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Ethereum Price Analysis – Constantinople hard fork delayed

Ethereum network fundamentals are on pause once again as the Constantinople hard fork has been delayed until February 27th.

Ethereum (ETH) has seen a seen violent and choppy trading, with +/-15% swings over the past few weeks. The market cap currently stands at US$12.25 billion with US$1.05 billion traded over the past 24 hours. The crypto asset remains down 92% from the record high set in January 2018.

The Constantinople hard fork, originally slated for January 16th, was postponed in the eleventh hour after a blockchain audit by Chain Security found a vulnerability in one of the Ethereum Improvement Proposals (EIPs). The exploit would have allowed for re-entry attacks to drain funds from a wallet multiple times. The bug was similar to the catastrophic failure in the DAO during June 2016, an event which led to a split of Ethereum and the creation of Ethereum Classic. The Constantinople bug has since been patched and the hard fork is now scheduled for block 7,280,000, around February 27th.

The Constantinople hard fork will include five EIPs total; 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).

Since the hard fork was delayed, the difficulty bomb delay was also never applied, and difficulty has been steadily increasing since the original hard fork date. After the fork, on February 27th, difficulty will be reset. Hash rate has also continued to decline since January, with mining profitability now at an all-time low. Hash rate will most likely continue to decline until February 27th as mining profitability will most likely continue to decrease, unless the price of ETH rises substantially. Block times, currently at 18 seconds, will also likely continue to increase.

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There has also been continuing talk of ETH 2.0 development, which will include a full rewrite and redesign. However, both ETH and ETH 2.0 will likely exist concurrently for several years before the complete migration.

ETH 2.0 includes Casper and Sharding, which will drastically alter the ETH network and include a consensus algorithm shift from solely Proof of Work to solely Proof of Stake. 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 PoW altogether, leaving a PoS block reward at 0.22 ETH/block for stakers. Currently, there are no plans to cap the total amount of ETH created.

Additionally, there has also been an ongoing discussion around changing the ETH PoW consensus algorithm to "ProgPow" in a separate hard fork, before Casper goes live. ProgPoW would be an attempt to reduce the use of ASIC mining by making GPU mining more efficient. Innosilicon and Bitmain currently each have three ASIC miners available for ETH. A third mining company, Linzhi, is also in the research and development phase of a new ETH mining chip.

The ETH network currently has 9,313 network nodes, 40% of which are located in the United States. Many nodes are run by Infura, which provides access for developers due to the somewhat cumbersome hardware requirements of running a node. ETH nodes have several sync modes, with fast sync requiring 125GB of storage and full sync exceeding 1TB of required storage. Node services like Infura have become increasingly important for ETH as the blockchain continues to grow.

The number of transactions per day on the network (line, chart below) has been flat over the past few weeks, and is currently around 550,000. Transactions per day will likely rise after the Constantinople hard fork as smart contract fees are set to decrease. The average transaction value per day has continued to fall since January 2018, and is sharply down from a high of US$20,000 in June 2017. Pending transactions are currently holding at 35,000, with the average transaction fee near May 2017 levels at US$0.092 (not shown).

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The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) fell from 43 to 23 but has begun to rise again. 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 (fill, chart below) have declined since January 2018, but remain well above levels seen throughout 2017. Active and unique addresses are important to consider when determining the fundamental value of the network when using Metcalfe’s law. Unique ETH addresses continue to grow at a rapid rate, and are currently at almost 52.5 million. While addresses can never be deleted, this metric indicates a growing use of the Ethereum blockchain. Further, there are 346 ETH-related job postings on LinkedIn, down from 1,000 postings in July 2018. There are also more than 1.18 million members in almost 3,865 Ethereum groups on

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ICO fundraising declined significantly towards the end of 2018. However, 2018 saw both the highest number of ICOs, 1,075, and the largest USD sum raised in one year, US$21.48 billion. Thus far in 2019, there have been 17 ICOs raising a total of nearly US$113 million. In contrast, the total USD raise January 2018 was US$2.15 billion.

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. Japan’s Financial Services Agency (FSA) will be releasing guidelines this year.

In December, 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." 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.

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The top Ethereum based dApps over the past week, ranked by volume, continue to be dominated by decentralized exchanges and gambling apps. IDEX and ForkDelta had the highest number of users over the past week. In the game category, CryptoKitties continues to dominate weekly user, volume, and transaction metrics. 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.

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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. ICOs and dApps continue to hold 2.976 million ETH, or 2.84% 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, 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, or third highest among all projects. On November 27th, the Aragon Project took a novel approach by moving 40,000 ETH into a US$1 million DAI loan, a stable coin, to protect against market volatility.

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Turning to developer activity, over 990 developers have contributed a cumulative ~28,000 commits to the ETH project on GitHub 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 of these commits occured in the Solidity repo (chart below). Solidity is the programming language used to write smart contracts on Ethereum. Overall, over the past year, ETH related repos have had more commits than any other crypto project.

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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. The majority of trading has occurred on Bibox, OKEx, LAToken, and Binance. In Asia, the Korean Won (KRW), and the Yen (JPY) pairs hold essentially no premium over the USD pairs while the Yuan (CNY) pair holds a 10% premium. Together, all three regions show relatively low interest in their fiat pairs, with ~1.5% of the total traded volume combined. Non-USDT stable coin volume has slowly increased over the past few weeks, including DAI, PAX, GUSD, and TUSD, but continues to remain a fraction of total traded volume.

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The over the counter (OTC) exchange LocalEthereum facilitated 4,123ETH in transaction volume last week, which is up significantly when compared to prior few weeks. In comparison, LocalBitcoins exchanged 8,632BTC in the past week.

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. 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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Google Trends data for the term "Ethereum" remained down sharply throughout 2018 and into 2019. A slow rise in searches for "Ethereum" preceded both highs in June 2017 and January 2018, likely signaling vast 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.

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Technical Analysis

ETH price action has had a violent few weeks on thin volume, only made more volatile by a delayed hard fork. Low timeframes have seen choppy price action, which is reminiscent of algorithmically driven stop loss hunting. Roadmaps for key decision points on high timeframes can be found using exponential moving averages (EMAs), Ichimoku Cloud, and Chart Patterns. 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$388 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, volume has continued to decline over the past few weeks, suggesting price consolidation before the next larger move.

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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$234.

The long/short open interest on Bitfinex is net long, with long positions at a relatively elevated level, and increasing towards record highs. Shorts have decreased significantly over the past few weeks. 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." There are subtle bullish RSI or volume divergences on the daily timeframe as price continues to creep lower on less and less momentum, which is suggestive of bearish exhaustion.

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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 singled settings (10/30/60/30) for faster signals are mostly bearish; price is below Cloud, Cloud is bullish, TK cross is bearish, and Lagging Span is below Cloud and in price. A traditional short entry triggered two candles ago, with a bearish Kumo breakout. A bearish Kumo twist will signify all metrics flipping bearish, which is highly suggestive of additional downside pressure based on the current trend.

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

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 late February. If price reenters the Cloud with a bullish TK cross, price will likely move toward the flat kumo at ~US$160. A short entry will trigger with a bearish TK cross below the Cloud, also signifying a high probability of bearish continuation.

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On the four hour chart, there is a building descending triangle on descending volume. The pattern carries a 1.618 fib extension and measured move of US$103 and US$97 respectively. A short entry triggers with a breach of the US$114 level. Additionally, Cloud metrics are also bearish, which is again suggestive of further downside. In the unlikely event of a bullish breakout, moving through the Cloud towards US$138 would be the Edge to Edge trade target.

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Lastly, on the ETH/BTC pair, the six hour chart is showing dueling chart patterns; a bearish Head and Shoulders vs a bullish Falling Wedge. The hallmarks of the Head and Shoulders include a descending volume profile and a series of three extreme highs, with the second high exceeding the first and third high. The hallmarks of a Falling Wedge include a descending volume profile with a series of lower lows in a tighter and tighter range. The Head and Shoulders carries a 1.618 fib extension and measured moved of 0.0263 BTC and 0.0228 BTC respectively.

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Ethereum network fundamentals are on pause once again as the Constantinople hard fork has been delayed until February 27th. 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 continue to fall. This will consolidate the remaining hashing power into fewer and fewer entities. ICO inflows and outflows also are down significantly since 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 raises towards private sales and away from public sales entirely.

Technicals lean bearish but also show the potential for a bullish reversal. There is no significant confluence leaning towards a definite up or down move in the near future. Over the next month, volatility will likely continue into the hard fork date. While chart patterns suggest the possibility for reversals, trend indicators show no potential for an immediate reversal any time soon. The US$50 and US$100 zones remain important levels of psychological support, as well as previous zones of consolidation in 2017. If the ETH/BTC ratio breaks the current horizontal support at 0.032 BTC, it is very likely to fall much further, potentially matching the previous low at 0.023 BTC.


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