May was a volatile month for Ethereum Classic (CCC:ETC-USD). The altcoin skyrocketed in value just before many investors left Bitcoin (CCC:BTC-USD) and other digital coins. During the recent crypto market selloff, ETC initially surged to $176 before shedding two-thirds of its value in a couple of weeks.
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ETC currently trades at around the $56 territory. Even at this price, Ethereum Classic is still up by more than 800% year-to-date (YTD). The 52-week price range has been $4.68 – $176.16, and its market capitalization (cap) is $7.3 billion.
By comparison, Ethereum (CCC:ETH-USD) and Bitcoin are up 220% and 29% YTD, respectively. Their market caps stand at $271 billion and $707 billion.
ETC currently remains a cost-effective way to buy Ethereum as a blockchain asset. Analysts point out that its unique relationship with Ethereum has proven to be a critical competitive advantage for the digital coin.
Today’s article looks at the underlying market dynamics that could drive the value of Ethereum Classic in the second half of 2021. Crypto investors may consider diversifying their crypto portfolio by buying ETC as a hedge against Bitcoin and Ethereum volatility. Here’s why.
ETC Within the Ethereum Ecosystem
Ethereum Classic reminds altcoin followers that “a cryptocurrency operation requires having a decentralized honest majority of nodes that supports a distributed ledger maintenance.”
ETC is an open source, public blockchain-based platform created from a hard fork in the Ethereum blockchain half a decade ago. A fork is a split between developers of a cryptocurrency. Ethereum forked to a new chain due to a hack that led to $60 million in stolen Ether, the currency used by Ethereum.
As Lucianna Kiffer of Northeastern University explains, “To resolve this loss, a hard-fork was proposed which would edit Ethereum’s code to effectively erase the attacker’s transactions from the blockchain … Ultimately, the hard fork went into effect on July 20, 2016. The network that accepted the hard fork kept the name Ethereum (ETH), and the network that rejected the hard fork (and kept the attacker’s transactions) was called Ethereum Classic (ETC).”
Put another way, after the fork, Ethereum Classic remained as the original version. Unlike ETH-USD, Ethereum Classic has a limit of 210 million tokens. At present, ETC has around 55% of its total in circulating supply. The demand for the altcoin will most likely go up while supply stays the same, similar to Bitcoin’s gradual increase in supply. The “squeeze” effect on the token is evident in the recent price momentum behind the Ethereum Classic.
Some Crypto Bulls Prefer PoW
The Ethereum blockchain is currently undergoing a series of updates to create Ethereum 2.0. These moves aim to improve the network’s security and scalability. One of the key changes will be the shift from the proof of work (PoW) algorithm to the more eco-friendly staking model, making Ethereum far more energy-efficient. With proof of stake (PoS), cryptocurrency miners can mine or validate block transactions based on the number of coins they hold.
Like its “big brother” Ethereum, ETC also operates as a smart contract platform and can host decentralized applications. Ethereum Classic, however, still retains a PoW algorithm similar to Bitcoin. While this may look out of touch with today’s environmental concerns, there is a population of crypto purists who deem PoS protocols as unsafe and would instead stick to the original ETC.
In late 2020, Ethereum Classic Labs launched a new token, Wrapped ETC. Crypto followers believe this move will give ETC users more access to the fast-growing Decentralized Finance (DeFi) market, “which are often to be found on the Ethereum blockchain.”
Accordingly, “WETC can be stored in ERC20-compatible wallets.” Wrapped ETC allows ETC holders to stake their tokens. Similar to how a certificate of deposit works at a bank, users agree not to trade ETC for a specific period and receive interest payments in Wrapped ETC in return.
In other words, Ethereum Classic has been busy in recent months, and the positive price momentum is a reflection of the developments on the platform.
The Bottom Line on Ethereum Classic
As Ethereum Classic is permissionless, anyone can participate and contribute to the project. Ethereum’s shift to the more eco-friendly PoS algorithm essentially leaves Ethereum Classic as the only alternative that runs separately as a PoW Ether.
Such a distinction should help ETC better differentiate itself from Ethereum in the long run. Investors indeed see the digital coin as a valuable asset to diversify and hedge against Bitcoin and Ethereum volatility.
While the price of ETC still depends to a great extent on how the broader crypto market performs, the digital coin is poised to ride on Ethereum’s strong market momentum in the coming years ahead. Given the expected growth in the blockchain space and DeFi applications, longer-term ETC prospects look bullish. Interested investors could consider buying the dips.
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On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.