Why Ethereum Classic is overvalued
Posted: Thu Jul 28, 2016 5:58 pm
This is a quick post to point out a few issues with the notion that Ethereum Classic is going to overtake Ethereum and become the dominant chain.
I correctly predicted at http://forums.prohashing.com/viewtopic.php?f=11&t=717 that when a major blockchain forks, markets will spring up in both forks and the old chain will always retain some value. Because the old chain has value, it will always have hashrate. Indeed, we moved our GPUs to mining Ethereum Classic because it was so ridiculously profitable that they were justified being on even when it was very hot outside. ETC's having hashrate is not an indicator of success. In addition, the current price of Ethereum Classic is overvalued because of technical factors that few people seem to be mentioning.
For one, the issue of replay attacks makes handling Ethereum Classic very difficult and risky. We had a cold wallet containing hundreds of ETH and ETC that was offsite. I intended to never spend that ETH, and a share of pool profits would periodically be sent to the wallet. When ETC first debuted at Poloniex and crashed, the value of that wallet in ETC fell to just $300, and the opportunity cost of taking away time from the business and the risk of replay attacks on the thousands of dollars of ETH didn't justify our caring about that money.
When the value of Ethereum Classic rose, I rushed home to ask Chris to get started with this process so we could liquidate as quickly as possible. But to mitigate against the replay attacks, we had to create yet another secure virtual machine to store our ETH, destroy and write new CD-Rs with the new wallet, regenerate the passwords, and take everything out of the house back to the other locations. Selling ETC is not as simple as pressing "send" - it involves time-consuming safeguards to make sure the more valuable ETH is not stolen. People with large amounts of ETC are holding them in cold storage, and they need time (like we did) to get access to the funds.
The other problem with ditching ETC is that it is not simple to get the daemon set up and configured. Chris had to modify the code of the Ethereum Classic client based on some forum suggestions to get it to download the correct blockchain. A command line parameter needs to be used that isn't obvious. Many ETH holders are not knowledgeable enough to be able to learn how to do that very quickly. He spent hours trying to get the daemon configured correctly.
Finally, there is the problem of getting the blockchain downloaded itself. The Ethereum blockchain is huge, and even if replay attacks were not a concern, one cannot simply start up the client and send money. It took over a day for the blockchain to download and validate, during which time the bubble had already deflated and we lost 33% of the value of our ETC.
Ethereum Classic, like Bitcoin, is an illiquid market where most of the value is being held on paper. The BTC network is so unreliable that it usually takes hours to get money to exchanges, but there has been plenty of time for buyers and sellers to get their money where they need it to be. By contrast, the ETC markets appeared without warning. Buy orders were easily able to flood in, but people could only sell what just bought or ETH they previously held on Poloniex.
Now, enough time has passed that people are starting to finally figure out how to configure ETC, have had time to download its blockchain, and will be able to execute their transactions to avoid replay attacks. Ethereum Classic will always have some value; however, the coins from people who see this as free money and wanted to sell as soon as the bubble started will start to arrive at the exchanges in increasing numbers. Many people who haven't actually installed ETC have failed to notice the difficulty in transmitting it, and the price of ETC will decline to a level representative of actual demand as the sellers can finally trade freely.
I correctly predicted at http://forums.prohashing.com/viewtopic.php?f=11&t=717 that when a major blockchain forks, markets will spring up in both forks and the old chain will always retain some value. Because the old chain has value, it will always have hashrate. Indeed, we moved our GPUs to mining Ethereum Classic because it was so ridiculously profitable that they were justified being on even when it was very hot outside. ETC's having hashrate is not an indicator of success. In addition, the current price of Ethereum Classic is overvalued because of technical factors that few people seem to be mentioning.
For one, the issue of replay attacks makes handling Ethereum Classic very difficult and risky. We had a cold wallet containing hundreds of ETH and ETC that was offsite. I intended to never spend that ETH, and a share of pool profits would periodically be sent to the wallet. When ETC first debuted at Poloniex and crashed, the value of that wallet in ETC fell to just $300, and the opportunity cost of taking away time from the business and the risk of replay attacks on the thousands of dollars of ETH didn't justify our caring about that money.
When the value of Ethereum Classic rose, I rushed home to ask Chris to get started with this process so we could liquidate as quickly as possible. But to mitigate against the replay attacks, we had to create yet another secure virtual machine to store our ETH, destroy and write new CD-Rs with the new wallet, regenerate the passwords, and take everything out of the house back to the other locations. Selling ETC is not as simple as pressing "send" - it involves time-consuming safeguards to make sure the more valuable ETH is not stolen. People with large amounts of ETC are holding them in cold storage, and they need time (like we did) to get access to the funds.
The other problem with ditching ETC is that it is not simple to get the daemon set up and configured. Chris had to modify the code of the Ethereum Classic client based on some forum suggestions to get it to download the correct blockchain. A command line parameter needs to be used that isn't obvious. Many ETH holders are not knowledgeable enough to be able to learn how to do that very quickly. He spent hours trying to get the daemon configured correctly.
Finally, there is the problem of getting the blockchain downloaded itself. The Ethereum blockchain is huge, and even if replay attacks were not a concern, one cannot simply start up the client and send money. It took over a day for the blockchain to download and validate, during which time the bubble had already deflated and we lost 33% of the value of our ETC.
Ethereum Classic, like Bitcoin, is an illiquid market where most of the value is being held on paper. The BTC network is so unreliable that it usually takes hours to get money to exchanges, but there has been plenty of time for buyers and sellers to get their money where they need it to be. By contrast, the ETC markets appeared without warning. Buy orders were easily able to flood in, but people could only sell what just bought or ETH they previously held on Poloniex.
Now, enough time has passed that people are starting to finally figure out how to configure ETC, have had time to download its blockchain, and will be able to execute their transactions to avoid replay attacks. Ethereum Classic will always have some value; however, the coins from people who see this as free money and wanted to sell as soon as the bubble started will start to arrive at the exchanges in increasing numbers. Many people who haven't actually installed ETC have failed to notice the difficulty in transmitting it, and the price of ETC will decline to a level representative of actual demand as the sellers can finally trade freely.