After the merger, crypto firms are struggling with ether spinoffs
With Ethereum’s now-completed Merge upgrade to proof-of-stake, crypto companies are grappling with what to do with assets’ new spinoffs.
Early Thursday morning, Ethereum, the second largest blockchain, completed its merger, eliminating 99.95% of the protocol needs for crypto mining, 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 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,” added Zhou.
The problem, according to data from Chainalysis, is that the remaining proof-of-work GBU mining opportunities are only 2% of Ethereum’s size.
Led by veteran crypto player Chandler Guo, 24 hours after the merger, a group of Ethereum miners “forked” the protocol’s codebase.
Forking is unique to the speculative and open source technology that underpins the world of digital coins.
Blockchain forking is a type of software coup in which a group of people decide to separate themselves from a protocol’s larger community. When that happens, the forking group makes its own copy of the protocol, which in turn duplicates all the assets.
In Ethereum’s case, this created a new coin called “EthereumPOW.” Since its creation, the so-called “fork coin” (ETHW-USD) has been sold strongly – 84% – over the past 5 days as of Saturday morning and is currently trading below $5, roughly 38 cents on the dollar at the price of ether.
“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 is already another proof-of-work version of Ethereum known as Ethereum Classic (ETC-USD). The blockchain and its original token was born in 2016 after Ethereum’s big DAO hack.
According to Yahoo Finance data, Ethereum Classic fell more than 14% in the past 5 days after rising 29% since July 26. It has more than $4.4 billion based on market capitalization and is trading 8% from where it sat in early January.
To complicate matters further, the new EthereumPOW coin isn’t even the only forked coin to come since Ethereum’s merger ended.
Hours after the first fork, Justin Sun, founder and CEO of the Tron Foundation, which originally backed Guo’s cohort, gave Ethereum again, creating the Ethereum Fair (ETF), which trades at 9 cents on the dollar of ETH and, according to Mognetti, “will likely be a nightmare.”
Regardless of what Mognetti and others intrinsically think about the new coins, the CEO of CoinShares is among many crypto firms still having to decide whether to hold or sell the free cryptocurrencies they receive.
On at least a handful of previous occasions, crypto investors have viewed the chance to fork coins to hold some underlying crypto as a kind of “free pay,” Nico Cordeiro, CIO of quantum crypto fund Strix Leviathan, explained to Yahoo Finance.
Performance was strong enough before the merger to have contributed to the declining price of ether, he noted.
“There was very, very high demand to get short Ethereum,” he suggested, adding that this was one side of a trade that allows investors to pick up potential new coins.
Because forkcoins come relative 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 some sort of backup,” he added, pointing to the general regulatory uncertainty of cryptoassets.
But receiving fork coins is not always freeMiles Brooks, director of tax strategy at crypto tax firm CoinLedger, told Yahoo Finance.
“If the value of the token goes down sharply after the PoW fork and after you have control over them, that could be likely. Investors could have a tax bill to pay, but potentially not enough assets to pay it,” Brooks said.
As for what to do with these assets most ether holders will receive, CoinShares’ Mognetti told Yahoo Finance that, at least for his firm, it’s too early to call. They can measure the new protocol’s “network health” by monitoring cryptomining hashrate, but ultimately the final decision will come down to “a little gut feeling.”
“I can’t tell you where it will go, but should there be a benefit, we will make sure our customers get some of it,” he added.
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David Hollerith is a senior reporter at Yahoo Finance covering cryptocurrency and stock markets. Follow him on Twitter at @DsHollers
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