Ethereum Price Analysis – May ICO treasury outflows highest since December 2018

Ethereum (ETH) is a distributed ledger and decentralized computing platform with smart contract capabilities. The crypto asset is currently second on the BraveNewCoin market cap table, with a market cap of US$29.29 billion and US$5.56 billion traded in the past 24 hours. The current spot price is down 81% from the all time high set in January 2018. However, the crypto asset has gained 227% since the December lows.

The ETH project was proposed by Vitalik Buterin in 2013, with a crowdsale occurring in 2014. Other ETH co-founders include Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Wood, and Jeffrey Wilke. The ICO raised nearly US$16 million, with a token selling for US$0.31. The ETH ICO would eventually become one of the most profitable in history. The mainnet went live in July 2015 with 72 million premined coins, which currently accounts for 67.7% of the circulating supply.

Thus far, protocol upgrade milestones have included; Olympic in May 2015, Frontier in July 2015, Homestead in March 2016, Metropolis Part 1: Byzantium in October 2017, and Metropolis Part 2: Constantinople in February 2019. The next hard fork, Istanbul, is potentially slated for this October, and thus far, two of the potential 30 EIPs have been approved; adding the Blake2 hash function to the ETH virtual machine (EIP 2024) and improved smart contract upgradability (EIP 1702)

The next upgrade, Serenity, is currently in development and includes a full rewrite and redesign, resulting in Ethereum 2.0. Phase zero of the herculean task could launch as early as January 2020. Both versions of ETH will exist concurrently for some time before a migration is completed.

ETH 2.0 includes Sharding and Casper, which will drastically alter the network. Sharding refers to a scaling solution for horizontally partitioning data within a database. The full implementation of Casper, slated for release in 2022, will remove Proof of Work (PoW) from the network and replace it with Proof of Stake (PoS), with a block reward at 0.22 ETH/block. Currently, there are no plans to cap the total amount of ETH created.

Source: Hsiao-Wei Wang

In total, almost 1,000 developers have contributed a cumulative 28,000 commits to the ETH project in the past year, across 204 GitHub repos. Most coins use this development platform, where files are saved in folders called "repositories," or "repos," and changes to these files are recorded with "commits," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity and interest.

Most of the commits over the past year have occurred in the Solidity repo (top chart). Solidity is the programming language used to write smart contracts on Ethereum. The ETH 2.0 repo has also become active over the past few months (bottom chart), with most of the commits in this repo coming from devs Danny Ryan, Justin Drake, and Vitalik Buterin. A potential ETH 2.0 genesis block launch is currently slated for January 2020. Overall, ETH related repos have had more commits than any other crypto project over the past year.

Source: github

Source: github

While the network is still PoW based, a proposal called Programmatic PoW (EIP 1057) has gained favor in the community and is likely to be implemented in Istanbul, pending a successful audit. ProgPoW is designed to reduce ASIC mining on a network by increasing the efficiency of GPU and FPGA mining. Innosilicon and Bitmain both currently have three ASIC miners available for the EtHash algorithm, while a new ASIC mining chip from a third mining company, Linzhi, is currently in the research and development phase.

If implemented, EIP 1057 will make all current Ethash ASICs unable to mine on the ETH chain. Those using Ethash ASICs may choose to continue mining the pre-fork chain. Another possibility is that ASICs will be used to mine the Ethereum Classic (ETC) chain, which also uses the Ethash algorithm. In any case, the goal of decreasing ASIC use on the ETH chain will be successful, although likely temporary.

For the moment, hash rate (solid line, chart below) and difficulty (dashed line, chart below) have remained stable since March. Both remain higher than 2017 levels and have begun rising above multi-month lows. Mining profitability is also near all-time lows but has begun rising in line with market prices. If ETH prices or mining profitability fall significantly, hash rate will likely follow suit. All ETH ASICs are currently profitable at an electricity cost of US$0.11/KWh.

Source: bitinfocharts

Average block times are currently 13.19 seconds, which is nearly the fastest in ETH history. The block count per day (line, chart below) has therefore followed suit. There are 106,846,409 ETH in circulation with inflation per annum currently at 4.54% (fill, chart below), which is slightly higher than pre-Constantinople levels, but essentially the lowest inflation levels ETH has ever seen. Despite record fast block times, pending transactions spiked to over 100,000 on June 1st and currently sit around 30,000.

Source: coinmetrics

The network currently has 6,163 active network nodes, 29% of which are located in the United States. Due to the somewhat cumbersome hardware and time requirements of running a node, many of these nodes are run by Infura, or similar node servicers, who provide access to the network for developers. These services have become increasingly important for ETH as the blockchain continues to grow. ETH nodes have several sync modes, with fast sync requiring approximately 310GB of storage and a full archival node requiring nearly 2.92TB of storage.

The number of on-chain transactions per day (line, chart below) has decreased slightly over the past week, and is currently around 750,000. This is up from a yearly low of 430,000 in February, but down from the record high of 1.24 million on January 9th, 2018. The average transaction fee (fill, chart below) is currently US$0.168, which is down from a pre-Constantinople level of above US$0.20. However, on February 19th and March 18th, the average transaction fee spiked to US$1.22 and US$0.63 respectively. Overall, fees are lower than during the entirety of 2018.

Source: coinmetrics

The 30-day network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has ranged from 30 – 70 since March 2018, and is currently 41. A clear uptrend in NVT suggests a coin is overvalued based on its economic activity and utility, which should be seen as a bearish price indicator, whereas a downtrend in NVT suggests the opposite.

An uptrending NVT with an uptrending ETH price suggests overbought conditions, or that the NVT metric may need to be retooled to better understand market variables. An NVT holding below 20 would likely signify bullish market conditions, as was the case from April 2017 to May 2018.

Monthly active addresses (MAAs) have increased to nearly 355,000, marking a new 12 month high (fill, chart below). MAAs are up from a yearly low of 192,000 in February, but down from an all time high of nearly 580,000 in January 2018. Overall, MAAs remain above levels seen throughout 2017 and earlier. Unique ETH addresses continue to grow at a rapid rate, and currently approach 70 million (not shown). However, addresses can only be added to the network, and never be deleted.

Source: coinmetrics

Globally, ICOs are also increasingly moving away from public sales, likely due to fear of regulatory reproach and a shifting regulatory landscape. 2018 saw both the highest number of ICOs, at 1,075, and the largest USD sum raised in one year, at US$21.48 billion. Thus far in 2019, there have been 158 ICOs, raising a total of just over US$2.6 billion. In contrast, the total USD raise in January 2018 was US$2.15 billion. The month of May marked an almost 12 month high for ICO funds raised. At the same time, Initial Exchange Offerings (IEO), where crowdsales are facilitated by an exchange, are increasing in popularity. However, these IEOs typically have a native blockchain or do not use ETH.

ICO treasury balances shrank significantly throughout 2018, both in USD value and in ETH quantity. December saw the largest outflows of the year at ~484,000 ETH. Since January 2019, ICOs have withdrawn just over 663,000 ETH from their treasuries. ICOs and dapps continue to hold around 2.5 million ETH, or 2.33% of the circulating ETH supply. May was the largest withdrawal period since December 2018, with Golem moving nearly 137,000 ETH from their treasury.

In November 2018, Aragon, a project focused on decentralized governance, took a novel approach by moving 40,000 ETH into a US$1 million loan using the Dai stablecoin, through the MakerDAO, to protect against market volatility. In April and May 2019, Aragon withdrew 12,000 ETH and 23,000 ETH from their treasury, respectively, and continues to hold 136,000 ETH. In March, Tezos withdrew 121,418 ETH, the second largest withdrawal of 2019.

In December 2018, the Kyber Network, a decentralized token swap platform, saw outflows totaling 50,000 ETH, one of the largest of 2018. DigixDAO, a project which has attempted to tokenize gold deposits, continues to hold just over 375,000 ETH, which is valued higher than the market cap of the entire DigixDAO project token. The frozen Polkadot wallet holds 306,000 ETH, which is the third highest holding of all projects.

Source: diar

The top Ethereum based dapps over the past week, ranked by volume, continue to be led by gambling and exchange dapps. IDEX had over 83,000 transactions in the past week, more than any other ETH dapp. On June 8th, IDEX trade settlement was delayed due to congestion on the ETH blockchain. In the games category, 0xUniverse has had the most transactions over the past week while My Crypto Heroes has had the most daily active users.

Overall, ETH has a considerably lower number of users and transactions compared to other dapp platforms like EOS (EOS) and Tronix (TRX), both of which have no transaction fees. On February 9th, Twitter user Kevin Rooke pointed out that of the 1,375 ETH Dapps, 86% had zero users and 93% had zero transaction volume.

Source: dappradar

The Decentralized Finance movement, or DeFi, has increasingly gained in popularity with the total value locked in Defi dapps growing substantially over the past three months. Lending dapps saw the biggest influx of money as their products began to provide a return for users. On Dharma, users can earn up to 10% APR and dYdX allows lending, borrowing, and 4x margin trading. The DEX Bancor saw the largest decline in holdings at nearly -14% after announcing, in mid-June, that US users would no longer be able to use the platform due to regulatory concerns.

Source: defipulse

In the markets, ETH exchange traded volume over the past 24 hours has predominantly been led by the Tether (USDT), Bitcoin (BTC), and U.S. Dollar (USD) pairs. Non-USDT stablecoin volume has slowly increased in recent weeks, including Dai (DAI), Paxos-Standard (PAX), Gemini-dollar (GUSD), and TrueUSD (TUSD), but continues to remain a fraction of total traded volume.

In Asia, the Korean Won (KRW), Yen (JPY), and Yuan (CNY) pairs have USD prices for ETH at US$280, US$273, and US$279 respectively. Together, all three regions show relatively low interest in their fiat pairs, with about 2% of the total traded volume combined. A return of the premium in South Korea signifies a return to bull market conditions.

The over the counter (OTC) exchange LocalEthereum facilitated 1,364 ETH in transaction volume over the past week, which is down significantly from earlier in the year. In comparison, LocalBitcoins exchanged 5,674 BTC last week according to coin.dance. Earlier this year, LocalEthereum removed fees for cash trades whereas LocalBitcoins removed the cash trade option altogether due to regulatory pressure. While traditional OTC desks often require a minimum order of between US$100,000 and US$250,000, these peer-to-peer marketplaces have no minimum order size.

Throughout 2018, ETH traders on the exchange decreased while volumes increased. The two spikes in volume on November 25th and December 7th correspond with local lows in ETH price. The spike in volume on February 20th preceded the fork on the 28th.

Source: dappradar

Google Trends data for the term "Ethereum" has increased slightly over the past two months when compared to the previous year, but overall remains down significantly from early 2018. Searches for “Ethereum” fell drastically throughout 2018 whereas a slow rise in searches for "Ethereum" preceded both highs in June 2017 and January 2018, likely signaling interest from new market participants at that time. A 2015 study found a strong correlation between the Google Trends data and BTC price, while a May 2017 study concluded that when the U.S. Google "Bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

Over the past few months, ETH has severely lagged BTC, leading to a lukewarm bullish push into resistance between US$300-US$400. As the macro bull trend resets, roadmaps for price can be found on high timeframes using exponential moving averages (EMAs), volume, Pitchforks, chart patterns, and Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the 50-day EMA and 200-day EMAs were bearishly crossed for almost a year, and subsequently crossed bullishly on May 19th. The previous bullish “Golden Cross” in May 2018 was overshadowed by a bearish reversal pattern, the head and shoulders. The 50-day EMA and 200-day EMA should now both act as support, at US$270 and US$223 respectively. A high volume zone also sits in between the EMAs at US$223. There are currently no active RSI or volume divergences but RSI has formed a multi-month concaving slope suggesting of strengthening bullish momentum.

The long/short open interest on Bitfinex (top panel, chart below) is currently 84% long. Over the past few days, long positions have decreased while short positions have increased slightly. A significant price movement downwards will result in an exaggerated move further, as the long positions will continue to unwind. This is known as a “long squeeze.” However, Bitfinex long/short ratios have historically had little bearing on price action for ETH.

The current spot price has returned to a bearish downward Pitchfork (PF) with anchor points in December 2017 and April and May 2018. In April, price breached the median line (yellow) for the first time since August 2018. Upside resistance sits at US$300 with near term support at US$185. If price fails to hold above support, a return to the median line at US$100 is possible within the next few weeks.

Turning to the Ichimoku Cloud, four metrics are used to indicate if a trend exists; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, and the Lagging Span. The best entry always occurs when most of the signals flip from bearish to bullish, or vice versa.

Cloud metrics on the daily time frame, with doubled settings (20/60/120/30) for more accurate signals, remain 100% bullish; price is above the Cloud, the Cloud is bullish, the TK cross is bullish, and the Lagging Span is above Cloud and above price. The bull trend will remain intact as long as price remains above the Cloud.

Lastly, on the ETH/BTC pair, trend indicators are bearish. On the daily chart, Cloud metrics using doubled settings are bearish (not shown), with a Kumo breakout below the Cloud occurring over the past month. The 50-day EMA and 200-day EMAs are currently bearishly crossed with price being denied at both the 50-day EMA and 200-day EMA several times this year. A bullish 50/200 EMA cross, as well as a Kumo breakout, should act as a strong buy signal for many traders, if it occurs.

ETH/BTC open interest (not shown) on Bitfinex is almost exclusively dominated by long positions, with long positions reaching a new sixteen-month high. There is a growing bullish RSI divergence suggesting weakening bearish momentum. In the near term, any bullish momentum is unlikely to drive to the 200-day EMA at 0.032 BTC and any bearish momentum is unlikely to exceed psychological and historic volume support at 0.020 BTC.

Conclusion

On-chain fundamentals for ETH continue to improve as transactions per day and daily active addresses continue to reach multi-month highs. Inflation has continued to decrease since the Constantinople hard fork in February with block times near an all-time low. Hash rate, difficulty, and mining profitability have all also increased week-over-week with the ProgPoW change likely coming by year’s end in the Istanbul hard fork. Although ETH 2.0 is still in the early stages of development, the changes are actively being discussed, debated, and coded, with a phase zero release slated for January 2020.

Technicals are currently bullish for the ETH/USD pair and deeply bearish for the ETH/BTC pair. ETH/USD has begun to revert towards the 200-day EMA at US$225 but remains in bullish territory. Over the past week, ETH/BTC broke down to retest the December 2018 low. Any further bearish momentum, although weakening based on RSI, is likely to push past this horizontal support and make a run towards 0.020 BTC.