[My previous piece got corrupted due to a phone edit and can't be edited. I spent too much effort to not make sure I get this right. So I am reposting this with the lost content, including the price discussion (!) and all of most of the research points that informed my discussion. I also added edits and updates since last night, since it's such a fast moving situation. Getting it right matters to me as an analyst more than anything.]
Unlike Steem, ETC is relatively "easy" to value. ETC is worth 70% less than its current trading price or $60 million in market cap. In the long term, it may be worth less than this post. But that may be a very long term. And it is a non-zero possibility that ETC makes it so. Let's explore this together.
Tweets Are Too Short
My interest in valuing ETC started with this Barry Silbert tweet. Silbert heads the Digital Currency Group, a blockchain asset manager, and bought some amount of Ethereum Classic (ETC) and then tweeted about having bought it. (The next day, Coindesk, a DCG owned publication, would publish an article about Genesis Trading, a DCG owned digital currency trading platform, feeling "confident that demand could begin to rise for the nascent digital currency." Forget it. It's Chinatown.
At the time of the original tweet, ETC traded at 4% of ETH's value. Barry laid out his analysis in a subsequent tweet. I found it to be insufficient as a basis for investing. (In Barry's defense, Twitter is a poor place to do a valuation or lay out an analytical framework).
25% chance ETH -> ETC in next six months. 25% x $1b = $250m = 5x increase in ETC value today
For starters, he assumed that Ethereum as a whole will be worth the same if ETC passes ETH in value. That doesn't make much sense. If there is that much uncertainty, his math should be something like 25% (his odds of ETC passing ETH in 6 months) * $500mm (half today's market cap) or lower. That's how I would break it down probabilistically but with way more scenarios. Static system value conditional on chaos having occurred seems like bad analysis and Ethereum is such a synergistic product that you kill the upside when you balkanize it. ETC's existence complicates and slows down dapp development if ETH wins out and vice versa to an ever greater degree. But why am I saying what I would do in a valuation when I can just do one myself?
Image source: etc-eth.com
An ETC Valuation
Steem is incredibly difficult to value properly because there is nothing like it, its use is growing so much, and the fact that Steem and Steem Power are priced the same but probably should not be because they aren't fungible. ETC is comparatively easy to value because we actually have a direct comparable asset, namely ETH. There are scenarios where ETC wins and Ethereum is overall more valuable but you need to start with market information available. Let's outline the differences between the two and what they have in common.
What do ETC and ETH have in common?
- The same underlying technology and protocol.
- The same endogenous (from within itself) existential risk from a technology perspective.
- The same exogenous (from without) existential risk from a competition/obsolescence perspective
- The same ability to be hard forked, which is true for most (all?) blockchains that use Satoshi consensus.
- A meaningful overlap in holders. This is shrinking and perhaps as much as 25-30% of ETH have sold their ETC already. This will take a better ETC blockchain explorer to analyze more fully but is valuable to monitor.
- Both are altcoins and historically altcoins have struggled to survive against BTC and its dominant network effects. We have precedents for these types of situations. From Bitcoin's [David G. Harding's twitter](
with the message "What I think of altcoins: fast hype-fueled peak followed by fade to obscurity) [Note that from this POV ETC is an altcoin OF an altcoin, so it's disadvantage is arguably compounded -- it has to beat ETH AND then beat BTC]:https://twitter.com/hrdng/status/737018222411665409
- hrdng
What advantages does ETH have that ETC does not?
- Support from the Ethereum Foundation, the people who brought Ethereum into existence.
- Support from the major Dapp projects, the things that make Ethereum and its ETH ecosystem valuable, and differentiate ETH from BTC. Dapps function on one chain. Interacting with another chain is like interacting with another coin. Digix and Maker wrote that they will treat ETC the same as Rootstock.
- The greater measurable support of the community. Every poll and vote and survey (and later this survey with a smaller sample) has shown support for the forked chain in advance. Price action also demonstrates greater community support for ETH post-fork.
- A higher price. This has fluctuated from as high as 30x to as low as 5x and sits at 6x right now.
- Rich tools to interact with the chain and the infrastructure (blockchain explorers, statistic gauges).
- A changed state that unwound TheDAO attack and returned ETH to ETH stakeholders interested in investing in Ethereum dapps.
- A ledger that is (mostly?) free from the replay attacks that have been hitting ETC accounts and contracts.
What advantages does ETC have that ETH does not?
- The benefit of never having hard forked to fix something that is not a protocol issue, a trait that is often described as "immutability." Note that both chains can still be forked, but the ETC chain just doesn't have the precedent. I don't know what precedent is worth
- Vocal support from many prominent blockchain and Bitcoin influencers. Many of these same people voicing support now were opposed to Ethereum before, so their support is incongruent but of interest.
- An edge in current mining profitability. Yesterday it was less profitable, but it's a roller-coaster. It may be profitable for miners to spin up for a couple days that spin back down after the difficulty increases and repeat this over and over again. I am not sure what kind of dynamic this would create in terms of ETC security or price stability.
- An attacker who will in 3 weeks control 4% of the ETC supply. There is no evidence that she is a long-term supporter of ETC. Her silence and her actions suggest that she is profit motivated. The hacker, if she is risk averse, can liquidate her ETC now for millions and not have to take the substantial existential risk that ETC (and ETH) faces. If she does this, she will have received an ample bug bounty subsidized solely by ETC holders.
- Attacker(s) who may in 3 weeks control another 8 million ETC or 10% of the entire money supply. That's $16-20 million at today's prices.
Probabilities and Slices
That background informs what scenarios are more likely than others. These are the relevant questions to me, where p = probability:
- P that the Ethereum technology has an existential bug or technical flaw?
- P that the Ethereum technology gets rendered obsolete by competition?
- P that the overall Ethereum network effects (core value of a currency) are lost to competition? Note that this P increases as ETC approaches ETH value.
- P that that ETC's vulnerabilities to replay attacks complicate its ecosystem and make it unusable or that ETC does not have the dev support to copy over ETH changes and improvements effectively to their chain without unforeseen consequences that break the chain or that they run into issues that require a fork and cannot reach consensus (difficulty bomb, switch to PoS) or that ETC just loses its network effects to its advantaged comp?
- P that the status quo remains and that the ETC and ETH stay there for the long term?
- P that ETH gets to BTC's current valuation. This is a scenario that blends all bull outcomes for ETH into one composite outcome. If ETH succeeds, the upside has a very high ceiling. The blend is at 10x the current price. This is what offsets the very high chance that it doesn't work at all.
- P that ETC gets to ETC's current valuation. This is a scenario that blends all the positive outcomes for ETC. It also is a blend at 10x the current price, or it was when I started it. There are much fewer scenarios from ETC's bull blend wherein ETC.
I acknowledge these are arbitrary but valuation is more art than science. It's important to ask the right questions so that you can answer them usefully. It's also important to have a timeframe. Mine here is loosely ~2 years. I also don't discount anything back because while the time value of money is important, so is my own time. This is neither exhaustive nor comprehensive. I could drill into every slice and expand it into ever more slices.
But a few notes. I have a 60% P that Ethereum, ETH and ETC and Expanse all of it, will fail. This may be extremely conservative or crazy high depending on whom you ask. Given that 9 out of 10 or more startups fail, it seems generous. Both ETH and ETC are incredibly risky and arguably more likely to fail than not without considering the relative relationship between ETH and ETC. And ETC's existence and persistence makes this mutual failure more likely. $0 or near to it is the most likely outcome for both ETH and ETC, more so for ETC. It's not something I forget. But the first set of microslices is the shaded columns and they add up to 100% because they comprise 100% of the 60% in which Ethereum as a whole fails.
Now within the other microslices, the scenarios where Ethereum technology continues to exist in a relevant way, we can tease out the relationship between ETH and ETC. This is a 40% macroslice of probabilities broken down into 4 scenarios. Within that 40%, there's a 13% P (15% overall) that ETH wins but Ethereum goes sideways because of the disruption this has caused or for no identifiable reason all. There's a 13% P (5% overall) of stagnation/status quo -- this arguably should be higher but I think it would come at the expense of the existential risks. There's a 40% (16% overall) that ETH is a huge success. I use the current BTC valuation as the anchor for this but it includes a multiverse from $2bn market cap to $40bn market cap -- this could be finetuned better, but it's similar to BTC's upside -->> if it works, you are comping it to crooked numbers. Same with the final scenario, ETC success, P'ed at 10% (4% overall). This includes passing ETH's in price at $200 million market cap all the way to the $40bn market cap but with much lower probability on the high side because of the paths it would take to get there and how much further it is away. That 4% ETC success corresponds to the 20% hash rate they have -- I would have this scenario at 1 or 2% if this was yesterday, given the hash rate relationship and my own feeling is that it's less than 1%, but I am leaning on the current hashing relationship as my base rate for assessing the probabilities and that produces a current ETC price estimate that is 4x more valuable than I would have thought.
All this gets to a price of ETC of $0.72 or a $59 million valuation. If you use Silbert's 25% number, you get to a $1.61 valuation, 3x from where he bought it yesterday for himself or his clients, or 35% lower than the price right now.
Random Valuation Considerations
- The ETC/ETH hash rate % is likely a CAP on sustainable valuation relative to ETH rather than a floor. ETC is unique in that it's mining is almost 100% fungible with another coin's, namely ETH. Miners are in it to make money. The marginal miner is short term profit oriented and not interesting in taking existential platform risk. They will sell their ETC as they mine it and this will keep the price of ETC from exceeding its relative price % ETC/ETH price percentage.
- There may be a troll premium to ETC. I have never had to factor this into anything I have ever valued but given that many public supporters of ETC are also people who were historically anti-Ethereum, this suggests ETC may have value as a form of moneyed trolling or perhaps market manipulation of ETH, ETC, and BTC prices. This invites regulatory scrutiny into the space and the trading activities of market participants.
- The security researcher Peter Vessenes, who uncovered TheDAO's vulnerability to recursive splits and now consults for Maker, outlined that Ethereum Classic is subject to many attack vectors for Ethereum participants.
- ETC lacks tools to evaluate useful metrics like # of tx and off-exchange activity. The only measure we have of ETC's use is from the on-exchange trading data.
- ETC's sub-reddit has 989 readers compared to Ethereum's 18,977. This is in line with the hash rate but it should be a higher percentage than the hash rate or the market price because ETC should be of interest to almost everyone in Ethereum.
- 90% of ETC volume is in the ETC/BTC pair. This suggests that the ETC buyers are new Ethereum technology participants. This is mild evidence against my operating assumption that two chains with traction would destroy total value.
- What is the composition of the miners mining ETC vs ETH? Are they net new to Ethereum, are they solo miners, farms. Are they newly or temporarily spun up hashing? The hash rate the day before the fork rate was 3,400 GH/s; today the forked Ethereum has a 3350 GH/s hash rate and ETC has a 750 GH/s hash rate. Where did this hashing come from?
- My general thesis for cryptocurrency/blockchain project value remains: "The value of any cryptocurrency is the people involved and the network effects they bring, all enabled by the underlying technologies and their usefulness to people."
- Much of Ethereum's value to me is synergies within the ecosystem -- reflexivity. So as Dapps are developed and used and run on the Ethereum currency, they both lock people into Ethereum and push the price up and make everything more valuable. Multiple Ethereum chains that have traction and split interest assault this value and do damage to one another. Or as Ciaran Murray tweeted it: The reduction of fragmentation incentives is #Ethereum's greatest utility. Would be detrimental to gen deve if there were two competing.
Truthfully this is a work-in-progress and always will be. There are many ways to analyze value, only some of which are applicable to a cryptocurrency. This is not how one might look at a stock or a muni bond or Italian 10 year bonds. This is just one framework and one effort and really a start to put all the information in one place for further analysis. I plan on finetuning this analysis as I get more and better information and as I get feedback in the comments here. In my experience, steemians have a lot to add. But ultimately Mrs. Market will decide what the right price is and she knows better than I do.
Updates since last night's post as of 11:30AM 7/27/16
- ETC has traded from 20% of ETH to 13%, so down by 1/3rd in 15 hours.
- ETC hash rate has dropped from 750 GH/s as of my research yesterday to 650 GH/s. ETH hash rate has increased by 200 GH/s (one measure says by 500 but that looks too high to be right).
- Charles Hoskinson, someone who helped Ethereum raise its ICO and the left the project and someone who has been involved with both Bitshares (left the project) and Lisk (still involved), offered to lend his support to ETC. Here is a thread about him leaving Ethereum in 2014.
- Vitalik Buterin tweeted: [
if this is what it takes to get bitcoin maximalists to like ethereum, so be it].(
)https://twitter.com/vitalikbuterin/status/758053905456586761
- vitalikbuterin - Digix has reiterated that it doesn't recognize any of their tokens on the old chain. "Any redemptions of DGX via our platform in future will only be recognizing DGX-Fork, not DGX-Classic. Any pledging in our future governance contracts will be by DGD-Fork holders, not DGD-Classic holders."
- The current ETC price is very close to the price my model suggests conditional on whether you agree with Silbert and think ETC has a 25% chance of surpassing ETH. That price is $1.61 so it only has to drop another 10% to get there.
- Yunbi has lost 40,000 customer coins from replay attacks in supporting ETC
- I didn't intend for this to be an ETH valuation but rereading it, it's right there, too. But note too that the ETH valuation would be higher but for ETC's continued existence and traction. Which brings up an open point for ETC traders. If ETC holders who have traded ETH for ETC, switch back to ETH, they would have potentially have increased their ETH holdings by 2-15x by trading into ETC. Then by trading out of ETC into ETH they not only get to participate in the chain that is already more likely to succeed but ALSO make that chain more likely to succeed by doing it, further increasing their returns. Network effects are tricky and powerful. This doesn't speak to the BTC traders, the source of 90% of yesterday's trading, and who are also sitting on a 2-15x gain in BTC terms, but their ETC sales don't have the same network effect benefits that the ETC sales of someone going back into ETH would.
ETC Monitoring Resources
- ETC/ETH stats comparison page
- Slacknation's ETC/ETH price and hash rate tool
- ETC Blockchain Explorer
- Mining profitability calculator
- ETC Reddit Sub
Disclosure: I hold no ETC but I do have a 444 ETH buy order for ETC @ .00555 ETH/ETC (0.555%), which is where there is enough margin of safety. I do hold ETH and have since the ICO. Also note that I have written this piece over the last 24h effectively in real-time, so be charitable to anything that is now outdated. Crypto doesn't slow down for anyone or anything. Least of all for some guy on the internet.
PS
I would love to have people list scenarios where ETC wins and what the path is. Here are the ones I have.
- The HF to PoS fails and ETC sticks with PoW. This is also a scenario where the overall value of the Ethereum technology platform is made less due to limits on scalability and growth. So a "win" for ETC but not a real victory.
- ETC gains and sustains a mining advantage and thus is "more secure." hash rate is important but it's not everything. Can ETC retain value with short term profit motivated miners, no Foundation, and having churned out most of the original Ethereum community?
- ETC price passes parity with ETH -- but how? Obviously, this would attract more capital and form a virtuous circle for value creation within ETC. Note that is actually the dominant barrier that ETH has over ETC.
- ETC is first to market with an Ethererum-based killer app and this drives adoption. Could this app be dark net related that prefers immutability above all else (ponzi, silk road classic, gambling?)?
- Shock change to ETH development leadership , a key differentiator between ETC and ETH.
Hat tip to the guys and gals of the 