Ethereum Price Analysis – Significant gains and a swift decline

Ethereum (ETH) is a decentralized computing platform with smart contract capabilities. The ETH mainnet went live in 2015. The crypto asset is currently second on Brave New Coin’s market cap table, at US$13.95 billion, with US$2.34 billion traded in the past 24 hours. The Ethereum spot price is down 91% from the all time high set in January 2018. Over the past two weeks, Bitcoin (BTC), ETH, and Ripple (XRP) have been held within a tight range while smaller cap coins like Litecoin (LTC), Binance Coin (BNB), and Stellar (XLM) have seen significant bullish momentum.

The Ethereum Constantinople hard fork was successfully implemented on February 28th and included five EIPs; lower gas fees for smart contracts (EIP 1283), improved scaling for off-chain transactions (EIP 1014), improved smart contract execution (EIP 145 & EIP 1052), a "Difficulty Bomb" delay for 12 months (EIP 1234), and reduced mining rewards from 3 ETH to 2 ETH per block (EIP 1234).

The difficulty bomb delay reset difficulty to levels last seen in January 2018 (dashed line, chart below), while the hash rate declined organically from November 2018 to mid-February 2019 (solid line, chart below). Overall, mining profitability remains near all-time lows. If prices or fall significantly, hash rate pointed at the ETH network will likely follow suit.

Source: bitinfocharts.com

Average block times are currently 13.3 seconds, which is fast when compared to the networks historic range. The block count per day (line, chart below) has increased to the highest level ever seen. There are 105,209,104 ETH in circulation with inflation per annum currently at 4.77% (fill, chart below), slightly higher than pre-fork levels.

Source: coinmetrics.io

There are also ongoing discussions around ETH 2.0 development. The networks second iteration will include a full rewrite and redesign of ETH 1.0. However, both 1.0 and 2.0 will likely exist concurrently for several years before a complete 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 altogether, leaving a Proof of Stake (PoS) block reward at 0.22 ETH/block. Currently, there are no plans to cap the total amount of ETH created.

Earlier this year, Vlad Zamfir, one of the chief architects of Casper’s PoS solution, revealed he was negotiating a research agreement with CasperLabs. Zamfir clarified that his "number one priority is obviously my work on ETH" and leaving was "never on the table."

While the network is still PoW based, a new proposal called "ProgPoW" (EIP-1057) has been a topic of discussion. ProgPoW is designed to reduce ASIC mining by making GPU mining more efficient. Innosilicon and Bitmain both currently have three ASIC miners available, while a new ASIC mining chip from a third mining company, Linzhi, is in the research and development phase.

The network currently has 8,700 active network nodes, 40% 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 ~190GB of storage and full GETH archival node exceeding 2TB of required storage.

The number of transactions per day on the network (line, chart below) recently increased to ~550,000, up from a yearly low of 430,000. Going forward, a significant uptick in transactions per day would likely suggest increased Dapp activity. The average transaction value per day (fill, chart below) is currently ~US$600, which is sharply down from a high of US$20,000 in June 2017. Pending transactions are currently holding at 15,000, down from over 30,000 pre-fork. The average transaction fee is currently US$0.10, down from a pre-fork level of US$0.20.

Source: coinmetrics.io

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has oscillated between 25 and 40 since November last year. Inflection points in NVT can be leading indicators of a reversal in an asset’s value. 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 NVT holding below 20 would likely signify bullish market conditions, as was the case from April 2017 to May 2018.

Daily active addresses (DAA) have increased to 204,000 since the recent fork, up from a yearly low of 192,000 (fill, chart below). DAA remain well above levels seen throughout most of 2017. Unique ETH addresses continue to grow at a rapid rate, and are currently at over 58.5 million (not shown).

Active and unique addresses are important to consider when determining the fundamental value of the network when using Metcalfe’s law. While addresses can never be deleted, this metric indicates a growing and sustained use of the Ethereum blockchain.

Furthermore, there are over 300 ETH-related job postings on LinkedIn, down from over 1,000 postings in July 2018. There are almost 1.2 million members in 3,700 ETH groups on meetup.com and almost 432,000 subscribers on Reddit’s /r/Ethereum.

Source: coinmetrics.io

ICO fundraising declined significantly towards the end of 2018 and through the beginning of 2019. However, 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 57 ICOs raising a total of nearly US$716.7 million. In contrast, the total USD raise in January 2018 was US$2.15 billion.

Globally, ICOs are also increasingly moving away from public sales, which is likely due to fear of regulatory reproach. Britain’s Financial Conducts Authority (FCA) recently released a 46 page guidance report for crypto assets in an effort to clarify regulations. The Monetary Authority of Singapore (MAS) released similar guidelines in November 2018. Japan’s Financial Services Agency (FSA) will also be releasing guidelines this year.

Switzerland and Liechtenstein continue to be among the most welcoming of crypto companies with expected changes to six laws in 2019 to increase blockchain and crypto regulatory certainty. This month, the German Finance Ministry issued a statement making a distinction between regulation for securities tokens, which differs from utility tokens. Malaysia is also seeking public comments before going forward with an ICO regulatory framework.

In December 2018, the United States Congress introduced the "Token Taxonomy Act," a bipartisan bill which aims to amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude "digital tokens from the definition of a security." This is a partial diversion from a comment last year by SEC chief Jay Clayton who said, "we are not going to do any violence to the traditional definition of security that has worked for a long time." In a speech earlier this year, SEC commissioner Hester Peirce noted that "supplemental guidance" is coming soon to help projects determine "whether their crypto-fundraising efforts fall under the securities laws."

Source: coinschedule.com

The top Ethereum based Dapps over the past week, ranked by volume, continue to be led by gambling and exchange Dapps. For the first time, Ethfinex, the Bitfinex ETH-based decentralized exchange, leads the weekly volume. In the games category, the Gods Unchained trading card game has had the highest ETH volume over the past week while CryptoKitties has had the highest number of transactions over the past week. 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.com

ICO treasury balances also shrank significantly throughout 2018, both in USD value and in ETH quantity. December saw the largest outflows of the year at ~484,000 ETH. Thus far in 2019, ICOs have withdrawn 115,000 ETH from their treasuries. ICOs and Dapps continue to hold 2.908 million ETH, or 2.76% of the circulating ETH supply. The MakerDAO alone also holds 2.06% of the circulating ETH supply.

In early December, the Kyber Network, a decentralized token swap platform, saw outflows totaling 50,000 ETH, one of the largest of the year. DigixDAO, a project which has attempted to tokenize gold deposits, continues to hold 395,430 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. On November 27th, the Aragon Project took a novel approach by moving 40,000 ETH into a US$1 million loan using the DAI a stablecoin, through the MakerDAO, to protect against market volatility.

Source: diar.co/ethereum-ico-treasury-balances/

Turning to developer activity, almost 1,000 developers have contributed a cumulative ~28,000 commits to the ETH project on 197 GitHub repos over the past year. 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 commits occured 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 coming from devs Danny Ryan and Vitalik Buterin. Overall, over the past year, ETH related repos have had more commits than any other crypto project.

Source: https://github.com/ethereum/solidity/graphs/contributors

Source: https://github.com/ethereum/eth2.0-specs/graphs/contributors

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 over the past few weeks, including Dia (DAI), Paxos-Standard (PAX), Gemini-dollar (GUSD), and TrueUSD (TUSD), but continues to remain a fraction of total traded volume. The majority of trading has occurred on Bibox, OEX, and OKEx.

In Asia, the Korean Won (KRW), Yen (JPY), and Yuan (CNY) pairs have USD prices for ETH at US$131, US$133, and US$148 respectively. Together, all three regions show relatively low interest in their fiat pairs, with ~2.2% of the total traded volume combined.

The over the counter (OTC) exchange LocalEthereum facilitated 1,600ETH in transaction volume over the past week, which is down slightly from earlier in the year. In comparison, LocalBitcoins exchanged over 12,788BTC last week according to coin.dance.

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. 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.

Source: https://dappradar.com/app/148/localethereum

Google Trends data for the term "Ethereum" has remained pinned to the ground for the past few months. 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

Ethereum has had significant gains over the past week with a swift and steep decline over the past few days. This likely indicates a need for consolidation before further price action. As price approaches key resistance levels, price roadmaps can be found on high timeframes using exponential moving averages (EMAs), Chart Patterns, and Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

Based on key support and resistance zones, ETH is unlikely to again break the US$380 level without a considerable amount of consolidation. If the local low at ~US$80 does not hold, then the next zone of supports sits at the previous consolidation level of US$50. This zone also represents psychological support, as does the US$100 level.

However, an Adam and Eve double bottom, a bullish reversal pattern, has completed and ETH reversed strongly at horizontal resistance. The hallmarks of the pattern include a V and U-shaped price action which increased in volume once resistance is broken. The 1.618 fib extension and measured move yield price targets of US$210 and US$250 respectively.

On the daily chart, the 50/200EMA bearish Death Cross occured on June 2018. The previous bullish Golden Cross in May 2018 was overshadowed by a bearish reversal pattern, the head and shoulders. Although the EMA cross is currently bearish, the 200EMA will act as a mean reversion level for price, currently at US$196. This resistance zone also matches the Adam and Eve chart pattern target and a previous increase in volume (horizontal bars).

The long/short open interest on Bitfinex (top panel, chart below) is 81% net long, with long positions again reaching record highs. Shorts have decreased significantly over the past few weeks and are currently sitting at levels last seen in November. A significant price movement downwards will result in an exaggerated move as the long positions will begin to unwind. This is known as a "long squeeze." A further move down will likely find support at the 50EMA and high volume price level, between US$130 and US$120 respectively. There are currently no active RSI or volume divergences.

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 singled settings (10/30/60/30) for faster signals, are bullish; price is above Cloud, the Cloud is bullish, the TK cross is bearish, and the Lagging Span is in Cloud and above price. A traditional long entry triggered on February 17th with an on-volume Kumo breakout, followed by a bearish TK cross, or long exit signal, on March 6th. Price is currently sitting above the Tenkan but below the Kijun. A long re-entry would not be warranted until a bullish TK recross above the Cloud.

Cloud metrics on the daily time frame, with doubled settings (20/60/120/30) for more accurate signals, are neutral; price is in Cloud, the Cloud is bearish, the TK cross is bullish, and the Lagging Span is below Cloud and above price.

Again, a traditional long entry will not trigger until price is above the Cloud. Price has not been above the Cloud since January 2018. A Kumo twist or Kumo breakout does not appear likely until after late March. Price is likely to meander within the Cloud until a breach above or below Cloud resistant or support. For Cloud traders, this is a distinct "no-trade zone" until a decision on the trend is reached.

Lastly, on the ETH/BTC pair, Cloud metrics using doubled settings remain bullish, including a bullish TK cross. The 50/200EMAs are currently bearishly crossed with price tapping the 200EMA on January 5th and currently sitting above the 50EMA. A bullish 50/200EMA cross should act as a strong buy signal for many traders. ETH/BTC open interest (top panel, chart below) on Bitfinex is almost exclusively dominated by long positions. There are currently no active RSI or volume divergences. Any further pullback is likely to find buyers near the 0.031-0.033BTC zone with Cloud, 50EMA, and volume support all at these levels.

Conclusion

With the Constantinople Hard Fork in the rearview, ETH fundamentals show a sustained decrease in inflation and lower block times, with hash rate near yearly lows. A reduction in ETH issuance will affect not only the annual inflation but also mining profitability. If ETH prices remain low, many miners will no longer be able to mine ETH at a profit and ETH hashrate will stagnate or fall. This will consolidate the remaining hashing power into fewer and fewer hands and may provide additional impetus for the ProgPoW EIP. Although ETH 2.0 is still in early stages, the changes are actively being discussed, debated, and coded.

ICO inflows and outflows are down significantly compared to 2018. Any ICO holding-related selling pressure is likely to continue until the next wave of potential Security Token Offerings hits the market. Globally, shifting regulatory clarity is pushing most crypto asset crowdsales towards private sales and accredited investors. As ICO ETH holdings have declined, MakerDAO ETH holdings have increased substantially, although this may change with the introduction of multi-collateral DAI coming later this year.

Technicals are currently neutral for the ETH/USD pair and bullish for the ETH/BTC pair, but neither ETH/USD or ETH/BTC are above the daily 200EMA. Although trend indicators show no immediate signs of reversal for the ETH/USD pair, a bullish reversal chart pattern yields a reversal target of US$200 over the next two months, which also matches the daily 200EMA resistance. ETH/BTC holds a resistant target of 0.05BTC. The US$50 and US$100 zones remain important levels of psychological support, as well as previous zones of consolidation in 2017, should price turn South.