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16th September 2022 > > ETH hard fork.

Updated: Sep 17, 2022


Update on the ETH Proof-of-Work (PoW) hard fork.

Market Snap

Market Wrap

Stocks are approaching a critical psychological level (and no, that is not technical analysis).

Crypto weakness is simply a reflection of risk asset weakness, and is not a harbinger of doom for cryptos, though many might wish it were so.

Curious Cryptos’ Commentary – ETH Proof-of-Work (PoW) hard fork

Following the successful completion of The Merge yesterday morning, attention now turns to the mooted hard fork of the Ethereum network.

A community of miners calling themselves EthereumPoW is claiming a long list of miners have signed up to mining ETHPoW. The current list can be seen here:

There are some notable miners in that list, including the second largest ETH mining pool known as F2Pool. Note that the largest, Ethermine, has declared it will stop its ETH mining operations, and transition to become an ETH staking pool to support the new Proof-of-Stake (PoS) coin.

For clarity, the new forked coin has not yet been launched, and it is not yet clear which block it will fork from if it does go ahead.

There seems to be two possibilities – either the last block before The Merge took place, or an as yet undetermined future block at which point the new forked coin comes into existence.

The distinction matters greatly for those who want to own the new forked coin ETHPoW. Let’s look at a scenario analysis to understand this point better.

Both Alice and Bob owned ETH in a self-custody wallet in the run-up to The Merge.

Alice is a long-term holder of ETH, and though she is a contrarian and agreed with the CCC that this was a sell the rumour, buy the fact event (see below) she decided that remaining invested in ETH was her preferred choice for her own risk profile. Alice expects at some point to receive ETHPoW – if the hard fork goes ahead – and intends to exchange it for ETH, but she isn’t greatly concerned when that happens, or if it happens at all.

Bob is a short-term speculator who bought ETH in the run-up to The Merge, for two reasons. Firstly, he believed the commonly accepted narrative that this was a buy the rumour, sell the news event, a mistake he would never have made if he had paid attention to the CCC over the last month. Secondly, he thinks that free coins in the form of ETHPoW sounds like a no-brainer.

Now that The Merge is complete, Alice continues to self-custody her coins, whilst Bob rushes off to a centralised cryptocurrency exchange to sell for fiat. Given his propensity to ignore the wisdom of the CCC, he probably doesn’t even use Coinbase or Binance, though these are the only two exchanges that have put in the hard yards to achieve the highly desirable CCC seal of approval.

If we assume the hard fork does occur, and is dated from The Merge, both Alice and Bob will be proud owners of ETHPoW. Alice will exchange hers for ETH, whilst Bob will exchange his for fiat and be pleased with his “free-money” haul.

However, if we assume the hard fork does occur, but is dated from an as yet undetermined future block, Alice will still own the new ETHPoW, but Bob misses out, and will forever curse the vagaries of the crypto world.

It seems that Bob is not alone in his approach.

You will recall that some centralised exchanges were trading ETHPoS IOUs and ETHPoW IOUs in the last few weeks. The IOU is a slightly misleading term, but it indicates that these are cash-settled contracts, requiring margin payments from both buyers and sellers. Pricing appears to have been sensible, with little to no room for arbitrage.

In the 24 hours before The Merge, the price of ETHPoW IOU roughly doubled from $30 to $60, give or take.

In the hours immediately following The Merge, the price plummeted to as low as $10, and now trades at nearly $14. With ETH trading at $1,470, ETHPoW is worth just 1% of that number.

Though we cannot know for certain, it seems likely that this collapse in the price of ETHPoW IOU is due to speculators buying ETH for the same two reasons as Bob above, and who are now closing both sides of the trade.

If the hard fork goes ahead, the CCC will provide full information and all the details required to access your new ETHPoW coins. Whether you decide to keep them, sell them, or exchange them for fiat is a personal decision that only you can make.

Curious Cryptos’ Commentary – Sell the rumour, buy the fact

Readers of the popular crypto press cannot fail to have noticed that with just one exception - the mighty CCC - The Merge was presented as a buy the rumour, sell the fact event.

Assuming one uses DCA (dollar cost averaging) following this approach would have resulted in buying ETH at ever higher prices between £1,100 and £1,500. Of course, we do not know what the future path of ETH will be but starting your DCA sell down at today’s price of £1,275 is hardly the most auspicious start.

If, however you had believed the CCC that this was a sell the rumour, buy the fact event, missing out on free ETHPoW is a small price to pay to be on the right side of the trade and to be in a position now to re-accumulate your ETH hoard at a lower investment price than your exit price, given the rather troubling macro-economic perspective.

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