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Ethereum Classic Price Analysis: Broken confidence

Following a successful 51% attack on the Ethereum classic network, confidence in the security of the blockchain has been battered, particularly with the threat of secondary attacks still looming over the network. While network usage has remained constant through the bear market, there is some evidence that this activity may not be organic and lacks true economic value.

Ethereum Classic (ETC), or the original Ethereum blockchain, broke from the ‘core’ Ethereum chain following the heated DAO hard fork which split philosophies in the community into two distinct camps.

The ETH chain is generally considered the superior blockchain, retaining the support of the Ethereum communities best developers and mining operations following the split.

Since the DAO fork in 2016, Ethereum core built a rich & diverse web of independent Dapp and token funding projects. It rose to a status of arguably the most important network in the crypto ecosystem and was likely the biggest driver of 2017s bull run, chewing into BTC’s dominance of digital asset markets.

Ethereum Classic has historically lagged behind the newer, shinier Ethereum chain. It has lacked both the quality and relevance of hosted projects, as well as network size and depth. Ethereum Classic’s smaller size is now leading to security challenges, evidenced by a recent 51 percent double spend attack on the network.

If a blockchain can’t offer security, then it pretty much has no reason to exist. It also appears that the ETC blockchain is not out of the water yet, with a sudden spike in the average transaction fee post attack, jumping 800% from $0.17 to $6.10 in 24 hours.

It is unclear why this rate spike occurred, one possible reason is that this was a network precaution to subsidize ETC mining pools and allow them to generate enough hash rate to prevent another chain attack. Whatever the rationale for the transaction fee spike, these murky onchain operations are likely to add to the increasing anxiety felt by ETC holders and short-term price volatility.

ETC fee spike (1)

Data from Bitinfocharts.com, Avg transaction fee for the ETC blockchain has been mostly flat until a sharp upward spike in the days immediately following the successful 51% attack.

All that said, ETC has faced skepticism regarding its reasons-for-existing before, but found ways to maintain market relevance and its top 20 position on the crypto market cap tables. It also has powerful, liquidity driving backers including the Digital Currency Group, Grayscale Investment and Coinbase.

GS ETC

Snapshot of holdings for major crypto investment fund Grayscale which retains a large vested interest in Ethereum Classic

The Core ETC dev team also diffused a ‘difficulty bomb’ built within the code of the Ethereum blockchain in 2018. This ensured long term network existence, and avoided the inevitable switch to a Proof of Stake style algorithm, retaining a decentralization argument. Additionally, ETC has its own solution to the Ethereum monetary policy challenge which bounds the total supply of ETC (creating scarcity), with a set total supply of 210 million ETC and 20 percent reductions in block rewards every 5,000,000 blocks.

This tokenomics decision creates certainty of network and drives investment, and is in marked contrast to ETH, which sets no upper limit on supply.

Exchanges and trading pairs

ETC- 7 day and pairs

The most popular trading pairs for ETC are crypto-to-crypto, with USDT, BTC and ETH markets making up ~93% of daily trading volumes. The USDT market makes up close to USD 42 million worth of volume daily. There are fiat on-ramps available for ETC in US dollar, Euro and Korean Won.

ETC exchanges pairs

The busiest exchange for ETC is top-3 by daily volume exchange Okex, which offers the two most popular markets in its ETC/BTC and ETC/USDT pair. It also offers an ETC futures markets. The next most popular exchange (by pair) is Bitforex, followed by Singapore-based Digifinex.

Onchain assessments

NVT signal

Derived from the NVT ratio, the NVT signal is a responsive blockchain valuation metric developed by Willy Woo and Dmitriy Kalichkin. Crypto markets are prone to bubbles of speculative purchasing, not backed up by underlying network performance and activity. The NVT signal provides some insight into what stage of this price cycle a token may be in.

A high NVT signal is indicative of a network that is going through one of these bubble periods, and may move towards a position of becoming overbought/overvalued, because of the market’s speculative assessments running out of steam.

ETC NVT

ETC NVT signal and price. NVT signal calculated with data from Coinmetrics.io. Adjusted onchain transaction volume used for NVT signal.

Over the last 9 months the NVT signal for Ethereum Classic (ETC) has bounced violently between ~60-20 NVT signal points. This would suggest that onchain transaction volume on the network is inconsistent and prone to switching between low to high onchain volumes on an almost daily basis.

For a platform blockchain that has primary value via complex smart contract operations which allows for DApps like games to be built over the network, one would expect onchain volume to be sticky as networks and tokens are designed to be interacted with and gas should constantly be used. The pattern of the NVT signal, however, suggests that the token is more often used for speculation.

In the short term, the NVT signal of ETC has reverted after hitting an undersold inflection point. Price has trended downwards following the reversal point being hit, suggesting that the network ran out of any speculative price momentum left towards the end of last year.

The NVT signal has middled out following the recent sharp drop, suggesting that NVT signal is at a ‘fair level’ based on historical level. This suggests that any price action in the short run will not be driven by transaction volume. NVT signal short term suggests a period of quiet price activity between $4-$5, with no strong under/oversold signals currently being sent by Onchain volume.

PMR signals

ETC PMR

ETC Kalichkin PMR and price.PMR signal calculated with data from Coinmetrics.io. Active Addresses^2 used for PMR.

Metcalfe’s law is a measure of connections in a network, as established by Robert Metcalfe the founder of Ethernet. It has subsequently been used to analyze the true value of network-based financial products like Facebook and Bitcoin, and by comparing it to price, can provide a useful tool to assess whether a token is over or undervalued.

It is also a more straightforward metric to implement versus onchain transaction volume, which can be challenging to measure accurately in USD terms. Addresses are measured as the number of unique sending and receiving addresses participating in transactions daily.

This makes it a relatively transparent metric as compared to onchain volume. However, there may be a question of the granularity of the data, and who controls these addresses.

Unlike NVT signal, which sent bearish-mixed signals for ETC’s onchain performance, the PMR signal is more bullish and suggests ETC has been oversold based on the number of addresses on the network.

Historically, when PMR hit an inflection point towards the end of February 2018, it generated momentum for a price run in subsequent weeks and was a signal that ETC was oversold and fundamental support created by active address growth was likely a driver for a price run.

This time around, however, as ETC’s PMR hit a historically indicated oversold inflection level, around late October, there was no reversal and both price and PMR simply continued to drop well below historical lows. This suggests that at least in the short run, active addresses are not contributing to token value.

For long term backers of the network, the new PMR lows may be a bullish long term indicator and may be a sign that the network will realize value in the next few years based on its ability to retain user activity.

Over the last year the Ethereum Classic subreddit subscriber count has risen by just over a 100% (12k to 24.1k), while the Ethereum Classic twitter follower count has risen from 125k to 227k, an increase of over 80%.

The Ethereum Classic project, supported by initiatives such as the Ethereum Cooperative, has shown a strong ability to extend community outreach over the last year and this may be contributing to the maintained active address activity on the blockchain. Nonetheless, this has failed to contribute to meaningful token value. Periods of positive price performance over the last year also appear to have been primarily triggered by speculative factors such as expectations surrounding the effects of a Coinbase listing.

ETC TC

ETC vs ETH transaction count, data from Coinmetrics.io. One network growing steadily, the other falling. ETH still does ten times more daily transactions than ETC.

Over the last year daily transaction count for Ethereum has fallen by ~38% (879K daily transactions 01/01/2018 vs 543k daily transactions 01/14/2018), while the daily transaction for ETC has risen by 18% over the same period (48K daily transactions 01/01/2018 to 56.5K daily transactions 01/14/2018).

ETC’s steady growth in daily transaction count has correlated with a steady fall in the median transaction value of ETC transactions. This would explain the falling PMR having less of an affect on ETC token value, despite active address growth and steady transaction counts. These accounts may add very little economic value because of small transaction sizes and as such do not affect external value of the ETC token.

A potential explanation for these results may be an emergence of spam transactions on the network to manipulate the GAStoken application which lets users store "gas" used for transaction fees and then sell it on the open market at a higher rate.

PMR signal suggests that ETC is oversold, and may suggest a $10-$15 run to the $15-$20 price level in the short term, however, some unusual network metrics suggest manipulation & create uncertainty, cancelling out any buy signals.

ETC TV

Median US dollar median daily transaction value on ETC network: has fallen steadily over the last year. On a number of days it is 0, supporting a spam argument.

TAAR

Network transaction volume to active addresses ratio or TAAR, is a recently developed equilibrium valuation metric from Pugilist Ventures’ Christopher Brookins. TAAR combines ”quantity and quality” of network network activity into a single metric.

Fundamental expectations would suggest that when TAAR and price are closely distributed, price (valuation) and fundamentals are aligned in equilibrium.

ETC TAAR

ETC TAAR (Transaction/Active Address ratio)and price.TAAR calculated with data from Coinmetrics.io.

The TAAR metric for ETC suggests that historically ‘quantity’ has dominated over ‘quality’, with the TAAR line generally sitting well underneath the ETC priceline. The two lines have moved closer together as price has fallen, suggesting that the fundamental and price expectation are approaching a new re-alignment.

In the long run, this may be a healthy re-alignment. As factors such as security risks (post the 51% attack) put downward pressure on the value of ETC, and this pushes closer alignment between network and fundamental network value, this means future prices may come from a point of greater rationality, and packaged with fewer corrections.

Alt-coin markets are dominated by emotional, short term profit driven retail traders and as such ETC was likely over-valued in short term bull markets, such as during a few periods in 2018 when new exchange listings drove up price based on speculative assessments. A crossing between price and TAAR may signal a bottom and sentiment reset.

TAAR may suggests that ETC is close to an oversold level and potential market reset, however like some unusual network metrics suggest manipulation & a lot of ‘quantity’ but very little ‘quality’ on the network, cancelling out any buy signals.

Technical analysis

Moving Averages and Long Term Trends

On the 1D chart, the death cross, using the 50 and 200 day EMAs, has persisted since the end of March 2018. The 50 day EMA (red line) is currently acting as resistance, which includes the most recent 57% bounce from the mid-December 2018 lows.

ETC TA1

Since the beginning of 2018, the price of ETC has been contained within a negative linear price trend with a Pearson’s R Correlation between time and price of ~0.89 (not shown). ETC’s periodic price recoveries have only coincided with oversold levels on RSI (black circles), thus a lack of any real buying demand. This lack of demand is visualized by the volume flow indicator (VFI) not being able to breach and hold above 0 since March 2018 (black arrow). The VFI interpretation is a value above 0 is bullish and below 0 is bearish, with divergences between price and oscillator being high probability signals.

ETC TA2

Ichimoku Clouds with Relative Strength Indicator (RSI)

The Ichimoku Cloud uses four metrics 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, Lagging Span (Chikou), and Senkou Span (A & B).

The status of the current Cloud metrics on the 1D frame with singled settings (10/30/60/30) for quicker signals is mixed; price is beneath the Cloud, Cloud is bearish, the TK cross is bullish, and the Lagging Span is beneath the Cloud and above price.

A traditional long entry would occur with a price break above the Cloud, known as a Kumo breakout, with price holding above the Cloud. From there, the trader would use either the Tenkan, Kijun, or Senkou A as their trailing stop.

ETC is currently sitting at $4.08 after attempting a Kumo breakout from its mid-December 2018 lows. Price failed to enter the Cloud after touching Senkou A resistance around $5.32. Since then, price has steadily declined and seems destined to retest the $3.50 range. The positive note is that RSI is currently at 35 and approaching oversold territory of 30 (black arrow). A positive news catalyst coupled with oversold RSI, may enable price to re-attempt a Kumo breakout above the $6.34 level. If so, the Senkou A around $4.61 is likely to be strong resistance. However, if price does manage to complete a Kumo breakout, the price targets are $7.00 and $8.26. Price support levels are $3.50 (critical to hold), $3.00, and $2.00.

ETC TA3

The status of the current Cloud metrics on the 1D time frame with doubled settings (20/60/120/30) for more accurate signals is bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and the Lagging Span is beneath the Cloud and above price.

The odds of a successful Kumo breakout are far smaller using slower settings with price needing to break and hold above $7.55 (flat Senkou B). The resulting upside price targets would be $8.82 and $10.26.

TEC TA4

Conclusion

Ethereum Classic likely faces short term price challenges following a sentiment hit taken after a successful 51% attack. Even if the post-attack price drop was not as big as expected, long term holders who have helped the token retain some value through the ongoing bear are likely more anxious than ever. With security of the network now compromised, recovering sentiment will be a challenge, and market dumps such as the recent price action triggered by the delay of the ETH Constantinople hard fork, are likely to be exaggerated in ETC’s case. Fundamentals show a growing user base and transactions, but with no real effect on onchain volume or token value, which suggests spam transactions.

The long term technicals for ETC have been bearish and show no real signs of abating; with price seemingly destined to re-test the critical support level of $3.50. The positive element being that a re-test of $3.50 will likely coincide with RSI entering oversold territory, which may help keep this critical level intact, in the near term. Both, the prudent short term trader (10/30/60/30) and longer term trader (20/60/120/30), on the 1D chart, will await a positive TK cross and Kumo breakout above $6.34 and $7.55, respectively, before entering a long position. Both trader’s support levels are $3.50, $3.00, and $2.00. In the event of a breakout, the (10/30/60/30) trader’s price targets are $7.00 and $8.26, and the (20/60/120/30) price targets are $8.82 and $10.26.


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