Ethereum Price Analysis – Fees rise with clogged network, miners respond by raising gas limit

Ethereum (ETH) is a distributed ledger and decentralized computing platform with smart contract capabilities. The crypto asset is currently second on the BraveNewCoin market cap table, with a market cap of US$17.72 billion and US$3.43 billion in trade volume over the past 24 hours.

The current ETH/USD spot price is down 88% from the all time high set in January 2018, and down 26% over the past week. However, the crypto asset remains up 100% from the December low late last year.

The ETH project was proposed by Vitalik Buterin in 2013. Other ETH co-founders include Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Wood, and Jeffrey Wilke.

An Initial Coin Offering (ICO) followed in 2014. The ICO raised nearly US$16 million, with each token selling for US$0.31. The ETH ICO would eventually become one of the most profitable in history.

The blockchain’s mainnet went live in July 2015 with 72 million premined coins, which currently accounts for 67% of the circulating supply.

Thus far, protocol upgrade milestones have included; Olympic in May 2015, Frontier in July 2015, Homestead in March 2016, Metropolis Part 1: Byzantium in October 2017, and Metropolis Part 2: Constantinople in February 2019.

Ethereum is upgraded through a series of Ethereum Improvement Protocols (EIPs). The Github repository for EIPs has been extremely active since January 2019.

Source: Github

In total, almost 1,000 developers have contributed a cumulative 28,000 commits to the ETH project in the past year, across 213 Github repos. Most of the commits over the past year have occured in the Solidity repo, which is the programming language used to write smart contracts on Ethereum.

Source: Github

The next hard fork, Istanbul, will contain several EIPs and is tentatively slated for October 16th, with a testnet launch scheduled for October 4th. Collectively, the protocol upgrades will aim to increase chain scalability and decrease transaction and smart contract costs. Six EIPs have been accepted for inclusion in the fork, while eight EIPs have been tentatively accepted, and 18 EIPs have been rejected or withdrawn.

The approved EIPs include; adding the Blake2 hash function to the ETH virtual machine (EIP 152), reduced alt_bn128 precompile gas costs (EIP 1108), adding a ChainID opcode (EIP 1344), repricing for trie-size-dependent opcodes (EIP 1884), a transaction data gas cost reduction (EIP 2028), and rebalanced net-metered SSTORE gas cost with consideration of SLOAD gas cost change (EIP 2200).

The tentatively accepted EIPs include; unlimited SWAP and DUP instructions (EIP 663), ProgPoW (EIP 1057), reduced gas cost for call to self (EIP 1380), improved smart contract upgradability (EIP 1702), EC arithmetic and pairings with runtime definitions (EIP 1962), sane limits for certain EVM parameters (EIP 1985), particle gas costs for EVM opcodes (EIP 2045), and reduced gas cost for static calls made to precompiles (EIP 2046). ProgPoW is now likely to be included in Istanbul part two, sometime later next year.

An adjacent protocol overhaul, Serenity, is currently in development and includes a full rewrite and redesign, which will result in Ethereum 2.0. Phase zero of the herculean task could launch as early as January 2020. Both versions of ETH will exist concurrently for some time before a migration is completed.

The ETH 2.0 repo has also become active over the past year, with most of the commits in this repo coming from devs Danny Ryan, Justin Drake, and Vitalik Buterin. Overall, ETH related repos have had more commits than any other crypto project over the past year.

Source: GitHub

ETH 2.0 includes Sharding and Casper, which will drastically alter the network. 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 Proof of Work (PoW) from the network and replace it with Proof of Stake (PoS), with a block reward at 0.22 ETH/block. Currently, there are no plans to cap the total amount of ETH created.

Source: Hsiao-Wei Wang

While the network is still PoW based, Programmatic PoW (EIP 1057) will likely be implemented in Istanbul, pending a successful audit. ProgPoW is designed to reduce ASIC mining on a network by increasing the efficiency of GPU and FPGA mining. Innosilicon and Bitmain both currently have three ASIC miners available for the EtHash algorithm, while a new ASIC mining chip from a third mining company, Linzhi, was released earlier this month.

If implemented, EIP 1057 will make all current Ethash ASICs unable to mine the ETH chain. Those using Ethash ASICs may choose to continue mining the pre-fork chain. Another possibility is that ASICs will be used to mine the Ethereum Classic (ETC) chain, which also uses the Ethash algorithm. In any case, the goal of decreasing ASIC use on the ETH chain will be successful, although likely temporary. At US$0.06/KWh, all currently available Ethash ASICs are profitable.

Source: asicminervalue

Hash rate (solid line, chart below) and difficulty (dashed line, chart below) have remained stable since March. Both remain higher than 2017 levels and have risen from multi-month lows. Mining profitability is also near all-time lows but has begun rising in line with market prices. If ETH prices or mining profitability fall significantly, hash rate will likely follow suit.

Source: BitInfoCharts

The average block time is currently 13.24 seconds, which is near the historic record. The block count per day (line, chart below) has therefore increased to a record high. There are over 107.42 million ETH in circulation with inflation per annum currently at 4.57% (fill, chart below). Inflation is slightly higher than pre-Constantinople levels, but essentially the lowest levels ever seen.

Source: CoinMetrics

Despite near record fast block times, pending transactions continue to hold well above 60,000, with only a few smart contracts accounting for most of the transactions. Over the past 30 days, the betting dapp Fair Win has accrued the most ETH spent in transaction costs, surpassing ERC-20 USDT significantly. Nearly 70% of all ETH gas costs have been related to Fair Win and ERC-20 USDT over the past month.

USDT was originally issued on the OMNI chain in 2015, but has been aggressively swapped to an ERC-20 token over the past few months. In total, 47% of all circulating USDT is now on the ETH chain. ERC-20 transfers are both cheaper and faster than OMNI transfers, thus many exchanges have opted to add the option for ERC-20 USDT in recent months. ERC-20 USDT transactions per day (light green line, chart below) and average transaction values (light green fill, chart below) have quickly surpassed OMNI transactions per day (dark green line, chart below) and average transaction values (dark green fill, chart below).

Source: CoinMetrics

The ETH network currently has 6,678 active network nodes, 36% of which are located in the United States. Due to the somewhat cumbersome hardware and time requirements of running a node, many of these nodes are run by Infura, or similar node servicers, who provide access to the network for developers. These services have become increasingly important for ETH as the blockchain continues to grow. ETH nodes have several sync modes, with fast sync requiring approximately 186 GB of storage and a full archival node requiring nearly 3.07 TB of storage.

The number of on-chain transactions per day (line, chart below) has ranged from 650,000 to 750,000 since July. This is up from a yearly low of 430,000 in February, but down from the record high of 1.24 million on January 9th, 2018. Transactions per day have been on a steady decline since early June.

The average transaction fee (fill, chart below) is currently US$0.41, which is up from a pre-Constantinople level of US$0.20. On February 19th and March 18th, the average transaction fee spiked to US$1.22 and US$0.63 respectively. Fees have been rising, despite declining transactions per day, because of a lack of efficient scaling methods. This week, miners voted to increase gas limits by 25%. Overall, fees are lower than during much of 2018.

Source: CoinMetrics

The 30-day network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has ranged from 30 – 70 since March 2018, and is currently 45. 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 30 would likely signify bullish market conditions, as was the case from April 2017 to May 2018.

Monthly active addresses (MAAs) have continued to decline since late June and are currently near 291,000 (fill, chart below). MAAs are up from a yearly low of 192,000 in February, but down from a sustained all time high of nearly 610,000 in January 2018. Overall, MAAs remain above levels seen throughout 2017 and earlier. Unique ETH addresses continue to grow at a rapid rate, and are nearly 76 million (not shown). However, addresses can only be added to the network, and are never deleted.

Source: CoinMetrics

Globally, ICOs are increasingly moving away from public sales, likely due to fear of regulatory reproach and a shifting regulatory landscape. 2018 saw both the highest number of ICOs, at 1,075, and the largest USD sum raised in one year, at US$21.48 billion. Thus far in 2019, there have been 193 ICOs, raising a total of just over US$3.13 billion. In contrast, the total USD raise in January 2018 was US$2.81 billion. Over 200 2018 ICOs now have a -80% return on investment.

The month of May marked an almost 12 month high for ICO funds raised, thanks to Bitfinex’s non-ETH token raise, LEO. At the same time, Initial Exchange Offerings (IEO), where crowdsales are facilitated by an exchange, are increasing in popularity. However, these IEOs typically do not use ETH or have a native blockchain.

The top Ethereum based dapps over the past week, ranked by volume, continue to be led by gambling and exchange dapps. Over the past week, Eth2Dai and IDEX had 35,00 transactions each, more than any other ETH dapp. On June 8th, IDEX trade settlement was delayed due to congestion on the ETH blockchain. In the games category, My Crypto Heroes has had both the most transactions and daily active users over the past week. NEST most likely has artificially inflated users and volume numbers.

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. On February 9th, Twitter user Kevin Rooke pointed out that of the 1,375 ETH Dapps, 86% had zero users and 93% had zero transaction volume.

Source: DappRadar

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. Non-USDT stablecoin volume has slowly increased in recent weeks, including Dai (DAI), Paxos-Standard (PAX), Gemini-dollar (GUSD), and TrueUSD (TUSD), but continues to remain a fraction of total traded volume. A CME Group ETH futures product is also rumored to be approved sometime this year by the US Commodity Futures Trading Commission (CFTC).

In Asia, the Korean Won (KRW), Yen (JPY), and Yuan (CNY) pairs have ETH at ~US$164. Together, all three regions show relatively low interest in their fiat pairs, with nearly 5% of the total traded volume combined. A return of a significant premium in South Korea would signify a return to bull market conditions.

The over the counter (OTC) exchange LocalEthereum facilitated 1,744 ETH in transaction volume over the past week, which is down significantly from earlier in the year. In comparison, LocalBitcoins exchanged 5,344 BTC last week according to coin.dance. Despite declining volumes, daily users have increased over the past few months.

Earlier this year, LocalEthereum removed fees for cash trades whereas LocalBitcoins removed the cash trade option altogether due to regulatory pressure. 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.

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. The spike in volume on February 20th preceded the fork on the 28th. On August 9th, volume spiked to the second highest ever, with 1,350 ETH traded that day.

Source: DappRadar

Worldwide Google Trends data for the term "Ethereum" spiked over the past two months, which matched the swift move up in price. Overall, searches for “Ethereum” remain down significantly from early 2018. A slow rise in searches for "Ethereum" preceded both highs in June 2017 and January 2018, likely signaling 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

The ETH spot price underwent two swift reversals over the past month, and is now essentially back to where the previous bullish move began. As a macro bear trend possibly emerges, roadmaps for price can be found on high timeframes using Exponential Moving Averages, Volume Profile Visible Range, Pitchforks, Ichimoku Cloud, and divergences. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the 50-day Exponential Moving Average (EMA) and 200-day EMA Death Cross occurred on August 24th, a signal for bear market conditions. Based on Volume Profile Visible Range (VPVR – horizontal bars, chart below), price now sits below the US$212 resistance node and just above the US$140 support node.

Over the past month, the multi-month concaving Relative Strength Index (RSI) was breached, with the RSI swiftly returning over the past few days. Currently, there is an active bullish divergence on RSI and volume, which is suggestive of weakening bearish momentum.

The long/short open interest on Bitfinex (top panel, chart below) is currently 83% long with long positions decreasing slightly over the past few days. A significant price movement downwards will result in an exaggerated move further, as the long positions will continue to unwind. This is known as a “long squeeze.” However, Bitfinex long/short ratios have historically had little bearing on price action for ETH.

Additionally, price continues to be bound by a bearish Pitchfork (PF) with anchor points in December 2017 and April and May 2018. In April, price breached the median line (yellow,) to the upside, for the first time since August 2018. Upside resistance sits at US$200 with near term support at US$154. If price fails to hold above support, a return to the median line at US$75 is possible within the next few weeks.

Turning to the Ichimoku Cloud, four metrics are used to indicate 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 bearish; price is below the Cloud, the Cloud is bearish, the TK cross is bearish, and the Lagging Span is below Cloud and near the current spot price. A traditional long entry signal will not trigger until the spot price is once again above the Cloud.

Lastly, on the daily ETH/BTC chart, trend indicators are bearish with the market currently attempting a mean reversion. The 50-day EMA and 200-day EMAs are currently bearishly crossed with price being denied at both the 50-day EMA and 200-day EMA several times this year. A continued mean reversion attempt back to the 200-day EMA, at 0.026 BTC, is possible in the near term.

Cloud metrics using doubled settings are bearish, with a Kumo breakout below the Cloud occurring in mid-June. However, an edge to edge bullish move towards 0.26 BTC is likely in the near term. In the future, a bullish 50/200 EMA cross, as well as a Kumo breakout, should act as a strong buy signal for many traders, if it occurs.

Conclusion

On-chain fundamentals have declined over the past few months, leading into the Istanbul hard fork, which is tentatively slated for October 16th. NVT, an inverse metric of on-chain activity, has begun to increase sharply, suggesting the current market cap does not support the current utility of the chain. Despite the lightning fast block times, pending transactions have now bloated to over 60,000. As average transaction fees spiked, miners voted to increase the gas limit by 25% in an attempt to decrease congestion and keep fees down. Most of the clogged transactions are due to two smart contracts, Fair Win and ERC-20 USDT.

Hash rate, difficulty, and mining profitability have all also increased week-over-week with the ProgPoW change likely coming in the next six months via the Istanbul hard fork. Although ETH 2.0 is still in the early stages of development, the changes are actively being discussed, debated, and coded, with a phase zero release slated for January 2020.

Technicals are currently bearish for the ETH/USD pair and deeply bearish for the ETH/BTC pair. ETH/USD is below the Cloud and 200-day EMA, indicating a significant trend shift in a bearish direction. VPVR resistance and support currently stand US$212 and US$163, respectively. ETH/BTC is in the midst of an active mean reversion attempt to the 200-day EMA at 0.026 BTC. A bullish edge to edge trade on the Cloud also supports this move.