Decred Price Analysis – A sustained increase in mining activity

Decred (DCR) is a Bitcoin fork launched in 2016. DCR uses a hybrid Proof of Work (PoW) and Proof of Stake (PoS) to incorporate governance functions. The cryptocurrency is down 85% from the record high of US$118, established in early May 2018. The market cap currently stands at US$181 million with US$1.81 million traded over the past 24 hours. Among all coins, DCR (blue, chart below) has one of the highest inflation rates, currently at 20.81% annually, which is only surpassed by Zcash (ZEC) at 44% annually (brown, chart below).

Source: coinmetrics.io

The hybrid consensus system in DCR attempts to shore the vulnerabilities of both PoW and PoS. PoW miners create the blockchain and earn a portion of the block reward. PoS stakeholders purchase tickets, which earn a portion of the block reward and can also be used to vote on whether a block is permanently added to the blockchain.

A classic PoW model favors entities with access to cheap electricity and high amounts of capital to invest in mining infrastructure. This model is subject to mining centralization and the 51% attack, where a miner or pool with more than half of the hash rate can control the blockchain and the transactions.

A classic PoS model favors early adopters who accumulated coins early, typically during an initial distribution. The benefits of PoS include decreased infrastructure costs as well as the ability for any user to directly participate in network governance decisions. PoS only blockchains are subject to stake grinding vulnerabilities, which effectively allows a majority PoS miner to control the blockchain.

DCR PoS stakeholders can also vote on code updates and budget proposals through a blockchain-anchored public proposal system dubbed Politeia, which went live in October 2018. If an update or proposal is approved by ticket holders there is a period of time for amendments or reversals, and then the implementation process begins.

Stakeholders can purchase tickets using a DCR client. Five tickets are then chosen randomly from the total ticket pool and, if at least three of the tickets vote ‘yes,’ the block is permanently added to the blockchain. Ticket costs in DCR have continued to increase over the past year. Ticket prices are based on supply and demand and have no direct correlation to DCR exchange prices. If more and more people stake their DCR, then the ticket price will continue to rise.

Source: https://dcrstats.com/

The PoW component uses the BLAKE-256 hash function, which is similar to Bitcoin’s SHA-256. The network has five minute block times and difficulty adjustments approximately every 12 hours. There are currently 221 network nodes, most of which reside in the United States. Over the past year, network hash rate and difficulty have increased substantially, with both reaching record highs a few days ago. This is largely in part due to the 12 BLAKE-256 ASICs released in 2018. The two most profitable ASICs are currently the Bitmain Antminer DR5 and the MicroBT Whatsminer D1.

Source: https://dcrstats.com/

Block rewards are split, with 60% going to PoW miners, 30% going to PoS stakeholders, and 10% going to developers. The current block reward breakdown is 11.046 DCR for PoW, 1.1046 DCR per ticket for stakeholders, and 1.8410 DCR for the developer subsidy. Of the total 21 million capped supply, 45.4% has been mined thus far, which includes an 8% pre-mine at launch, or 1.68 million DCR.

According to a December 2015 blog post, all pre-mined coins owned by developers were either purchased at a rate of US$0.49 per coin or earned for work performed. Of the total 9.538 million circulating DCR, 48.18% of the coins are being held in the PoS pool. The developer fund address currently holds 602,000 DCR, or US$9,761,346.89 at current prices, and is the largest single account on the network accounting for 6.31% of the total circulating supply.

Source: https://dcrstats.com/

Turning to the health of the network, the current number of transactions per day on the network (line, chart below) has been ranging between 3,200 and 3,500 per day over the past six months. August 2017 saw a record high of 4,800. The average transaction value per day has fallen from US$7,900 in late June 2018 to just under US$2,000 currently. Transactions fees, all of which are collected by the PoW miners, are currently averaging 0.00035 DCR per transaction, or US$0.00636 (not shown).

Source: coinmetrics.io

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has been in a wide-ranging downward trend over the past two years. The current NVT of 26 is near the high of that range. 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.

Daily active addresses (fill, chart below) have declined since January 2018 and are currently below 10,000. Active and unique addresses are important to consider when determining the fundamental value of the network using Metcalfe’s law. A steep drop off in addresses paints a bearish picture as it indicates a sharp drop in on-chain usage.

Source: coinmetrics.io

Turning to developer activity, over 3,000 cumulative commits have occurred in the 66 DCR GitHub repos over the past year. Decred v1.4.0 was released in early February and included; a new consensus vote agenda, speed-ups, alpha Trezor support, and advanced Politeia integration. The dcrd repo (chart below) had a recent spike of commits by lead developer Dave Collins, when he optimized the master branch.

Most coins use the developer community of GitHub 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.

Source: https://github.com/decred/dcrd/graphs/contributors

In the markets, DCR exchange traded volume in the past 24 hours has predominantly been led by Bitcoin (BTC) based trading, with some volume originating from Tether (USDT) denominated markets. The majority of trading occurred on DragonEx, QBTC, Binance, and Bittrex. Earlier this month, OkCoin listed DCR/USD, DRC/BTC, and DCR/ETH pairs.

Google Trends for the term "Decred" has dropped substantially since the start of 2018, and is currently sitting near multi-year lows. A slow rise in searches for "Decred" preceded the bull runs in 2016 and 2017, likely signaling a large swath of new market participants at that time. A 2015 study found a strong correlation between google trends data and BTC price whereas a 2017 study concluded that when U.S. Google "Bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

DCR has ranged within a tight zone over the past 100 days, indicating the potential for a new trend. As the high timeframe bear trend may be coming to an end, a price roadmap for a new bull trend can be determined using Pitchforks (PFs), Volume Profile of the Visible Range (VPVR), Ichimoku Cloud, exponential moving averages (EMAs), and chart patterns. Further background information on the technical analysis discussed below can be found here.

On the three day chart, DCR had been bound to a bearish PF with anchor points in January, March, and May. Over the past month, the asset has drifted above the diagonal resistance, suggesting a potential end of the multi-month downtrend. A return to within the PF would indicate a move towards the median line (yellow) at US$7.00.

The VPVR (horizontal bars) shows strong resistance at US$30.00 and strong support below US$3.50. If the local low at US$14.50 doesn’t hold there is negligible support until US$3.50. There are no active RSI or volume divergences.

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.

Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals are neutral to bullish; DCR is in the Cloud, the Cloud is newly bullish, the TK cross is bullish, and the Lagging Span is in Cloud and above the spot price. A traditional long entry will not trigger until the spot price is once again above the Cloud. This is known as a Kumo Breakout. DCR has not been above the Cloud since May 2018. If the current lows hold, a move towards US$35 is likely based on the flat Kumo, or 50% retracement of the range.

The 50 and day 200 EMAs have been bearishly crossed since late July, with DCR only recently breaching the 50 EMA once more. A mean reversion attempt would bring the asset to US$27, which is also within the target zone for a bullish reversal pattern, the Adam and Eve. This pattern includes a V and U-shaped price structure. The 1.618 fib extension and measured move provide price targets of US$24 and US$27 respectively.

On the daily DCR/BTC pair, trend indicators are also leaning neutral to bullish. The Cloud metrics are showing a potential bullish Kumo breakout for the first time since June. Price has crossed the 50 EMA and touched the 200 EMA several times recently. The most conservative long trade would be taken after both the bullish Kumo breakout and a bullish 50/200 EMA cross. The VPVR shows significant horizontal resistance at the 0.006 BTC level, but very little horizontal resistance above this level. There are no active RSI or volume divergences.

Conclusion

Network fundamentals show a sustained increase in mining activity over the past year, largely due to the vast number of BLAKE-256 ASICs entering the market. Stagnating transactions per day and rapidly declining daily active addresses suggest very little organic on-chain activity beyond mining and speculation. Fortunately, DCR’s treasury system for blockchain proposals and developer funding will likely sustain the coin for many years to come. DCR is very similar to DASH in this regard.

Technicals show a likely end to the multi-month bear trend on both the DCR/USD and DCR/BTC pairs. A bullish trend for both pairs should begin to solidify throughout April. The USD pair has escaped the bearish Pitchfork and is ready for a bullish Kumo breakout. If the local lows do hold, a 50% retracement target of US$35 is likely within the year. The BTC pair is likely to move towards the 0.006 BTC horizontal level and consolidate for the next decision regarding trend continuation or reversal.