Ethereum Price Analysis – Lull in on-chain fundamentals

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$23.28 billion and US$3.13 billion traded in the past 24 hours. The current spot price is down 85% from the all time high set in January 2018. However, the crypto asset has gained 166% since the December low.

The ETH project was proposed by Vitalik Buterin in 2013, with a crowdsale occurring in 2014. Other ETH co-founders include Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Wood, and Jeffrey Wilke. 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 blockchains mainnet went live in July 2015 with 72 million premined coins, which currently account for 67.7% 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. GitHub is a 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.

Source: GitHub

The next hard fork, Istanbul, is slated for October 16th. Four EIPs have been accepted for inclusion in the fork, while five EIPs have been tentatively accepted, and sixteen EIPs have been rejected, which leaves seven more proposed EIPs.

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), and a transaction data gas cost reduction (EIP 2028). The tentatively accepted EIPs include; ProgPoW (EIP 1057), improved smart contract upgradability (EIP 1702), repricing for trie-size-dependent opcodes (EIP 1884), EC arithmetic and pairings with runtime definitions (EIP 1962), and rebalanced net-metered SSTORE gas cost with consideration of SLOAD gas cost change (EIP 2200).

The next 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.

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

In total, almost 1,000 developers have contributed a cumulative 28,000 commits to the ETH project in the past year, across 204 GitHub repos. Most of the commits over the past year have occured in the Solidity repo (top chart). Solidity is the programming language used to write smart contracts on Ethereum. The ETH 2.0 repo has also become active over the past few months (bottom chart), 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

Source: GitHub

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, is currently in the research and development phase.

At US$0.04/KWh, all currently available EtHash ASICs are profitable. 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.

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 begun rising 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. All ETH ASICs are currently profitable at an electricity cost of US$0.10/KWh.

Source: BitInfoCharts

The average block time is currently 13.10 seconds, which is near the fastest in ETH history. The block count per day (line, chart below) has therefore followed suit. There are over 107.23 million ETH in circulation with inflation per annum currently at 4.52% (fill, chart below), which is slightly higher than pre-Constantinople levels, but essentially the lowest inflation levels ETH has ever seen. Despite record fast block times, pending transactions have been holding above 40,000 over the past week.

Source: CoinMetrics

The ETH network currently has 6,359 active network nodes, 30% 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 165GB of storage and a full archival node requiring nearly 2.92TB of storage.

The number of on-chain transactions per day (line, chart below) have declined over the past month, and are currently just below 735,000. 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. The average transaction fee (fill, chart below) is currently US$0.1336, which is down from a pre-Constantinople level of above US$0.20. However, on February 19th and March 18th, the average transaction fee spiked to US$1.22 and US$0.63 respectively. Overall, fees are lower than during most 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 43. 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 uptrending NVT with an uptrending ETH price suggests overbought conditions, or that the NVT metric may need to be retooled to better understand market variables. An NVT holding below 20 would likely signify bullish market conditions, as was the case from April 2017 to May 2018.

Monthly active addresses (MAAs) have decreased over the past month and currently stand at just over 305,000 (fill, chart below). MAAs are up from a yearly low of 192,000 in February, but down from an all time high of nearly 580,000 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 currently over 72 million (not shown). However, addresses can only be added to the network, and never be 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 176 ICOs, raising a total of just over US$2.73 billion. In contrast, the total USD raise in January 2018 was US$2.15 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 have a native blockchain or do not use ETH.

ICO treasury balances have reduced significantly throughout 2018 and 2019, both in USD value and in ETH quantity. The month of December saw the largest outflows since January 2018 at just over 484,000 ETH. May 2019 saw outflows totalling over 327,000 ETH, the largest since December. Since January 2019, ICOs have withdrawn nearly 875,000 ETH and continue to hold over two million ETH total.

The three largest remaining treasuries are Golem, DigixDAO, and Polkadot, at 368,000 ETH, 335,000 ETH, and 306,000 ETH, respectively. Polkadot’s funds were frozen in November 2017 when a bug was executed which deleted a code library for the Parity multi-sig wallet. Additionally, 19 ICOs currently have treasuries with greater value than the market cap of the token.

The top Ethereum based dapps over the past week, ranked by volume, continue to be led by gambling and exchange dapps. IDEX had nearly 55,000 transactions this week, down from 83,000 transactions over the past month, but 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, CryptoKitties has had the most transactions over the past week while 0xUniverse has had the most daily active users.

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

The Decentralized Finance movement, or DeFi, has increasingly gained in popularity with the total value locked in Defi dapps growing substantially over the past seven months. Lending dapps saw the biggest influx of money as their products began to provide a return for users. On Dharma, users can earn up to 10% APR and dYdX allows lending, borrowing, and 4x margin trading. The DEX Bancor saw the largest decline in holdings at nearly -14% after announcing, in mid-June, that US users would no longer be able to use the platform due to regulatory concerns.

Source: DeFiPulse

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. A CME ETH futures product is rumored to be approved sometime this year by the US Commodity Futures Trading Commission (CFTC). 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.

In Asia, the Korean Won (KRW), Yen (JPY), and Yuan (CNY) pairs have USD prices for ETH at US$216, US$218, and US$212 respectively. Together, all three regions show relatively low interest in their fiat pairs, with about 2.5% of the total traded volume combined. A return of a significant premium in South Korea would signify a return to bull market conditions.

USDT, which was originally issued on the OMNI chain in 2015, has been aggressively swapped to an ERC-20 token over the past few months. Since enabled, ERC-20 USDT usage has increased massively, both in terms of transactions per day and average transaction values. 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.

The over the counter (OTC) exchange LocalEthereum facilitated 2,279 ETH in transaction volume over the past week, which is down significantly from earlier in the year. In comparison, LocalBitcoins exchanged 5,768 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.

Source: DappRadar

Google Trends data for the term "Ethereum" spiked over the past two months, when compared to the previous year, but overall remains down significantly from early 2018. Searches for “Ethereum” fell drastically throughout 2018 where as 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

Over the past two weeks, ETH continues to significantly lag any bullish BTC moves. The current spot price now threatens to bearishly reverse course for the first time since April. 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 EMAs were bearishly crossed for almost a year, and subsequently crossed bullishly on May 19th. The previous bullish “Golden Cross” in May 2018 was overshadowed by a bearish reversal pattern, the head and shoulders. With price now below the 50-day EMA and 200-day, they both may act as resistance. A bearish “Death Cross” may soon follow.

Based on Volume Profile Visible Range (VPVR – horizontal bars, chart below), price now sits just above the US$212 node and below the US$295 node. Should the current support fail, the next closest historic support sits below US$163. There are currently no active RSI or volume divergences but RSI has formed a multi-month concaving slope suggesting of strengthening bearish momentum.

The long/short open interest on Bitfinex (top panel, chart below) is currently 84% long with long positions increasing significantly 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 has returned to a bearish downward 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$254 with near term support at US$192. If price fails to hold above support, a return to the median line at US$91 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 in Cloud and below price. A traditional long entry signal will not trigger until price is once again above the Cloud. However, based on the distance from the Kijun, a mean reversion to the flat Kumo at US$255, or the Kijun at US$278, may occur before a further downward move.

On the four hour chart, Cloud signals are leaning bullish with a bearish 50 and 200 EMA cross. If price remains above the Cloud, the 200 EMA at US$233 will be the only critical resistance remaining before a likely move to US$255. A bullish 50/200EMA cross should also provide additional bullish momentum. If price drops below the Cloud, a retest of the local lows at US$205 and US$194 becomes increasingly probable.

Lastly, on the ETH/BTC pair, trend indicators are bearish with price recently breaking a multi-month horizontal support level. On the daily chart, Cloud metrics using doubled settings are bearish (not shown), with a Kumo breakout below the Cloud occurring over the in mid-June. 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 bullish 50/200 EMA cross, as well as a Kumo breakout, should act as a strong buy signal for many traders, if it occurs.

A mean reversion attempt back to the 200-day EMA, at 0.03 BTC, is possible in the near term. The last remaining significant support, before a much further drop, sits at the VPVR node around 0.019 BTC. Additionally, lower timeframes continue to print bullish divergences, signaling weakening bearish momentum.

Conclusion

On-chain fundamentals have declined slightly over the past month but remain well above the levels seen in the latter half of 2018. Inflation has continued to decrease since the Constantinople hard fork in February with block times near an all-time low. Hash rate, difficulty, and mining profitability have all also increased week-over-week with the ProgPoW change likely coming in October 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 the bearish direction. VPVR support currently stands at US$163 and US$137. Over the past month, ETH/BTC broke a multi-month low and remains on thin ice. Any further lows will likely break the significant VPVR support at 0.019 BTC with no further significant support until 0.012 BTC. Otherwise, mean reversion to the 200-day EMA at 0.03 BTC is also possible, albeit much less likely based on the current trend.