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Ethereum Price Analysis – Bearish in the medium term

Network fundamentals continue to be heavily focused on preparation for future scaling implementations. Although overall network use is currently low, transactions per day have been decreasing while transaction costs and unconfirmed transactions have been increasing.

Ethereum (ETH) has risen 15% over the past two weeks, in a wide but shrinking range, alongside near record volume that declined sharply. The market cap stands at US$22.9 billion, with US$1.15 billion traded in the past 24 hours.

Scaling blockchain transaction capacity continues to be a concern for blockchains. In a recent post, Vitalik Buterin discussed introducing zero-knowledge Succinct Non-interactive Argument of Knowledge (zk-SNARKs) on to mass-validate transactions.

zk-SNARKs would introduce a relayer and transactor hierarchy, where the transactor could perform three functions; registration, deposit/withdraw, and sending. The relayer could then essentially batch and optimize these transactions en masse using zk-SNARKs and get rewarded with transaction fees, increasing layer one scaling to 500 transactions per second. zk-SNARKS already enable privacy on layer two, a feature which was added to ETH last October as is similar to Zcash (ZEC).

Like many others, Buterin has commented on his increasing concerns around privacy and mass surveillance while using cryptocurrency. The transaction tumbler Mobius, which enables private transactions with ring signatures and stealth addresses similar to those seen on Monero (XMR), has gained increasing public attention as users become more concerned with privacy as well.

Buterin and Vlad Zamfir have also floated the idea of chain mergers, with the example of ETH and ZEC. Zamfir admits that this would be difficult but probably not impossible and Buterin agreed that it would have the "complexities of corporate mergers and acquisitions times ten". Chain mergers and or ERC20 mergers are likely an inevitable natural evolutionary progression of the current Cambrian explosion of both.

Ethereum Price Analysis 8 Oct 2018 (1)

On-chain scaling solutions like Proof of Stake (PoS) and Sharding will allow for more transactions to be validated at once. Off-chain scaling solutions include the Raiden Network, which uses bidirectional channels and is similar to Bitcoins Lightning Network, and Plasma, which uses a series of smart contracts to create hierarchical trees of sidechains. Buterin has mentioned that both are much farther along the research and development phase than this time last year.

The current number of transactions per day on the network is below 500,000 for the first time since November 2017. Pending transactions are currently rising and above 55,000. Average transaction fees have begun to increase slightly over the past few weeks despite a decrease in transactions per day. Any increase in transactions per day will likely increase fees quite substantially.

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The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has been in decline since June 13th, but is on the rise again. Inflection points in NVT can be leading indicators for a reversal of an asset’s value. A clear downtrend in NVT suggests a coin is undervalued based on it’s economic activity and utility, which should be seen as a bullish price indicator, whereas an uptrend in NVT suggests the opposite.

Daily active addresses (fill, chart below) have declined since January, but remain well above 2017 levels. Active and unique addresses are important to consider when determining the fundamental value of the network based on Metcalfe’s law. Unique ETH addresses, which now exceed 43 million, continue to grow at a rapid rate. While addresses can never be deleted, this metric indicates a growing use of the Ethereum blockchain. ETH-related job postings on LinkedIn currently exceed 450, down from 1,000 postings in July.

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The Initial Coin Offering (ICO) phenomenon has slowed significantly since 2017, with a few notable exceptions. There have been a total of 813 ICOs thus far in 2018, which have raised a total of US$20.3 billion. The month of May saw the most ICOs, with 141, while September saw the least, with 51. In 2017, ICOs raised a mere US$3.88 billion, with only US$95 million raised in 2016. Total raises in 2018 still exceed US$10 billion even when the top 10 raises are excluded.

A recent report by Bitmex Research found that 75% of all ETH raised by ICOs has been sold or moved out of ICO addresses as of October. The report also concluded that even at current ETH prices "projects are still sitting on unrealized gains, rather than losses." The DigixDAO project and Golem are the two largest holders of ICO ETH, with 764,450ETH between them, or US$171.23 million at current prices.

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The top dApps over the past week, ranked by volume, continue to be dominated by decentralized exchanges and gambling apps. There has also been a resurgence of get-rich-quick pyramid and Ponzi scheme dApps, although FOMO3D and PoWH3D have fallen out of favor. EOS, which has also introduced several new dApps recently, is also dominated by gambling and scam dApps.

The decentralized oracle and prediction market, Augur, continues to see very little activity due to several issues. The project recently announced version 2 of the platform, addressing many of these problems. The most important changes attempt to reduce fees and eliminate volatility risk by integrating the stable coin dai. Non-fungible token (NFT) games continue to see diminished ETH volume compared to other dApps.

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Hash rate and difficulty have both declined significantly since early August but have begun increasing recently. Block times, block reward, price, and transaction fees all effect mining profitability, which is currently near all time lows. The network node count is currently ~13,000, half of which reside in the U.S., and many of which are run by Infura.

Node services like Infura add a degree of centralization to the network but become increasingly necessary as blockchain size increases. ETH has several sync modes, with fast sync exceeding 97GB and full sync exceeding 667GB.

However, consensus algorithm, mining, and block rewards are all set for major changes in the coming months. EIP 1234 will reduce the block reward to 2 ETH/block and delay a difficulty increase, and will be implemented in the Constantinople hard fork on October 30th. Although there was a delay in developing the testnet code for Byzantium, there is no expectation of mainnet implementation of Byzantium, according to developers.

A hybrid version of Casper will change the consensus algorithm from solely PoW to PoW and PoS and is set for 2020. The fork will also change the block rewards for PoW and PoS to 0.6 and 0.22ETH/block, respectively. The full implementation of Casper is slated for 2022 which will remove PoW altogether, leaving the PoS block reward at 0.22ETH/block for stakers.

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In the markets, ETH exchange traded volume in the past 24 hours has predominantly been led by the Bitcoin (BTC), Tether (USDT), and U.S. Dollar (USD) pairs. The majority of trading has occurred on Bithumb, OKEx, and Binance.

In Asia, the Korean Won (KRW) and Yuan (CNY) pairs hold a slight premium while the Yen (JPY) pair is in line with the Brave New Coin (BNC) Ethereum Liquid Index average price. Together, all three regions show relatively low interest in their fiat pairs, with ~5% of total traded volume combined. Dai volume has continued to slowly increase over the past few weeks.

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The over the counter (OTC) exchange LocalEthereum facilitated 2,277ETH in transaction volume over the past week. In comparison, LocalBitcoins exchanged 8,197BTC in the past week. 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.

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Technical Analysis

Trading volumes have again declined sharply over the past weeks. With the volume decline, price has also been choppy and harder to predict on intraday time frames. As volume begins to increase, recognizing the formation of a trend will prove to be highly profitable. Exponential moving averages (EMAs), Bollinger Bands (BBands), Pitchforks, Ichimoku Cloud, and chart patterns can be used to determine the entry points and targets. Further background information on the technical analysis discussed below can be found here.

The 50/200EMAs on the daily chart have been bearishly crossed for 120 days, resulting in a steady decline of over 60%. This bearish Death Cross and the opposing bullish Golden Cross are significant events for many traders and dictate the direction of the trend going forward. The previous Golden Cross in May was overshadowed by a bearish reversal pattern, the head and shoulders. Although the EMA cross is bearish, the 200EMA will act as a mean reversion level for price, currently at US$413.

Total long/short open interest is net long and near record highs on Bitfinex, with both long and short positions at elevated levels. A significant price movement in either direction will likely be exaggerated as these positions begin to unwind. There are no active divergences but a bullish RSI divergence was made as price has made a lower low without making a lower low in momentum. RSI continues to trend below 50, suggesting momentum continues to lean slightly bearish.

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On the daily chart, BBands are tight and showing a slight bearish bias, suggesting further downside. BBands measure volatility and attempt to predict the direction of price action as consolidation is occurring. If a break out occurs while price is below the 20SMA (red), the indicator suggests bearish continuation. The BBands expand with volatility, after the move has happened. Historically, BBands have only been this tight on five occasions.

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Price also remains bound to a bearish Pitchfork with anchor points in December, March, and May. Based on the rate of change of the trend, price is more likely to continue sideways and return to the median line (yellow). Price will continually test the median line as either support or resistance until price closes above or below the Pitchfork. Volume profile also suggests the current price zone, or orderblock, has had the most cumulative buy and sell volume since April 2016. A break of the previous local low at US$170 would potentially see a decline to US$65 based on the historical volume profile.

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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 double 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 in price. A traditional long entry will not trigger until price is above the Cloud.

Further, price has continued to decline since a Kumo breakout on June 7th without a bearish Kijun bounce. Strong resistance at the Tenken shows heavy bearish strength. The TK lines continue to display signs of a C-clamp, similar to conditions found in late March and early April, which suggest oversold conditions. This TK disequilibrium suggests that a long position is favored over a short position, with targets of US$270 and US$400.

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On the four hour chart, a potential Head and Shoulders bearish reversal pattern has formed, with price currently sitting near the neckline. The hallmarks of this pattern include a descending volume profile and a series of three local highs, with the second high exceeding the first and third high. Although typically horizontal, the diagonal nature of this formation makes the pattern difficult to evaluate. The pattern will remain valid until a large increase in volume or a price break of the right shoulder at US$237.

Head and Shoulders patterns are typically seen at the top, not after a downward move. While this makes the probability of this pattern becoming a reality less likely, it does not mean that they cannot happen. An inverted Head and Shoulders appeared on the weekly Oil chart after a significant downward move as well, reaching it’s 1.618 fib extension almost exactly on target.

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On the ETH/BTC pair, price has largely been confined by several diagonal support and resistance zones since 2015. Price quickly fell after breaking the bottom support zone which also completed a bearish inverted Adam and Eve double top chart pattern. The pattern yields a 1.618 fib extension of 0.0174BTC, suggesting further downside. The ratio appears to have found support near the last local low of ~0.026BTC. Cloud remains entirely bearish with a growing TK C-clamp suggesting oversold conditions.

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Network fundamentals continue to be heavily focused on preparation for future scaling implementations. Although overall network use is currently low, transactions per day have been decreasing while transaction costs and unconfirmed transactions have been increasing. A significant uptick in network use, through dApps or otherwise, will have a dramatic impact on transactions fees. ICO raises have also decreased significantly over the past few months as all but 25% of raised ICO ETH has been sold.

Technicals remain bearish in the medium term but favor a move toward US$269 as opposed to fresh lows, thanks to a bullish TK C-clamp on both the ETHUSD and ETHBTC pairs. The overall trend remains significantly bearish with price below the daily 200EMA and below the daily Cloud, although a mean reversion would bring price to US$400. Price will likely remain bound within the downtrending Pitchfork for the next few weeks. Further significant downside will likely require consolidation and mean reversion.


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