Ethereum Price Analysis – Leveraged positions at record highs

Ethereum (ETH) tumbled more than 40% this month, before recovering slightly over the past week on record-setting exchange volume. The market cap stands at US$21 billion, with US$1.72 billion traded in the past 24 hours.

The number of transactions per day recently dropped below 500,000 for the first time since July. Pending transactions are currently holding around 60,000. Average transaction fees have hit their lowest levels since October 2017. Based on the transaction and fee decline, the popularity of "trade mining," which reimburses exchange fees to users via native platform token, appears to have waned.

Source: bitinfocharts.com

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has been in decline since June 13th after surpassing a two year high. 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 its economic activity and utility, which should be seen as a bullish price indicator.

Daily active addresses (fill, chart below) have declined since January, but remain well above 2017 levels. Active and unique addresses are important considerations when determining the fundamental value of the network based on Metcalfe’s law. Unique ETH addresses, which now exceed 42 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.

Source: coinmetrics.com

The ICO bonanza has begun to slow significantly recently, with a few notable exceptions. There have been a total of 782 Initial Coin Offerings (ICOs) thus far in 2018, which have raised a total of US$18.83 billion. In 2017, ICOs raised a mere US$3.88 billion, with only US$95 million raised in 2016. ICO sales have plummeted since EOS and TaTaTu completed their ICOs in June, having raised a combined US$5.575 billion. The messaging service Telegram also completed two private pre-sales this year totaling US$1.7 billion.

Security tokens may be the next big step in crowd raising for ETH. EIP1411 has been proposed to standardize these tokens, which generally have different fungibility and legal requirements than ERC20 tokens. Security token offerings (STOs) help decrease the barrier of entry to traditional venture capital and allow for increased asset liquidity. Other projects working to bring STOs into the spotlight include Polymath and tZero.

Source: coinschedule.com

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 pyramid and Ponzi scheme dApps, although FOMO3D and PoWH3D have fallen out of favor.

IDEX continues to dominate active decentralized exchanges as it has had both the most users in the past 24 hours as well as the highest ETH volume over the past week. Over the past 30 days, IDEX has held over 50% of the market share in comparison to other popular DEXs. Bitfinex also introduced ETHfinex trustless yesterday, entering into the DEX foray.

The key components of a DEX over a centralized exchange include; limited or no custodial risk and no KYC/AML regulatory hurdles. While an advantage for some, these characteristics often mean that large institutional players cannot legally participate on the exchange, which decreases liquidity dramatically.

Source: etherscan.io

Augur, the decentralized oracle and prediction market, continues to see very little activity due to several issues. The platform has struggled to address low accessibility, time to sync with the platform, poor design, lack of options, gas costs, and ETH price volatility. Despite being one of the earliest ICOs in 2015, and holding a US$138 million market cap, the project has yet to deliver a widely-used product. Although Augur founder Joey Krug has floated the idea of introducing stable coins like dai to decrease platform fees, there is no indication this will happen anytime soon.

The viral hit CryptoKitties, which took the world by storm late last year, recently saw the millionth kitten and continues to maintain user interest. CryptoKitty auctions have collected over 49,000ETH since inception, with an average cost of US$59 per Kitty. In June, the project released the KittyVerse platform allowing cats to participate in races and catfights.

Source: dappradar.com

Despite ETH pushing yearly lows in recent weeks, many dApps and large ICOs continue to hold vast quantities of ETH. There are 11 ICOs which hold more than 100,000ETH and at least 10 ICOs whose market cap is less than it’s treasury. In total, over 4% of all ETH in existence continues to be held by ICOs.

However, there have been significant movements of large quantities of ETH out of ICO wallets, from both ICO holdings and from the ETH ICO itself. The proclaimed ETH killer, EOS, which had the largest ETH raise ever, sold the last of it’s ETH holdings by July 2nd. Generally, coins are not removed from cold storage and sent to an exchange for any other reason than to sell, although moving coins in and of itself does not automatically mean the coins will be sold.

Source: app.santiment.net/projects/ethereum

Hash rate and difficulty have both declined significantly since early August. Block times, block reward, price, and transaction fees all effect mining profitability, which is currently sitting near all time lows. The network node count is currently 14,000, 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 substantially. ETH has several sync modes, with fast sync approaching 94GB and full sync exceeding 667GB.

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. 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.

Source: bitinfocharts.com

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

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.

The over the counter (OTC) exchange LocalEthereum facilitated 2,117ETH in transaction volume over the past week. In comparison, LocalBitcoins exchanged 7,627BTC in the past week. Traditional OTC desks often require a minimum order of between US$100,000 and US$250,000, whereas these peer-to-peer marketplaces have no minimum order size.

Source: dappradar.com/app/148/localethereum

Technical Analysis

Ethereum has experienced further signs of capitulation due to rapidly falling prices on high volume. Exponential moving averages (EMAs), divergences, Pitchforks, and Ichimoku Cloud can be used to determine the entry points and targets during this period, as well as the strength or weakness within the macro trend. 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 101 days, resulting in a steady decline of over 60%. The bearish Death Cross and bullish Golden Cross are significant events for many traders as these crosses 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.

Total long/short open interest is net long and at record highs on Bitfinex, with both long and short positions at all time high 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.

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.

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.

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 a long position is favored over a short position, with targets of US$235 and US$327.

The status of the current Cloud metrics on the four hour time frame with double settings (20/60/120/30) for more accurate signals are also bearish; price is below Cloud, Cloud is bearish, TK cross is bullish, and Lagging Span is below Cloud and in price. Again, a traditional long entry will not trigger until price is above the Cloud. The long flat Kumo at US$235 should act as a magnet for price.

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.

Conclusion

Fundamentals suggest that despite declining overall network use compared to previous months, more value is being transferred on the Ethereum blockchain. Hash rate continues to decline suggesting that mining profitability has dropped far below what many miners can sustain. A decrease in ETH block reward after October 30th may further this decline if other metrics affecting mining profitability do not increase. Although the intention is to eventually make PoW mining unprofitable entirely, full PoS Casper implementation will not be ready for many years. ICOs and dApps continue to have muted growth over the course of the year, with STOs on the horizon likely representing the next evolution of crowdfunding.

Technicals in the near term favor a move toward US$235 as opposed to fresh lows, thanks to record short positions paired with a bullish TK C-clamp. The Overall trend remains significantly bearish with price below the daily 200EMA and below the daily Cloud. Price will likely remain bound within the downtrending Pitchfork for the next few weeks. Further significant downside will likely require consolidation and mean reversion.