Ethereum Price Analysis – Relief rally more likely than lower lows

Ethereum (ETH) has dropped 15% over the past week and is currently down 81% from the record high set in January. The market cap stands at US$27.9 billion, with US$1 billion traded in the past 24 hours.

The number of transactions per day has ranged between 60,000-70,000 over the past few weeks. Pending transactions have decreased from 80,000 to around 50,000 over the same time. Recent spikes in fees have been related to “trade mining” activity, a new fee model becoming popular on Chinese exchanges. The model reimburses 100% of the platforms transaction fees via the platforms native token. This has encouraged users to create fake transactions in order to collect fees and earn more tokens.

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio 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 and unique active addresses have both been used to discuss the fundamental value of the network based on Metcalfe’s law. Unique ETH addresses, which now exceed 40 million, continue to grow at a rapid rate. While addresses can never be deleted, this metric indicates a growing use of the ETH blockchain. Many of these addresses have been created post-ICO mania and continue to be created as more and more decentralized applications (dApps) come online. Reflecting this growth, ETH-related job postings on LinkedIn currently exceed 500, down from 1,000 postings in July.

According to coinschedule.com, there have been 725 Initial Coin Offerings (ICOs) thus far in 2018, which have raised a total of US$18 billion. The total for 2017 was 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 next step in crowdfunding will likely be Security Token Offerings (STOs) which meet strict regulatory guidelines. Most ICOs attempt to declare themselves as “utility tokens” in order to skirt regulatory compliance. U.S. SEC chair Jay Clayton has already said, “I believe that every ICO I have seen is a security,” although most are not registered as such. Most token pre-sales are considered securities under the U.S. Howey Test where there is an investment of money, the investment is in a common enterprise, and buyers expect to profit from the efforts of others.

According to dappradar.com, the top dApps by volume over the past week continue to be dominated by decentralized exchanges and gambling apps. IDEX has had both the most users in the past 24 hours as well as the highest ETH volume over the past week. Bancor has regained popularity after a security breach resulting in the loss of  ~25,000ETH and 3.2 million BNT in July. The Augur prediction market sneaks in at 7th in volume over the past week with a relatively low amount of active users.

The top crypto collectible dApps are MLBCrypto Baseball and CryptoKitties. The baseball dApp is officially licensed by the MLB and has been auctioning off Non-Fungible Tokens (NFTs) of baseball players. CryptoKitties have largely fallen in popularity since the virality achieved in December, but the dApp continues to release new genes into the wild. CryptoKitties auctions have collected over 46,000ETH since inception, with an average cost of US$61 per Kitty.

According to dappcapitulation.com, most dApps and large ICOs continue to hold vast quantities of ETH despite wild fluctuations in ETH price. The most notable exception being EOS, which has sold 100% of it’s ETH treasury in stages, the last of which sold on July 2nd.

Hash rate and difficulty have posted record highs throughout August, while mining profitability is holding near record lows. The network node count is currently 15,708, half of which reside in the U.S., and many of which are run by Infura. ETH Proof of Work (PoW) mining will eventually become entirely impossible through the Casper Proof of Stake (PoS) transition. This change will also come with a significant reduction in inflation, to about 500,000 ETH per year or 0.22 ETH per block.

Casper is unlikely to be implemented until 2019-2020. A community poll, with votes weighted by wallet balance, unanimously supported decreasing issuance to 1ETH per block until Casper is implemented (EIP 858). The ETH inflation rate is currently around 7.3% and ETH miners are paid $2.5 billion a year despite the reduction in block reward after the Metropolis fork in October 2017.

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 OKEX, Binance, Huobi, and Bitfinex. In Asia, the Korean Won (KRW) and Yuan (CNY) pairs hold a slight premium while the Yen (JPY) pair is in line with the 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 1,520ETH in transaction volume over the past week, according to dappradar. In comparison, LocalBitcoins exchanged 7,922BTC in the past week, according to coin.dance. 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.

Technical Analysis

ETH has experienced signs of capitulation due to its rapidly falling price on high volume. Ichimoku Cloud, divergences, Pitchforks, exponential moving averages (EMAs), and Chart Patterns can be used to determine the entry points and targets, as well as the strength or weakness within the macro trend. Further background information on the technical analysis discussed below can be found here.

Open long and short interest remains net long on Bitfinex. Shorts have been decreasing since July with long interest steadily increasing. Long interest is nearing an all time high, alongside a relative local bottom in price, which may indicate bullish exhaustion and further downside pressure, similar to a long squeeze. In contrast, Bitcoin’s open interest is currently heavily net short near a local bottom in price, suggesting a potential short squeeze.

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 quicker 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 dropped over 30% since the bearish TK cross below the Cloud on July 30th. A relief rally towards the Kijun at US$370 is likely if price does not make lower lows.

The status of the current Cloud metrics on the daily 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 bearish, and Lagging Span is below Cloud and in price. Again, a traditional long entry will not trigger until price is above the Cloud. Price has continued to decline without a bearish Kijun bounce, using these settings, indicating the singled daily Cloud settings are optimal for current market conditions.

There is an active RSI bullish divergence from the April low to present. Price made a lower low without making a lower low in RSI, suggesting that bearish momentum is waning. If lows are respected, a price move towards the flat Kumo at US$541 is possible.

On the four hour chart, price remains bound to a bearish Pitchfork with anchor points in May and July. Based on the trends rate of change, lows below the bottom diagonal support of the Pitchfork are unlikely to be sustained. The 50EMA and 200EMA have remained bearishly crossed since late May. Both EMAs should act as resistance if price moves North. A breach above the Pitchfork or a bullish 50/200EMA cross should be considered long entry signals.

On the ETH/BTC pair, price has largely been confined by several diagonal support and resistance zones. Price has broken the edge of the bottom support zone, completing a bearish inverted Adam and Eve double top chart pattern. The pattern yields a 1.618 fib extension of 0.0174 which matches the Volume Profile’s support zone.

Conclusion

Ethereum’s price rise throughout 2017 was strongly influenced by the rise of numerous ICOs which brought about a new method of crowdsourcing. As ICOs minted ERC tokens and typically sold them for ETH, most have held onto their ETH and continue to do so. Each and every ICO that continues to hold large sums of ETH represents a potential for further price capitulation. ETH’s price may remain stale from a fundamental standpoint until dApp use or Security Token Offerings gain in popularity.

Technicals suggest the macro bear trend is intact with a relief rally more likely than lower lows. The Bitfinex long vs. short ratio supports a potential long squeeze, which would result in lower lows. A countertrend rally to US$370 will likely be quickly sold into from both active longs and new short sellers. The sustained drop in ETH/BTC ratio suggests that while BTC has declined, ETH has declined at a hastened pace.

Ethereum’s price rise throughout 2017 was strongly influenced by the rise of numerous ICOs which brought about a new method of crowdsourcing. As ICOs minted ERC tokens and typically sold them for ETH, most have held onto their ETH and continue to do so. Each and every ICO that continues to hold large sums of ETH represents a potential for further price capitulation. ETH’s price may remain stale from a fundamental standpoint until dApp use or Security Token Offerings gain in popularity.