Past the Merge, crypto firms grapple with with ether spinoffs
With Ethereum’s now finished Merge upgrade to proof of stake, crypto companies are grappling with what to do about assets’ new spinoffs.
Early Thursday morning, Ethereum, the second largest blockchain, completed its Merge and eliminated the protocols need for crypto mining by 99.95%, which had accounted for 0.2% of worldwide electricity consumption.
For the niche industry of Ethereum GPU-mining, which earned much of the total $19 billion generated from mining the protocol last year, the long-awaited upgrade meant “all of these miners are out of a job,” Kevin Zhou co-founder of hedge fund Galois Capital, told Yahoo Finance.
“And they really didn’t want to go quietly into the night,” Zhou added.
The problem, according to data from Chainalysis, is that the remaining opportunities for proof of work GBU-mining account for just 2% of Ethereum’s size.
Led by veteran crypto player Chandler Guo, 24 hours after the Merge a group of Ethereum miners “forked” the protocol’s codebase.
Forking is unique to the speculative and open-source technology underlying the world of digital coins.
Blockchain forking is a kind of software coup where a group of people decides to split off from a protocol’s larger community. When that happens, the forking group makes a separate copy of the protocol, which in turn duplicates all its assets.
In Ethereum’s case, this created a new coin called “EthereumPOW” (ETHPoW-USD). Since its creation, the so-called “forkcoin” (ETHW-USD) has faced heavy selling - 84% - in the last 5 days as of Saturday morning and currently trades below $5, about 38 cents on the dollar to the ether’s price.
“Personally, I don’t really see why we need to get another Ethereum in the mix,” Jean-Marie Mognetti, CEO of digital asset manager CoinShares told Yahoo Finance.
As Mognetti pointed out, there’s already another proof-of-work version of the Ethereum known as Ethereum Classic (ETC-USD). The blockchain and its native token were birthed in 2016 following Ethereum’s major DAO hack.
According to Yahoo Finance data, Ethereum Classic fell by more than 14% in the last 5 days after rallying 29% since July 26. It holds more than $4.4 billion by market capitalization and trades 8% from where it traded at the beginning of January.
To complicate matters more, the new EthereumPOW coin isn't even the only forkcoin to come since Ethereum’s Merge concluded.
Hours after the first fork, Justin Sun, founder and CEO of the Tron Foundation, who originally supported Guo’s cohort, forked Ethereum again, creating Ethereum Fair (ETF), which is trading at 9 cents on the dollar to ETH and according to Mognetti “will probably be a nightmare.”
No matter what Mognetti and others inherently think about the new coins, CoinShares chief executive officer is among many crypto firms that still must decide whether to hold or sell the free cryptocurrencies they are receiving.
In at least a handful of past occasions, crypto investors have viewed the chance to get forked coins for holding some underlying crypto as a kind of “free payday,” Nico Cordeiro, CIO of quant crypto fund Strix Leviathan, explained to Yahoo Finance.
The notion was strong enough before the Merge to have contributed to the sagging price of ether, he noted.
“There was very, very heavy demand to get short Ethereum,” he suggested, adding this was one side of a trade allowing investors to grab possible new coins.
Because forkcoins come in proportion to an investor's holdings of the original cryptocurrency, it's difficult for fund managers to pass on the opportunity even when a new token has minimal promise, Cordeiro explained.
“[Ethereum] is basically a giant experiment with hundreds of billions of dollars so it's natural to want a stake in a kind of backup copy,” he added, pointing to the regulatory uncertainty of crypto assets.
But receiving fork coins isn't always free, Miles Brooks, director of tax strategy with crypto tax firm, CoinLedger, told Yahoo Finance.
“If the value of the token goes down severely subsequent to the PoW fork and after you have control over them, which could be likely. Investors may have a tax bill to pay but potentially not enough assets to pay it,” Brooks said.
As for what to do about these assets most ether holders will receive, CoinShares’ Mognetti told Yahoo Finance at least for his firm, it's too early to make a call. They can guage the new protocol's "network health" by monitoring its crypto mining hashrate but ultimately, the final decision will come down "a bit of gut feeling.”
“I can’t tell you where it will go, but should there be a benefit we want to make sure our customers get some of it,” he added.
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David Hollerith is a senior reporter at Yahoo Finance covering the cryptocurrency and stock markets. Follow him on Twitter at @DsHollers
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