Ethereum Price Analysis – Constantinople hard fork imminent

Ethereum (ETH) has had a choppy start to the year, dipping to ~US$80 before touching ~US$160. The current spot price is ~$US126, leaving the crypto asset down 91% from the record high set in January 2018. The market cap currently stands at US$13.11b, just below Ripple (XRP) at US$13.67b, and far below Bitcoin (BTC) at $US64b. US$1.85b in ETH has been traded over the past 24 hours.

The upcoming Constantinople hard fork is the main focus for ETH market watchers, and is slated for Wednesday the 16th. The ETH community and most exchanges have supported the fork, so it is unlikely that this will be a contentious hard fork.

The hard fork will include five Ethereum Improvement Proposals (EIPs); 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).

Further down the pipeline is Casper, which will drastically alter the ETH network, reducing the inflation rate even further. The inflation rate (chart below) in 2017 and 2018 was 14.75% and ~7.40% respectively. For comparison, projected annual inflation rates for other cryptocurrencies through 2019 include; ETH 4.70%, BTC 4.11%, BCH 3.77%, LTC 8.97%, ETC 8.60%, DASH 9.02%, and XMR 6.54%.

Source: coinmetrics.com

Vitalik Buterin’s hybrid version of Casper will change the consensus algorithm from solely PoW to PoW and PoS, and is set for a 2020 release. A white paper for Vlad Zamfir’s Correct-by-Construction Casper was released in November 2018. The fork will also change the block rewards for PoW and PoS to 0.6 and 0.22 ETH/block, respectively. The full implementation of Casper is slated for release in 2022 and will remove PoW altogether, leaving the PoS block reward at 0.22 ETH/block for stakers. Currently, there are no plans to cap the total amount of ETH created.

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 on the ETH chain 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.

On the network side, hash rate and difficulty declined significantly from August to mid-December. As ETH price fell dramatically, mining profitability also fell dramatically. Difficulty is now lower than the peak in October 2017, before the difficulty reduction. Block times, block reward, price, and transaction fees all effect mining profitability, which is currently near an all-time low. Decreasing block rewards further will also decrease mining profitability, unless ETH does not dramatically increase in value.

There are currently 10,142 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 for running a node. ETH nodes have several sync modes, with fast sync requiring 123.53GB 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.

Source: bitinfochart.com

The current number of transactions per day on the network (line, chart below) has been flat over the past few weeks, and is currently ~550,000 per day. Transaction 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 33,000, with the average transaction fee near May 2017 levels at US$0.087 (not shown).

Source: coinmetrics.io

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. There are 333 ETH-related job postings on LinkedIn, down from 1,000 postings in July 2018. There are also more than 1.17 million members in almost 3,871 Ethereum groups on meetup.com.

Source: coinmetrics.io

ICO fundraising declined significantly towards the end of 2018. However, 2018 saw both the highest number of ICOs and the largest USD sum raised compared to previous years. Q4 saw the fewest number of ICOs for the year at 176, raising a total of US$1.611 Billion. ICOs are also increasingly moving away from public sales, which is likely due to fear of regulatory reproach. The largest raise of the quarter was HetaChain’s $190 million. The project is a business-focused blockchain which uses Byzantine Fault Tolerant delegated Proof of Stake as a consensus mechanism. The only ICO of 2019 thus far has been VocoNetwork, a decentralized marketing solution, which has raised $3,524,057.

Source: coinschedule.com

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. Among all dApps 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.

Source: dappradar.com

ICO treasury balances 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 ~3 million ETH, or ~2.9% of the circulating ETH supply. In early December, the Kyber Network, a decentralized token swap platform, saw outflows totalling 69,000 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.

Source: diar.co/ethereum-ico-treasury-balances/

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 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.

Most of these commits occured in 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.

In the markets, ETH exchange traded volume in the past 24 hours has predominantly been led by the Tether (USDT), Bitcoin (BTC), and U.S. Dollar (USD) pairs. The majority of trading occurred on OKEx, DigiFinex, Huobi, and Bitfinex. In Asia, the Yuan (CNY), the Korean Won (KRW), and the Yen (JPY) pairs hold essentially no premium over the USD pairs. Together, all three regions show relatively low interest in their fiat pairs, with ~4% of the total traded volume combined. Non-USDT stable coin volume including TUSD, USDC, and Dai has slowly increased over the past few weeks but continues to remain a fraction of total traded volume.

The over the counter (OTC) exchange LocalEthereum facilitated 1,954ETH, or ~US$250,000, in transaction volume over the past week, which is down when compared to the preceding two weeks. Throughout 2018, users on the exchange decreased while volumes increased. The two spikes in volume on November 25th and December 7th also correspond with local lows in ETH price.

In comparison, LocalBitcoins exchanged 10,739BTC, or ~US$39 million, 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.

Google Trends data for the term "Ethereum" remained down sharply throughout 2018. 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.

Technical Analysis

Throughout 2018, ETH experienced a series of bearish consolidation patterns leading to lower and lower lows. As the possibility of a trend reversal increases, looking to the previous breakpoints of the consolidation patterns illuminates the horizontal resistance levels.

ETH is unlikely to again break the US$388 level without a considerable amount of consolidation, which has occurred previously. 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.

On the daily chart, the 50/200EMAs have been bearishly crossed since June 2018. 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 2018 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$253.

Total long/short open interest on Bitfinex is net long, with long positions at relatively elevated levels but decreasing. 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 no active RSI or volume divergences on the daily timeframe.

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 mixed; price is in Cloud, Cloud is bearish, TK cross is bullish, and Lagging Span is below Cloud and above price. A traditional long entry will not trigger until price is above the Cloud. This is known as a Kumo Breakout. Price has not been above the Cloud since May 2018.

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$167.

Lastly, on the ETH/BTC pair, the 50/200EMAs remained bearishly crossed. A bullish 50/200EMA cross should be seen as a long entry signal. The Cloud metrics will all have turned bullish once price is above the Cloud. Both the 50/200EMAs and the Cloud have been distinctly bearish since mid-July. Speculation leading to the ETH hard fork likely led to an overperformance of the ETH/BTC ratio over the past few weeks.

Conclusion

Ethereum network fundamentals will remain in a holding pattern until after the Constantinople hard fork next week. A reduction in ETH issuance will affect not only the annual inflation but also mining profitability. Transactions per day and average transaction fees have been flat over the past few weeks, while pending transactions have increased significantly. This picture indicates potential difficulties for scaling in the near term, especially if transactions per day increase significantly. ICO inflows have decreased substantially whereas ICO outflows have increased substantially. This selling pressure is likely to continue until the next wave of potential Security Token Offerings hits the market,

Technicals are the beginning to slowly turn bullish but remain bearish to neutral in the near term. Based on trend indicators, including EMAs and Ichimoku Cloud, there are no indications of immediate trend reversal until price breaks the US$160 level. The US$50 and US$100 zones remain important levels of psychological support, as well as previous zones of consolidation in 2017.