in developing rollups and sharding. I think the barriers to catch up to Ethereum are large, which is why I am not convinced of the popular “multi-chain” theory—the belief that there will be several (or many) large blockchains that people and applications use. Ethereum is already the most decentralized and most secure blockchain. And soon it will be the most scalable. I think it is very possible that blockchains end up being winner-takes-most.

Flows, supply and demand, and valuation

Everything I have written up to this point is why I initially invested in Ethereum. I want to own the underlying platform that powers the decentralized internet. Moving on from Ethereum’s fundamentals, I now want to look at how supply and demand for ETH is changing. While I want to own ETH for the long-term either way, I do think there are some intriguing catalysts that might move its price over the next 1-2 years.

In the next few months, Ethereum is expected to switch from being a proof-of-work blockchain to proof-of-stake. The implications of this are enormous.

Currently, the Ethereum blockchain is validated by miners—many of which are professional mining companies that rent warehouses, own servers, have employees, etc. The revenue for these mining companies comes in the form of ETH that is issued to them in exchange for their service. However, most of this ETH gets immediately sold so they can pay their real-world business expenses—like rent, salaries, new servers, and lots of electricity.

When Ethereum switches to proof-of-stake, validating the network will be simpler and does not require those real-world expenses. This has two major benefits. First, around 70% less ETH will need to be issued to pay for validation. Second, stakers validating the network will not need to sell the ETH issued to them to pay for business expenses. Thus, daily sell pressure from validators is expected to be significantly less than it is currently.

With that being said, less ETH being issued and less of that issuance being sold will still only amount to <1% of daily ETH volume. That might sound meaningless, but I don’t think so. A large portion of ETH volume is price insensitive trading from entities like exchanges and quant funds. I believe a small decrease in selling every single day can have a meaningful effect on price at the margin over time. And there are two other factors that are helping this supply and demand dynamic.

After the merge, people who stake ETH tokens will receive their proportional share of fees generated on the Ethereum network. Staking ETH will be equivalent to investing in a stock and receiving dividend payments. Due to everything I described in the first half of this writeup, I believe the yield earned on staked ETH will become the risk-free rate of crypto. My guess is that this yield settles around 3-5%.

Currently, there are 121 million ETH tokens outstanding and 13 million of those are staked. The current yield on staked ETH is 4.2% but that is expected to meaningfully increase after the merge (for reasons that are unnecessary to explain here). For the yield to eventually settle at 3-5% will require much more ETH to be staked—probably around 30 to 50 million total. This would mean another 17 to 37 million ETH that is staked and not being traded.

Finally, despite the current investing environment that is terrible for just about everything, I believe the demand for owning ETH is going up over the long-term. More traditional brokerages are offering Bitcoin and Ethereum trading. More institutional investors have shown interest in owning Ethereum. I believe things like index funds that own or track Ethereum are inevitable. And this institutional demand should only increase when they can own a profitable and growing tech platform that pays them 3-5% on their investment each year.

So, in summary, I expect demand flows for Ethereum to be increasing over the next year or two just as structural selling and the amount of unstaked ETH that is being trading are both decreasing. Ultimately, the price of any asset is determined by supply and demand, so demand increasing at the same time that supply decreases is a potentially powerful combination.

Having said all that, valuation is difficult. I have seen plenty of investors try to value Ethereum and quite frankly, not a single one has given me much confidence (though I appreciate those people sharing their thoughts publicly and I have still learned from them). The thing that I struggle with is the scaling of Ethereum’s layer 2 ecosystem of rollups and sharding.

Rollups and sharding should increase Ethereum’s speed and decrease fees by orders of magnitude for the end users. The hope is that these decreased fees per transaction are more than made up for with more transactions. I think this makes sense, but the magnitude of that is a complete shot in the dark for me. Will decreasing fees 90% increase usage 10x? 100x? I have no idea. I think it is possible that Ethereum is successful and yet the fees decrease so much that the chain is not as profitable as some people are discounting the future at today.

On the other hand, there is a legitimate argument that rollups will not cause fees paid to Ethereum to drop at all. In the future, you and I will probably not be doing transactions directly on Ethereum mainnet. Our transactions will happen on rollups and then the rollups will settle and pay fees on Ethereum. Other groups using Ethereum mainnet could be companies, institutions, and governments. If this happens, the entities paying Ethereum fees are going to evolve from price-sensitive individuals today to price insensitive organizations in the future, and thus maybe the fee decrease is not as much of a concern as I think.

How all that will shake out, I do not know. But I do think slapping a multiple on Ethereum’s current earnings or extrapolating the current numbers forward are both overly simplifying things. In my opinion, there are too many moving pieces over the medium-term for that. I do not have a better method though. If I was more confident in how to value Ethereum, it would be a larger position for me. Although to be fair, looking at simple methods like current multiples do not show a demanding valuation.

I am optimistic about crypto’s future, and I am optimistic that Ethereum has a good chance at being the settlement layer for the decentralized internet. But I think valuing Ethereum today is a bit like valuing the internet in 1995 or valuing the iPhone in 2007. If Ethereum is successful, the most popular apps built on it are difficult to even imagine today because they cannot yet exist with today’s technology. Ethereum’s merge this summer and the layer 2 buildout over the next couple years will mean the majority of the foundational infrastructure for crypto will be in place for the first time. And finally, we will be able to see its potential.

The Ethereum Investment Case Has This Unexpected Achilles’ Heel

With the next crypto bull run on the horizon, investors have speculated that Ethereum will be one of this cycle’s best investments.

As reported by Bitcoinist previously , Chris Burniske, a partner at Placeholder Capital, said that he thinks Ethereum could rally to $7,500 in the coming years:

“If BTC goes > $50,000 in the next cycle, and ETHBTC returns to its former ATH, then expect to see ETH > $7,500. T o the mainstream ETH will be the new kid on the block — expect a frenzy to go with that realization,” Burniske explained, showing how a 3,000% Ethereum rally in the coming years may be feasible.

Yet there is a potential “Achilles’ heel” to the ETH investment case that could limit upside, especially if gains are measured against that of other top cryptocurrencies.

This Factor Could Prevent Ethereum From Growing Rapidly

According to cryptocurrency investor and commentator Humboldt Capital , the Ethereum investment case’s “biggest Achilles’ heel” is the fact that you don’t need to invest in ETH to benefit from the growth in on-chain applications.

That’s to say, one can capture more upside by investing in, say, MakerDAO’s MKR token than ETH itself.

“An investment thesis for ETH centered on continued growth of DeFi, is like advocating to invest in the S&P 500 vs just the Tech sector. So far, the biggest Achilles’ heel for ETH is the fact you don’t need to invest in the protocol layer, you can just invest in the best apps.”

An investment thesis for $ETH centered on continued growth of DeFi, is like advocating to invest in the S&P 500 vs just the Tech sector. So far, the biggest achilles heel for $ETH is the fact you don’t need to invest in the protocol layer, you can just invest in the best apps. — Humboldt Capital (@HumboldtCap) June 14, 2020

DeFi Itself Is Likely to Slow Down

Not only may Ethereum not strongly benefit from growth in DeFi, but the adoption of decentralized finance may peter out.

As reported by Bitcoinist previously , Multicoin Capital’s Kyle Samani sees the growth of this segment of the Ethereum ecosystem “plateauing” in the near to medium term. Referencing ETH’s slow block times (compared to the internet, which traditional finance is based on) and the potential for high transaction costs, he explained :

“You just can’t build global scale trading systems for lots of users on POW chains. It just doesn’t work. High latency –> all kinds of negative second order effects. So I think for now we are near a plateau for DeFi – measured in ETH terms (not USD) – until the core latency problems are solved.”

Samani’s comment came in spite of the fact that there’s been a recent eruption in DeFi adoption.

DTC Capital’s Spencer Noon observed that certain decentralized finance applications, like MakerDAO and Synthetix, have seen usage strongly increase in recent weeks.

Not the Only Reason Why Investing in Ethereum Isn’t a Good Idea: Fund Managers

Steven McClurg and Leah Wald, partners of Exponential Investments, explained that Ethereum’s lack of consistent monetary policy, the mentality of its investors, and the way the which the blockchain is structured makes ETH a poor investment.

Ether is digital tungsten to BTC's gold. @stevenmcclurg and my latest piece deep dive into why institutional investors should be wary of investing in $ETH . https://t.co/1KgGzEgKzO @BeExponential — Leah Wald (@LeahWald) June 11, 2020

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Crypto Analyst: Ethereum (ETH) Investment Thesis is “Questionable”

Although the crypto market, in general, has undoubtedly had a bad year, some digital assets have had it worse off than others. Bitcoin’s (BTC) ~83% decline from its all-time high is mere peanuts, especially when compared to the 94% loss that Ethereum (ETH) has undergone. ETH has fallen so far from its high horse that the market capitalization of XRP, Ripple’s go-to asset, has surpassed that of Ether. While many optimists believe that this discrepancy is a buying signal for Bitcoin’s former right-hand man, so to speak, a handful of analysts have declared that the asset’s harsh drawdown is justified.

ICO Season Dries Up, DApps Fail To Gain Traction

In early-2017, as Ethereum became a household name in the cryptosphere, investors began to manufacture an investment thesis surrounding ETH. Due to the abounding popularity of initial coin offerings (ICOs), and Ethereum’s ability to effortlessly facilitate such projects, ETH quickly became the de-facto king of token sales. And as such, as the ICO subset boomed, so did the value of Ether.

While ICOs became an industry flavor of the month, so did decentralized applications (dApps), with Ethereum, again, becoming a hotspot for this distinct application of blockchain technology.

Initially, as 2017 came to a close, everything seemed fine and dandy for the originally Canadian project, as investors continued to launch money at Ethereum-centric startups for the promise of ground-breaking platforms.

Yet, once 2018 rolled around, it near immediately became apparent that these startups’ promises weren’t worth their water. Newfangled dApps were underwhelming, with many criticizing such initiatives for missing key functionality and falling victim to glitches. ICOs realized their promises were baseless, before coming under fire from key regulatory agencies — namely the U.S. Securities and Exchange Commission.

Ethereum 2.0 Still Promising

Although many lambast Ethereum for its progress (or lack thereof), the long-standing network still has the potential to reverse its dreary fate in the future. As reported by NewsBTC previously , the network’s Serenity (Ethereum 2.0) upgrade sequence is right around the corner. For those who aren’t in the loop, Ethereum co-founder Vitalik Buterin claimed that Serenity will facilitate “pure PoS consensus, faster times to synchronous confirmation (8-16 seconds), economic finality (10-20 minutes),” and, arguably most importantly, a 1,000x scalability upside.

While Serenity is unlikely to go 100% live during 2019, many are confident that in 2020 or 2021, immense progress will be made towards the project’s long-term goal, hopefully catalyzing some form of global adoption.

I am a writer who has been following Bitcoin for years now. My insights and interviews have been featured in leading publications in the industry such as LongHash and Decrypt. I own a small amount of Bitcoin.

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Writing a Credible Investment Thesis

Only a third of acquiring executives actually write down the reasons for doing a deal.

By David Harding and Sam Rovit

November 15, 2004

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis. The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business."

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29% of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40% had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83% of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value. This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much."

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal. Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage—can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.-based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3% of market value immediately after the deal's announcement. Translating these findings into our own terminology:

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20% return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15% a year.

Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level.

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

As a rule, investors like to see their companies investing in growth. We believe that investors in the stock market do, in fact, look past reported EPS numbers in an effort to understand how the investment thesis will improve the business they already own. If the investment thesis holds up to this kind of scrutiny, then some short-term dilution is probably acceptable.

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

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