Cardano Price Analysis – The early stages of development

Cardano (ADA) is a smart contract platform focused on peer-review and scientific study, marketed as a "third generation blockchain." The crypto assets price has continued to decline since establishing a record high on January 3rd. The asset is ranked ninth largest by total market cap, at US$2.03 billion, with US$37.41 million in trade volume over the past 24 hours.

ADA development began in 2015. A token presale raising US$62 million occurred in Asia, mainly Japan, from September 2015 to January 2017, where a total of 26 billion tokens were sold at US$0.0024 each. Public trading of the tokens began on October 1st, 2017. There is a hard cap of 45 billion ADA tokens, 13.88 billion of which will be issued through staking rewards.

The team initially included three conglomerates which held 5.18 billion ADA between them; the Cardano Foundation which aimed to standardize, protect, and promote ADA; Emurgo which aimed to develop, support, and incubate commercial ventures; and Input Output Hong Kong (IOHK), founded in 2015 by Charles Hoskinson and Jeremy Wood. IOHK also works on Ethereum Classic development and focuses on research and development in cryptography and distributed systems.

On October 12th, IOHK released a detailed blog post explaining several issues IOHK and Emurgo have had with the Cardano Foundation, including lack of strategic vision or plan, lack of transparency regarding operations, and misrepresentation of the Cardano trademark.

ADA’s blockchain will eventually have two layers, the Cardano Settlement Layer (CSL) and Cardano Computation Layer (CCL). The blockchain will also support two scripting languages, Simon and Plutus, as well as sidechains. The ADA platform has a complex and transparent roadmap with plans to launch in three phases; the testnet era, the bootstrap era, and the reward era. While currently still in bootstrap era, IOHK and the Cardano Foundation have run every node operating on the network, in a centralized manner.

The ADA consensus algorithm uses Proof of Stake (PoS) and will switch to Delegated PoS (DPoS), dubbed Ourobouros, similar to EOS and Bitshares. Hoskinson and Dan Larimer, creator of DPoS, worked together on Bitshares a disagreement caused Hoskinson to exit the project. In January, Larimer wrote a scathing extensive review of Cardano’s Ouroboros which garnered a response from Hoskinson.

DPoS allows for stake pools with representational democracy, which combine the total stake of individuals and increases the probability of receiving stake rewards. PoS also allows for social consensus and secure voting on peer-reviewed protocol proposals with a decentralized treasury to fund those proposals, similar to Dash (DASH) and PivX (PIVX).

The average number of transactions per day on the network (line, chart below) decreased from May to late August, but has since begun to increase. The average transaction value (fill, chart below) rose dramatically in March and July but decreased dramatically in October to under US$120,000 per day. The causes for a spike in average transaction value in March and July are unclear, but likely related to a large holder moving coins and not necessarily economic value transfer.

Source: coinmetrics.io

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has been steadily increasing since September. Inflection points in NVT can be leading indicators for a reversal of an asset’s value. A rising NVT suggests that a coin is overvalued and the market cap does not support the price based on its utility.

Daily active addresses (fill, chart below) have declined steadily over the course of the year and increased slightly since late August. Active and unique addresses are important to consider when determining the fundamental value of the network based on Metcalfe’s law. The data for total unique addresses could not be obtained.

Source: coinmetrics.io

Turning to developer activity, the main repo for the ADA project on GitHub has had a cumulative 823 commits over the past 90 days and 3,295 commits over the past year. Most coins use the developer community of GitHub, which was acquired by Microsoft for US$7.5 billion. 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.

Google Trends for the term "cardano" remain down sharply over the course of the year. A slow rise in searches for "cardano" preceded the bull run in Q4 2017, likely signaling a large swath of new market participants at that time. A 2015 study found a strong correlation between the google trends data and bitcoin price. A May 2017 study concluded that when the U.S. Google "bitcoin" searches increase dramatically, bitcoin price drops.

In the markets, exchange traded volume is led by Tether (USDT), Bitcoin (BTC), and Korean Won (KRW) pairs. The exchanges with the highest volume include Binance and UpBit. OKCoin listed ADA/USD, ADA/BTC, and ADA/ETH on September 19th. ADA is also on the short list for a potential Coinbase listing, which would increase USD retail exposure. No ADA pairs are currently listed on Bitfinex or the Circle Invest trading app.

Technical Analysis

ADA had declined 67% since mid-July before establishing a local low that preceded a 30% move higher. However, the trend throughout the entire year has remained distinctly bearish. The status or reversal of a trend can be determined using Pitchforks and exponential moving averages (EMAs). The Ichimoku Cloud can be used to find optimal entry and exits. Further background information on the technical analysis discussed below can be found here.

Price remains bound to a bearish Pitchfork (PF) in the chart below with anchor points in December, March, and May. Price recently bounced from the median line (ML) zone and is holding in the top diagonal of the PF. Price will continually attempt to return to the ML (yellow) throughout any given trend. However, based on the current price of ADA, the bearish PF may be invalidated soon, with a candle close above the diagonal.

Overlayed on the chart, the 50/200EMAs have been bearishly crossed since May with a 200EMA and PF resistance rejection in July. A bullish entry signal will trigger with a break above the 200EMA and/or after a bullish 50/200EMA cross. The decision point will likely occur at the 200EMA, which also represents psychological resistance at US$0.10.

Turning to the Ichimoku Cloud, four metrics are used to determine 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.

The status of the current Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals are bearish; price is below Cloud, Cloud is bearish, TK cross is bearish, and Lagging Span is below Cloud and hovering around the current spot price. A traditional long entry will not trigger until a break above the Cloud occurs, which has not happened since January. If/When a candle does close above the Cloud, the long flat Kumos at US$0.13, US$0.25, and US$0.81 all represent likely price targets and horizontal resistance zones.

The status of the current Cloud metrics on the twelve hour time frame with doubled settings (20/60/120/30) for more accurate signals are also bearish; price is below Cloud, Cloud is bearish, TK cross is bearish, and Lagging Span is below Cloud and hovering around the current spot price. Again, a traditional long entry will not trigger until there is a break above the Cloud. Should the spot price continue sideways over the next week, a bullish Kumo twist and Kumo breakout will occur, signalling a long entry.

The ADA/BTC pair has a nearly identical technical outlook to the ADA/USD pair: a bearish 50/200 cross and entirely bearish Cloud. As discussed above, long trades will not trigger until a break above the Cloud, above the 200EMA, or until the 50/200EMA crosses bullishly.

Conclusion

ADA is currently a centralized platform in the very early stages of development, and will likely need one or two years before resembling anything like Ethereum or EOS. Although I’ve been unable to find any legal opinions on the matter, ADA also very likely represents a security due to its centralized nature of operation. This carries significant regulation in the United States and may be why several exchanges have held off on listing the ADA token.

Based on the state of the network, any purchase of the ADA token is purely speculative. To the ill-informed, this information might be unknown in light of the fact that ADA carries a large market cap and is ranked highly on crypto market cap tables. The potential dissolution or rearrangement of the Cardano Foundation also increases centralization as well as creates concerns regarding existing ADA nodes run by the Foundation and the potential sale of any tokens held by the Foundation.

Technicals for ADA are certainly more generous than the Fundamentals. Trend-based indicators show a strong confluence for the potential end of a nine month bear market. The pitchfork and Cloud suggest potential entries as early as this week should there be a candle close above either. A range from the current price to below US$0.10 and 1800 sats can be seen as a high risk high reward long entry zone. The definitive litmus test for a bull market will be sustained price action above the daily 200EMA, currently at US$0.15.