15th August 2022 > > Ethereum hard fork.

tl;dr

There is a potential hard fork of ETH at The Merge.

Market Snap

Market Wrap

A minor and very temporary breach of $25k to the upside early this morning did not lead to forced covering of shorts, and momentum since then has been downhill, which is all a bit dull frankly.

Shorts remain over-stretched with a small widening in the perpetual futures funding rate. I wonder where the pain point does lie.

Curious Cryptos’ Commentary – Ethereum hard fork

As we get closer to The Merge – scheduled for probably the 15th September but possibly the 16th – there is talk of a hard fork.

From Investopedia, their definition of a hard is:

“A hard fork refers to a radical change to the protocol of a blockchain network that effectively results in two branches, one that follows the previous protocol and one that follows the new version.”

There have been many hard forks of BTC, the most successful of which is BCH (Bitcoin Cash) which forked on 1st August 2017. All blocks of BTC and BCH are identical up to the penultimate one to the fork itself. From that point on, the two blockchains diverge and each one records transactions entirely unrelated to the other chain.

One of the implications of the identical history is that if you owned BTC prior to the fork, you then owned both BTC and BCH post the fork. This doesn’t mean you have doubled your money, but it can still be a relatively lucrative process. On the date of the hard fork BTC was priced at $2,700 whilst BCH closed that day at $380, hence increasing the value of your BTC holding by a welcome 15%.

Since that date BCH has hugely underperformed BTC, now trading at $135.

Most hard forks become worthless in a short space of time. My strategy since 2017 has been to sell every hard fork as soon as practically possible, but of course, that is not investment advice, just a comment on my personal decision.

ETH has already been through a hard fork in July 2016, after a major hack. The ETH community decided to roll-back the blockchain to the block immediately preceding the hack, thereby undermining somewhat the claim of immutability.

A smaller group of crypto enthusiasts did not take kindly to this and kept the original chain going – now known as Ethereum Classic (ETC). ETH was trading around $13, whilst ETC closed its first at $1.60. Now at $40, ETC has multiplied 25 times in that period, whilst ETH has hugely outperformed at 150 times.

…

A group of miners have enlisted the support of some major centralised exchanges in a project to hard fork ETH at the block at which The Merge takes place.

This new version of ETH will remain as a Proof-of-Work (POW) blockchain, with the ticker ETHW. Owners of ETH today will own both ETH and ETHW after The Merge. You can rest assured that I will be ready to hit that sell button for ETHW.

In some respects, ETHW is already in existence, at least conceptually.

Centralised exchanges Poloniex and MEXC have launched ETHPoS and ETHPoW tokens. Owners of ETH can exchange ETH into both ETHPoS and ETHPoW in a 1:1 ratio.

ETHPoS is trading at around a $50 discount to ETH whilst ETHPoW is trading just below $70, a mere 4% of the price of ETH.

This seems on the face of it to give rise to two possible arbitrage opportunities:

i) Sell ETH and buy a larger amount of ETHPoS for the same cash outlay.

ii) Exchange ETH for both coins and sell ETHPoW for a $70 cash payment upfront.

But there are risks to these trades.

The key one is that neither Poloniex nor MEXC come with the CCC seal of approval – I would not leave any cryptos on either exchange for any period. If truth be told, I have never had the need to use either one, so I might be being a bit harsh, but with cryptos, it’s always better to be safe not sorry.

The second issue is related to the fact that the hard fork is not guaranteed to happen. In that case both tokens will be suspended and delisted. In practical terms that means your holding of ETHPoS should simply be upgraded to ETH, but there are operational risks around that process.

If there are any further developments, the CCC will keep you informed.