November 27, 2020 · 6 min read

Fasten your seat belts for the crypto ride

BTC crossed $19,000 then dropped more than $2000

Bitcoin reached its highest value this Tuesday since December 2017, and then promptly the market imploded. Speculation over the durability of the bull run, a US treasury announcement rumour and profit-takers cashing out caused a sharp drop of the BTC price. As of writing, bitcoin sits at a $16,800 price range. BTC is however still up by 43% since September and has strongly outperformed all major asset classes in the past three months as per the chart below.

The Dow Jones topped 30,000 for the first time ever and the S&P 500 hit all-time high and closed above 3600 on Tuesday, propelled by hopeful vaccine prospects and (eventually) a transition to a Biden administration. In Europe, the FTSE100 rose by 6.54% in the last three months and CAC 40 increased more than 18% in November offsetting a slump amid spiking COVID cases. However as the need for safe-haven assets declines and the market goes sky high the gold price has missed out and has instead fallen by 7% in the last 3 months.

XRP, the third-biggest crypto by market cap, has shown a stellar growth over the past week, coincided with BTC breaking record after record since its epic decline in 2018, the spike of unique addresses interacting with XRP, and a partnership with Bank of America. Ripple also filed a trademark for its new remittance product Paystring in early November and did a $45 million buyback program in Q3. However, following Bitcoin’s massive sell-off, XRP fell by 20%.

Ethereum has been steadily tracking BTC since the pandemic doomsday but it clearly has its own agenda. ETH started to garner a strong momentum in July with the ‘DeFi’ boom. As the anticipation for the pending ETH 2.0 launch heated up, ETH price increased by more than 30% in the past week and by 57% since the deposit contract for Eth 2.0 went live in early November. However (again!), ETH fell by more than 15% in the past 24 hours. Does everyone need some cash for Black Friday?

Ethereum 2.0

Ethereum 2.0 is finally set to launch on the 1st of December. With the deadline nine hours ahead, Ethereum 2.0’s deposit contract threshold of 524,288 ETH was met. Crypto lending and interest income provider Celsius Network topped up with 25,000 ETH additionally to help grow the new Ethereum network. Ethereum 2.0 will be rolled out in three phases.

Phase 0 - the Beacon Chain goes live and introduces Proof-of-Stake

The most fundamental and significant upgrade is Ethereum moving away from the energy-intensive Proof-of-Work consensus mechanism to Proof-of-Stake. So rather than hardware-warrior miners competing to solve complex mathematical problems thus verifying new transactions (with many hundreds of thousands of computers all performing the same calculations using energy and creating CO2 emissions), in PoS, validators who commit (‘stake’) at least 32ETH to the ETH2.0 deposit account will be randomly invited to fulfill their computational responsibilities to propose and attest a block and will be rewarded with ETH as a percentage of their stake. If a validator tries to attack or compromise the network, his/her stake will be slashed, all or partially. In PoW if an attempt to mess with the network fails, you lose the cost of electricity which can be quite vague to calculate. I never turn the light off when I leave home, I might as well attack? In PoS however, your failed attempt will cost 32 ETH and you can simply tap on a calculator and find out how much you lose. As of this writing, you could lose about $16,800. The worry will be that something happens to your connection, power which could look like you are intentionally off-line which can put your staked ETH at risk.

Phase 1 - Deploy shard chains

To tackle the scalability issue, the upgrade to 2.0 will introduce shard chains. Currently the Ethereum blockchain consists of consecutive blocks, but for Ethereum 2.0, sharding of a blockchain into 64 separate chains will enable transactions to be run on parallel chains. In short, faster and with less wasteful, redundant calculation and power use

Phase 1.5 - Merge the previous PoW blockchain and the new PoS blockchain

Phase 2 - Fully-functioning ETH 2

Smart contracts can be executed, more dApps can be built, shard chains will be interoperable.

To stake, or not to stake, that is the question

Now it all comes down to you calculating opportunity costs and creating your own risk profile. If you had staked, you locked up about $16,800 (as of writing) until Phase 1.5 set to launch in 2021 (but you never know…). That money could have gone into our future COVID-19 cure developer, a painter who is about to die soon, or a vintage ‘James Bond’ watch even.

So what are the risks or is this really ‘free money’?

The benefits (amongst others) are clear, faster, cheaper, less wasteful, no more chasing the cheapest electric power or buying up super-powerful graphics cards to over-heat a room. We should however, at least consider what the risks might be to this ‘guaranteed’ return.

Firstly no rewards whatsoever will be paid out for 2 years which might be too long for you to wait for something back? Although the move from PoW to PoS has been planned since at least 2016 and the testing and iterative redesign has been thorough, there is no guarantee that everything will work ‘exactly the same*’* as it did in ETH1.0. A bit like an operating system upgrade for a device running Microsoft or Apple software, sometimes things don't quite work as they are supposed to or ‘are not supported’. Do you actually know who maintains the software for your wallet, website or app which stores your crypto?

Assuming you do decide to ‘stake’, you also need to work out if you want to validate blocks yourself (being asked to be in service 24/7/365 running nodes) or to use staking service providers. Yes they will eat away a portion of your rewards of course. Haven’t got 32 ETH? No problem you can pool your resources too.

Keeping up with ETH development phases, projects, staking, governance is way beyond the effort you are willing to put?

No problem, with Novum Insights DeFi Calculator, we suggest ways to go after stable and safer yields. Read it here. And check out our Calculator here.