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ETC-USD: Ethereum Classic Is a Huge Risk but It’s Not Totally Unjustified
Of all the cryptocurrencies that have been suffering from the steep correction that started around the middle of May, I was hoping that Ethereum Classic (CCC: ETC-USD ) could be the one digital asset to move against the grain. Alas, it is not to be — at least, I don’t think so given the current state of affairs.
Though always a longshot, ETC appeared to be a charting a large-scale bullish pennant formation. In my opinion, it was unlike many other cryptos, which charted patterns that were obviously signaling bearish intent. For an example, check out my writeup on Dogecoin (CCC: DOGE-USD ) for Blockster.com. With a head-and-shoulders pattern prominently displayed, you couldn’t get more bearish.
But as I had explained for my crypto updates on InvestorPlace, this was not the case for Ethereum Classic. Instead, I would posit genuine enthusiasm existed for ETC coins to jump higher. It would have been incredible if it did. Unfortunately, ETC took its cues from the broader crypto complex, including of course Ethereum (CCC: ETH-USD ).
Because of this unfortunate connection to every other crypto, Ethereum Classic is very risky. But if you’re interested in this space for the long haul, you may want to keep it on your radar. Heck, it might even outperform ETH on a consistent basis.
To understand why, let’s briefly discuss the difference between ETC and ETH.
For those who are new to the blockchain and the crypto markets, in the beginning of alternative decentralized platforms, only one Ethereum blockchain existed. But quickly, things got a little strange to say the least. Here’s how I explained it:
Though not nearly as popular as Ethereum, ETC is actually the original Ethereum blockchain. An exposed vulnerability in the architecture caused a split between two camps: those who wanted to trudge forward with the original network, and those who wanted to start anew with a hard fork.
The hard forked version is the Ethereum you know and love today, while the original Ethereum became Ethereum Classic. What makes the latter intriguing is that consensus calls for the ETC protocol to maintain its proof-of-work (PoW) status. In contrast, Ethereum is transitioning toward proof-of-stake (PoS).
On a very basic level, PoW protocols are much more energy intensive for crypto miners and network participants. In order to verify transactions in a PoW-based blockchain, this type of protocol favors those with the highest computing power.
In contrast, PoS protocols are less-energy intensive. Here, the emphasis isn’t necessarily on raw computing power but those who have a vested stake in the success of the target blockchain. Therefore, network engagement is the pivotal concern rather than computing power.
If you’ve followed crypto-related news, you’ll know that the sector has been abuzz about Ethereum transitioning to a PoS protocol. On paper, the move makes sense on multiple levels. Environmentally, a more energy-efficient system is infinitely more responsible than a PoW protocol, especially one as popular that undergirds ETH.
In addition, PoS is more democratic and transparent. By gaining more leverage through a higher stake in Ethereum, the community has assurances that miners and network contributors will act in their best interest (because no one would want to destroy a system in which they have a financial stake in).
But the challenge is the native efficiency of PoS. Basically, the more efficient a blockchain system becomes, the lower the profit margin is for miners and network contributors. Further, this isn’t a new concept. In 2019, Coindesk contributor Christine Kim warned that Ethereum mining may become barely profitable.
Interestingly, though, Ethereum Classic wouldn’t have that problem. As a PoW protocol, ETC is much clunkier and inefficient relative to ETH. But inefficiency provides excellent profitability margins — all other things being equal — precisely because such inefficiency organically facilitates jobs for miners to do.
Of course, Ethereum Classic would need to become much more popular than it is for this thesis to play out. And that popularity is not guaranteed. Still, if the economics of staking don’t pan out for ETH, it’s possible that you can see an exodus back to ETC.
The above argument isn’t meant to push you into Ethereum Classic. In particular, the whole crypto sector is risky. Additionally, you must separate the utility of the blockchain from its underlying crypto sentiment.
To be blunt, I believe the nearer-term narrative is ugly. Therefore, I’m personally staying far away and keeping the powder keg dry. But when the dust settles, you might want to consider ETC among your risk-on crypto ideas. Staking might be a good idea in principle but perhaps not in practice.
On the date of publication, Josh Enomoto held a LONG position in ETC, DOGE and ETH. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.