First off: Ethereum is – compared to many, many other cryptocurrency projects – a great project, and its tokens, Ether, are being traded on the exchanges for quite some time, now. With price moving up and price moving down. But as Ethereum gained more popularity, the down phases suddenly became rare. Volumes of 1.000 BTC only on Poloniex became common, and soon, the daily amount being traded increased well into the five figures – sometimes even close to 100.000 BTC on a single day.
Yes. That’s right. 10.000.000 USD worth of traded Ether and more, and an increase in value of 60x the IPO price. People (that being traders, “investors”, regular shitcoiners and what not) were in a great mood and shorting Ether became the new synonym for financial suicide. Things were great and lots of profits were made (as long as you didn’t have that stupid idea of shorting Ether).
Bad news, security incidents or anything that would earn any other cryptocurrency you can think of a horrible death didn’t seem to affect Ether. Users in crypto related chatrooms were preparing their shorts (“It just has to dump on this!”), just to find themselves being margin called later on. I have refrained from shorting ETH after two small failed attempts, but what happened there just didn’t feel right.
But then, in the middle on June 2016, justice was served: The DAO, a concept for Decentralized Autonomous Organizations living on the Ethereum blockchain in form of a Smart Contract, was attacked by someone who was able to drain Ether worth ~60.000.000 USD from the Smart Contract which hosted The DAO.
Ether’s price crashed heavily, and many people thought that Ethereum was just dying. Game over, thank you for playing. It was fun while it lasted.
When Ethereum’s Vitalik Buterin announced that a solution – probably a soft- or a hard fork – was in the making, the price recovered almost back to normal. Well, “almost”. But still: any other cryptocurrency would not have survived this. Even Bitcoin would have taken a huge hit by that.
Now let’s look at the chart, which reflects the ETH price since the DAO debacle:
After the initial relief about what seems to be a solution for the problem, the price declined steadily. This was mainly because people (at least some) realized what has actually happened, and that the solution to the problem – which ever they will come up with – is not without drawbacks.
The available options were:
- Shit happens: leave the stolen funds to the attacker and book it under “lesson learned”
- A soft fork: miners won’t process certain transactions until things are resolved
- A hard fork: “roll back” the blockchain to a moment in time when the attack hasn’t happened
My choice would clearly be 1, for a number of reasons. While I would have incurred a small loss if the community went for that solution, I think it’s more important to protect the principles of what makes us spend so much time behind the screen. Keep the bigger picture in mind, write off the loss and move on. Everybody knows that oh so common crypto mantra, “Don’t invest more than you’re willing to lose!”, so it isn’t that much of a deal, is it?
But the community decided that it’s more important to protect the investments which were put into The DAO than keeping the foundations of crypto alive: the hard fork solution was chosen. Congratulations, dear crypto community. You have just proven that we can’t rely on what makes blockchain technology reliable.
Now let’s do a little gedankenexperiment. Imagine something was wrong with Bitcoin. No, wait, a proper analogy would be that something is wrong with something that’s built on top of Bitcoin, let’s say a fictitious Bitcoin exchange – let’s call it Lt.Box – has lost the equivalent of 50.000.000 USD, which is just a bit more than 75.000 BTC.
To protect investors’ funds, the decision is made to just roll back things and do a hard fork, so the BTC was never lost. What would happen next? While we can certainly only speculate about this, I’m quite certain that this would not lead to an increase in price.
Ethereum on the other hand has started to rise a lot as soon as it became clear that this whole situation is going to be resolved using a hard fork. Before, it was trading in the 0.016 range against the Bitcoin, and after, it climbed up to some tremendous 0.023 BTC per ETH. That’s close to a 50% increase – not an appropriate reaction, if you consider that:
- anything that makes cryptocurrencies strong was just sold down the river
- Millions of Ether are likely to hit the exchanges when the former DAO token holders are reimbursed.
My conclusion is that ETH has become untradeable for me – it just does not react logically to things. It’s an interesting gambling asset at best, and it has become a symbol for the fact that it actually is possible to solve a problem by just throwing money at it.