Wall Street's major banks model Ethereum for the first time: predicting a year-end price of $4,300

Citigroup predicts Ethereum's year-end target price at $4,300, but the value capture of L2 remains shrouded in uncertainty.

On September 15, according to news from the Wind Trading Desk, Citigroup released its latest research report, setting a year-end target price of $4,300 for Ethereum (ETH), which is lower than the current spot price.

The report uses the same predictive model as previously applied to Bitcoin, taking into account three main factors: fundamental value, capital inflow potential, and the macroeconomic environment. The report also provides a forecast range of $6,400 in a bull market and $2,200 in a bear market:

• Fundamental Value: Citigroup's model shows that the current price of Ethereum has surpassed the level supported by its network activity, likely driven by recent ETF inflows and market over-excitement about tokenization and other use cases, indicating a risk of overvaluation in the short term.

• Capital Inflow Potential: Although the price-driving effect of funds flowing into Ethereum ETFs (with every $1 billion inflow potentially raising the price by 6%) is twice that of Bitcoin, Citigroup expects its overall flow to be far less than Bitcoin, as new investors will still prefer Bitcoin.

• Macroeconomic Environment: Citigroup notes that in the current forecast, the macroeconomic impact on Ethereum is minimal. However, once an economic recession occurs, macro factors will become a key force driving Ethereum lower.

Value Anchors and Challenges of L2: A 30% Value Transmission Rate is the Key Assumption

Citigroup believes that unlike Bitcoin's positioning as "digital gold," Ethereum's value is more closely tied to its network activity (i.e., usage as a smart contract platform).

However, the report sharply points out that the recent growth in the Ethereum ecosystem's activity mainly occurs on the second layer (L2) networks built on top of the Ethereum network, and the prosperity of L2 has not directly and fully translated into Ethereum's value.

(Ethereum ecosystem activity is primarily concentrated in L2 networks)

Due to transaction costs and throughput limitations, applications and users are migrating to L2, but there is much skepticism in the market about how much value L2 can bring back to the Ethereum mainnet. Although last year's Ethereum network upgrade, Dencun, reduced the fees paid by L2 to the mainnet, it has also intensified market concerns about Ethereum's value capture capability.

Citigroup's model assumes a 30% value transmission rate from L2 activity to the Ethereum mainnet. Even under this assumption, the current price of Ethereum is still above the valuation derived from the combined activities of L1 and L2.

This portion of the premium is attributed by Citigroup to recent market buying pressure and the "prosperity expectations" for future use cases such as tokenization and stablecoins.

Stronger but Smaller ETF Fund Flows: Significant Leverage Effect, but Total Amount Hard to Compare with Bitcoin

Fund flows are another key factor affecting Ethereum's price.

The report observes that the large purchases by digital asset treasury companies and the influx of ETF funds are important drivers for Ethereum's recent outperformance against the broader market.

Citigroup emphasizes that the leverage effect of fund flows into Ethereum is extremely strong. A weekly inflow of $1 billion into ETFs can drive Ethereum's price up by about 6%, while the same amount of funds only impacts Bitcoin's price by 3%.

However, Citigroup expects the scale of funds flowing into Ethereum to be smaller than that of Bitcoin. The logic is that Ethereum's market cap ratio of about 25% relative to Bitcoin may be the upper limit for new fund allocations in the short term, as new investors tend to start their allocations with the most well-known Bitcoin.

Limited Impact of Macroeconomic Factors in Bull Market Scenario

The macroeconomic environment, particularly the stock market and the dollar, is a traditional force influencing cryptocurrency prices.

Similar to Bitcoin, Ethereum's price is positively correlated with the stock market and negatively correlated with the dollar.

However, in Citigroup's baseline scenario, macroeconomic factors are not a decisive force. The report points out that although Citigroup's U.S. equity team predicts a slight upward space for the stock market before the end of the year, with a target of 6600 points for the S&P 500, this only contributes a weak upward drive of 35 basis points to its price prediction based on Ethereum's historical beta coefficient.

But investors must note that in a bear market scenario, macroeconomic factors will be crucial. The report emphasizes that the target price of $2200 in a bear market will be primarily driven by macroeconomic factors triggered by economic recession, particularly a significant decline in U.S. stocks.

Citigroup Predicts a Target Price of $4300 by Year-End

Citigroup ultimately constructed its price prediction model by integrating the three core factors mentioned above—network activity, fund flows, and the macro environment:

• Baseline Scenario ($4300): Assumes moderate fund inflows before year-end, with market excitement about Ethereum's network use cases maintained, supporting prices slightly below current levels.

• Bull Market Scenario ($6400): Predicated on a significant increase in network activity (possibly driven by the explosion of stablecoins or tokenized applications), while demand from ETFs and treasury companies remains strong.

• Bear Market Scenario ($2200): Primarily dominated by recessionary macro factors, especially stock market declines, leading to a reversal in market sentiment and prices falling back to levels supported only by current network activity.

In summary, Citigroup's report provides investors with a clear analytical framework. It affirms the value of Ethereum as an application platform but does not shy away from pointing out its core shortcomings in L2 value capture.

In the short term, there is a risk of prices being driven up by market sentiment. In the long term, whether Ethereum can fulfill its promise as a "world computer" hinges on its ability to effectively capture the value of a thriving L2 ecosystem.