The Enormous Value of Ethereum Classic During Banking Crises
You can listen to or watch this video here:
In recent days we have experienced the rollercoaster ride of a banking crisis. Not only this, but the crisis was instigated and provoked by higher political forces who are seeking to destroy the crypto industry to install their worldview and paradigm of ultra-regulated centralized money.
However, those who had money on a blockchain as Ethereum Classic (ETC) were much less affected emotionally and financially than those who held fiat money in banks or cryptocurrencies in crypto exchanges.
This distinctly marked the enormous importance of ETC as a new paradigm of wealth ownership and access.
In this post we will explain some of the aspects of this phenomenon.
Debt Money vs Physical Money
Fractional reserve money means that banks may take deposits and lend money creating more money in the process in an economic phenomenon called monetary multiplier effect. Not only this, but bank deposits are short term debt while the bank loans are long term obligations. These two things combined basically make the banking system structurally insolvent.
In this system of debt money, a depositor has a legal claim that he owns a debt. This is a double risk because he is depending on the property rights consistency of the local jurisdiction for the legal claim plus the solvency of the depository institution for the debt itself.
In physical money, owners have possession and control of the money directly independently of the property rights consistency of the local jurisdiction or the solvency of any entity.
Ethereum Classic works this way. When users have their private keys that control addresses inside the network which have balances of ETC, then these users have a physical asset that they and only they possess and control.
This is the fundamental change in the paradigm. Blockchains as ETC transfer the wealth from the hands of third parties into the hands of the original owners.
In this paradigm, the dependency on the will of the government or the solvency of an institution is non-existent.
Price vs Debasement vs Default vs Return Risks
However, the risks of owning money are more complex. There are several risks of owning one kind of money or another, but people usually confound them in their minds making the risks difficult to differentiate. Following are explanations of the four main types of risks of owning a money.
Although the fiat money paradigm in developed nations has convinced many that the money is stable, the truth is that money has a market price and it may fluctuate, usually to the downside. In extreme cases as in countries like Venezuela or Argentina, the price of money may fluctuate 10% to 30% or more in a month and most likely downward.
When gold, silver, and copper were commonly used money, people had to check their prices frequently to pay and settle transactions.
The above is to illustrate that one may hold money, and just by holding it one may experience variations in the value of that money merely by the volatility in the market and the price of money against goods and services in the economy.
ETC is no exception. It has been at $4 a few years ago, then at nearly $200, and now it’s holding relatively steady at around $20. However, as hard and sound cryptocurrencies as Bitcoin and Ethereum Classic mature, their values will likely stabilize and become much less volatile in the future. And, just for their soundness, their general direction in value should be upward rather than downward.
When people own money, they may have a number of units of the currency and experience no change in their holdings. However, the variations in the aggregate supply of the currency does change its value.
It is not the same to own a fixed number of units of a currency where the overall supply of that currency is fixed or very stable, versus owning a fixed number of units of a currency that is being printed in large quantities on a yearly basis with no limit in sight.
ETC has solved this problem by having a fixed supply with an algorithmic and immutable monetary policy that guarantees that the money will be issued at a slow and steady pace over the next 120 years where the maximum amount that will ever exist will be 210,700,000 coins.
When one has the money, whether fiat or ETC, in a financial institution or exchange then one has exposure to default risk.
Default risk is different than price or debasement risks. It is the possibility that the depository institution will not be able to return the deposit to the owner, thus creating a permanent loss independent of the price of the unit or its soundness or dilution.
ETC has no default risk because it is not a fractional reserve system, and the protocol does not lend ETC away running fractional, credit, or maturity risks. In Ethereum Classic, the holding of the currency in an address mimics the holding of a physical object. It is the closest thing to physical possession and control, but over a communications channel.
Many people feel that holding ETC in a static address is lame and a bad deal because their holdings are not receiving any returns in the form of interest.
This has driven many to use lending services, whether centralized in the traditional world or decentralized on the blockchain, to deposit their crypto in the hope that they will get an interest return.
This practice is fine, but the main risk is that, in search of returns, users may actually lose all their capital, as seen in recent bankruptcies of crypto exchanges, or their holdings may be hacked and stolen from complex applications as bridges and smart contracts that are part of the backbone of lending and yield dapps.
The differential in returns may not only be the price difference between the static and safe holding, but also whether the holding itself is still existent!
In this sense ETC provides the option for users to just hold it safely and statically in ETC addresses.
Legal and Technical Access Risks
Now that we know the four main types of risks, the legal and technical access risks must be addressed.
Access risks are not about value gains or losses as with price, debasement, default, or return risks. They are about legally or physically having access to the money.
Physical access is significantly diminished in the banking system and even more during banking crises. In the last few months individuals and businesses couldn’t move their money at all from troubled institutions, or for a while couldn’t even open accounts at other banks to move the deposits that were available.
Legals risks to access may be as described above, where institutions or regulators may legally restrict access to users’ money while they sort out the solvency of the institutions.
There are other legal access problems, for example government may legally confiscate hard assets en masse as it happened just before World War II in the US where the government mandated all citizens to give their gold to the central bank to back the currency.
Other legal access restrictions may be simple prohibitions and forced liquidations of the hard assets. This has been common place in countries as Argentina, and will likely be common in many nations under the coming Central Bank Digital Currency (CBDC) regimes as the control by the national banks will be absolute and technical.
Speaking of technical access, this is not about arbitrary government or corporate control, but more about what are the tools and applications necessary to be able to manage one’s private keys and addresses, and thus the digital assets.
It is perfectly possible that the internet may suffer blackouts in extreme situations, that apps may be difficult to use or broken, or that they may be hosted in centralized servers under the control of risky or clumsy trusted third parties.
All these considerations are important when deciding how much and how to allocate the custody of money.
ETC provides guarantees that no matter what the legal or technical access problems for a user may be, that the accounts and balances will always be there, immutable, whenever the user regains access.
Holding ETC In Exchanges vs Non-Custodial Wallets
The analysis of the above risks brings us to the issue of how to hold ETC to be as safe as possible, avoiding as much as possible the possibility of bank debt default or arbitrary intervention.
In this crisis, many have moved their fiat money to crypto, depositing it in exchanges believing that they may be safer than holding money in the banks.
This can’t be further from the truth.
The only way of holding crypto safely is by owning proof of work native cryptocurrencies as ETC and holding them directly inside the blockchain in addresses that one controls through non-custodial wallets such as software wallets or hardware wallet.
Holding crypto in exchanges has, indeed, a different risk combination than fiat, but in terms of default risk specifically it is actually the same or higher than financial institutions.
Fiat money at banks may be bailed out by central banks. In crypto exchanges it will be a permanent loss. Banks are supported by the elites, special interests, and the political class.
Exchanges are virtually under attack by these groups and regulators are acting as obstruction agents putting obstacles and pushing these services into submission or to directly shut them down.
Again, the only way to own ETC safely is by controlling the private keys directly.
The Gold Ownership Fallacy
Unfortunately there are many who are falling for a trick in the blockchain industry which is owning gold or other external assets through these systems. When one owns the native cryptocurrency or a token inside a blockchain it is a true possession because the assets are also inside the network.
When one owns gold, an external physical asset, through a blockchain, it is exactly the same as having a gold certificate in a bank or broker. There is no guarantee that whichever setup was created to represent the gold on the blockchain, that that setup will be safe and that the gold will be actually there.
The only way to own gold safely is to have it physically in one’s possession, just as owning ETC through the private key is the real direct possession and control of the asset.
The Power and Responsibility of Self Custody
In summary, holding ETC in an address that one controls through the private key is the most revolutionary, secure, and conservative way of owing the money.
ETC does not have fractional reserve, debt, debasement, or default risks, has manageable legal and technical access risks, and manageable price and return risks if held static in addresses.
This is why it is enormously valuable during banking crises.
However, this poses a new dilemma, which is a consequence of the change of paradigm that a true decentralized blockchain as ETC brings to the world, which is that users now need to start learning how to manage their private keys in a safe way so that the risk of losing them, thus losing possession of the ETC, is minimized.
But this will be a topic of another post!
Thank you for reading this article!
To learn more about ETC please go to: https://ethereumclassic.org