What is The Triple Halving Thesis?
Nikhil Shamapant recently outlined an ethereum investment thesis based on what’s called a “stock-to-flow” analysis. What’s compelling about it is that it’s based largely on an analysis of predictable changes in the supply and demand dynamics of ether itself, rather than making speculative guesses on total financial market adoption or hand-waving bitcoin comparisons.
In short: The Triple Halving Thesis has an ether price target of $30,000–50,000 as a long-term sustainable price level. This will be driven by reductions in net sell pressure due to (1) reduced ether supply due to burning of gas fees post-EIP1559, (2) reduced market-price sell pressures by miners due to The Merge —ethereum’s transition from proof-of-work to proof-of-stake, (3) reduced liquid supply of due to increased Eth2.0 staking and lock-up in defi protocols, and (4) sustained (and likely growing) demand due to introduction of ETFs, institutional adoption, retail investor education, and a wider range of use cases.
You can read the full 79-page report yourself, but below I try to distill down the key building blocks of the analysis.
The Core Argument
How is the price of an asset determined? Well, it depends on supply & demand. When there are more buyers (more demand), it creates upward pressure on prices. When there are more sellers (more supply), it creates downward pressure on prices. A key assumption behind the analysis relates to predictable changes in the sell-side pressures imposed by proof-of-work miners. To appreciate The Triple Halving Thesis, it’s useful to first think through how Bitcoin’s Halvening works.
Bitcoin’s Halvening refers to the every 4-year event in which the rewards miners receive from mining a block is cut in half. This has prompted bull-market cycles in bitcoin each time, but why? A stock-to-flow analysis helps to explain.
(1) Miners: Miners are running a business where they sell mined rewards to cover their expenses of running the mining rig and pocket a small profit margin; this creates consistent selling pressure because miners sell at market price to cover recurring mining expenses.
(2) Hodlers: Simultaneously, a strong bitcoin hodler and DCAer culture provides consistent buy pressure at all prices.
(3) Halving: Halving the mining rewards thus has the effect of removing sell-side pressure, while demand remains consistent — leading to a net increase in price. This is realized gradually since at each block there are fewer new coins put into circulation, due to the halved mining rewards.
Ethereum’s Triple Halving Thesis suggests that there will be a similar net reduction in the supply of ether that is approximately equivalent to three halving events (50% * 50% * 50% = 12.5%). Where does this come from? Changes to the ethereum protocol will also have the effect of reducing sell-side pressure.
(1) Burning Gas: EIP1559, live in August 2021, did many things — one of which included burning ether.
- Burning gas fees essentially takes the most liquid flows (i.e., ether that is being used as gas to transact on the network) and burns 70% of it. The reduction in ether supply serves to dampen market-price selling pressure from proof-of-work miners before the merge.
- Based on Justin Drake’s analysis of ether issuance & sell pressure, the report estimates that EIP1559 gas burning is equivalent to .5 of the 3 halvenings in the Triple Halving Thesis. The remaining 2.5 come from the PoS merge.
(2) The Merge: Ethereum’s transition from proof-of-work to proof-of-stake will mean that there will no longer be miners (and costs associated with running mining rigs).
- Therefore, much of the inelastic, market-price selling pressure imposed by miners will evaporate. In an environment of sustained and growing demand for ethereum, this will lead to upward pressure on prices.
- So how much sell-side pressure will be removed after the Merge? Justin Drake’s analysis suggests that that the sell pressure will drop from about 22.3K ETH/day pre-EIP1559 to about 2.6K ETH/day post-merge. This amounts to an approximately 90% drop in inelastic selling pressure (i.e., where sell pressure will be about 10% of what it was pre-EIP1559).
- To the extent that bitcoin’s halvening price action is driven by similar flow mechanisms, these changes in the ethereum protocol would be equivalent to more than three bitcoin halvenings (where 10% < 12.5% from above).
- The upward pressure on ethereum price is likely to be observed gradually post-merge as there will be less selling pressure each block when there are no longer any proof-of-work miners. Because it removes a consistent price-inelastic selling pressure, this effect does not get fully priced in before the merge.
Price Target Implications
The Triple Halving Thesis does not lead to a direct extrapolation of a price target — I had originally expected to see something more concrete in the report, but I still valued the analysis because it clearly outlines an underappreciated & powerful catalyst that could apply strong upward pressure on ethereum price. Exact price targets are going to depend on assumptions around how widely demand takes off and how deep selling pressure will be faced at higher price levels (e.g., at 10k and 20k, that others have pinned as priced targets).
The report advocates for a 50k base case price target which corresponds to a $5.5T market cap, while speculation and illiquidity may drive prices up temporarily to 150k by 2023. Given the growing popularity of defi protocols, institutional interest, versatility of applications, and yet-to-go-mainstream understanding of ethereum as a distinct asset, I feel that the 50k target is very reasonable. But, remember to do your own research as this is not investment advice. Good luck.
