Market Byte: What’s Next for Ethereum Classic?

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The price of Ethereum Classic (ETC) increased 103% – compared to Bitcoin’s (BTC) increase of 13% – between March 13th and March 24th, starting from $26 and peaking at $48.50. Renewed interest in ETC was likely spurred by speculation that the Ethereum (ETH) merge to Proof of Stake later this year may cause miners to migrate their hashpower to the Ethereum Classic Network.

cumulative returns

Source: Tradingview

 

The merge to Proof of Stake successfully occurred on a version of the Ethereum testnet on March 15th – a sign that the team may do the same on the Ethereum mainnet later this year. When the merge happens on mainnet, Ethereum miners will no longer earn block rewards with their existing setups and will need to find somewhere to contribute their processing power. Given that the Ethereum Classic network has a long-term commitment to Proof of Work and is a fork of Ethereum with very similar code, the ETC network may be a good candidate for receiving Ethereum’s hashpower.

comparison

Source: flexpool.io as of 3/25/2022

 

Miner activity can be observed through changes in hashrate—the average computational power used to secure the network per second. Hashrate increases when more miners begin mining on the network and decreases when they leave. Since the testnet merge announcement, ETC hash rate has increased only slightly by approximately 1% from March 15 to March 22, indicating that there hasn’t been a large influx of miners to Ethereum Classic yet. However, mining power will have to relocate somewhere. Since the transition from mining ETH to mining ETC is likely to be a gradual process, it may be premature to conclude that miners will not be switching over.

hashrate

Source: Coin Metrics

 

Beyond the potential hashrate migration from ETH merging to Proof of Stake, the Ethereum Classic network also has a 20% reduction in block rewards, estimated to occur on April 15th, 2022. Reducing the inflation rate of a protocol has historically been followed by positive price action as seen with Bitcoin Halvings. As a result, lower ETC inflation and ETH transitioning to Proof of Stake could lead to a couple of scenarios.

 

  1. ETC price & hashrate both increase:
    • While ETC has been plagued by 51% attacks in the past, increased hashrate means greater network security which may lead to more confidence in the network.
    • Decentralized applications (dApps) built on the ETC network are sparse at the moment, but increased network security could lead to more on-chain inflows.
  2. Hashrate remains relatively flat
    • Instead of shifting to mine ETC, ETH miners may instead choose other networks or alternative revenue sources unrelated to crypto for their hardware, such as video encoding.

 

With more miners and a familiar development platform, ETC could draw in more external interest from developers that want to build apps in an accessible, familiar environment. Increased network security should also give users the confidence to store their funds and transact on the Ethereum Classic network. Given the reduction in ETC inflation, the simplicity of transitioning ETH miners to ETC, and the narrowing profitability between mining ETH and ETC, moving to ETC mining may be a viable and attractive option for some miners currently on the Ethereum network.

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