Ethereum Price Analysis – Scaling solutions join the mix

Ethereum (ETH) remained in a tight trading range this week near its all time high. The market cap now stands at US$43.89 billion with US$1.26 billion in trade volume over the past 24 hours. Holders have seen a 58% increase from November.

The number of transactions per day recently hit a new all time high of 791,000, in no small part due to a popular Decentralized Application (dapp) called CryptoKitties. More than US$8,000,000 in ETH has been spent on the self-described “breedable Beanie Babies.”

The explosion in transactions has led a backlog and higher fees. The current transaction costs, at the time of writing, are 41 gwei for a <2 minute transaction and 10 gwei for a <60 minute transaction.

Hash rate also hit a new all time high, in the setting of a decreased block reward from 5 ETH to 3 ETH and decreased difficulty. Block times briefly increased to 26 seconds from 23 seconds, only compounding the problem.

There are currently 870 decentralized applications (dapps) in various stages of development. As these dapps are released, Ethereum will need to scale or may collapse under its own success. CryptoKitties provided an excellent stress test of the current system, at one point accounting for over 20% of transactions on the network.

Vitalik Buterin, Vlad Zamfir, and other Ethereum developers are currently working on many scaling solutions, the most drastic being a switch from Proof of Work (PoW), or mining, to Proof of Stake (PoS). The protocol changed, dubbed Casper, would lock Ether in a smart contract and provide the user with interest. The process would require much less electricity and no mining software or hardware.

Further scalability updates include the already live Raiden Network, which is analogous to Bitcoin’s Lighting Network, and will allow for hub and spoke off-chain channel-based transactions. The future Plasma update will address smart contract scalability, while a type of database partitioning called Sharding is being developed to address the growing blockchain size. Despite the growing body of work surrounding scaling, Vlad Zamfir has stated that Ethereum is neither safe nor scalable but is optimistic about its future.

Ethereum has also been the platform of choice for Initial Coin Offerings (ICO). The Securities and Exchange Commission (SEC) continues to remain vigilant against the most obvious ICO scams, the most recent being PlexCorps on December 4th. Securities fraud cases will increase as the SEC becomes more comfortable with the technology, but statements like “falsely promising a 13-fold profit in less than a month” should be a red-flag for anyone involved.

ETH trading volume has been led by Bitcoin (BTC), the US Dollar (USD), and South Korean Won (KRW) trading pairs on Poloniex, GDAX, and Bithumb respectively. A peer-to-peer, over-the-counter Ethereum exchange opened in late October but complete volume data is not currently available.

The rise of GDAX volume and liquidity has come quickly thanks to retail and institutional investors clamoring on board through parent company Coinbase. As an early entrant into the US market, Coinbase has grown to be the go-to company for retail investors in the US. Gemini, Bitstamp, and Kraken are also available to US customers, but are not as widely known and do not specifically cater to retail investors.

Bitfinex no longer offers trading to retail US customers, although the exchange still leads the market in USD Tether (USDT) trading volume. While USDT trading volume is often combined with USD trading, making Bitfinex appear to be the market leader, USDT is a fiat analog pegged to the USD. The company behind the asset claims to have 1 USD for every USDT in existence.

Technical Analysis

After breaking above of the multi-month Ascending Triangle horizontal resistance, the price has now retested this level and found it as support. The fractal stop loss level on the daily time frame for an active long trade is currently US$403.90. This lagging indicator appears after a high-low-high, or low-high-low in candle structure. During a bull trend, price should not be breaking horizontal levels of bearish fractals (high-low-high),

The Ichimoku Cloud on the daily chart, with doubled settings (20/60/120/30) for a more accurate and smoother signal, shows all Cloud metrics are bullish. Price has bullishly bounced on the daily Kijun, or 50% retracement, twice now and remains in a tight range.

These ranges typically represent consolidation with a high likelihood of continuation. This specific pattern is known as a bullish flag and has measured move of US$580 and US$650 respectively, the 1.618 fib extension.

On the four hour chart, the Ichimoku Cloud with doubled settings (20/60/120/30) is showing signs of long entry signals and bullish bias. A long entry will trigger when a candle closes above the Cloud and the Lagging Span is above price and above Cloud.

As the price ranges in a zone Cloud signals become slightly less probable, but no less actionable. The lowest risk long entry will likely come after the price has broken the current all time high, around US$500.

The ETH/BTC ratio continues its descent through key support levels. After breaking down from a descending triangle, price entered a bearish Pitchfork. This indicator projects a diagonal trend using three anchor points. The median line (red) represents the mean of the trend while the top and bottom zones represent overbought or oversold territory, respectively. Price has respected the oversold and overbought zones thus far.

A long trade on this pair will remain a high risk trade until price breaks out of the bearish trend. Currently, price remains very near the mean of the downtrend.

Lastly, on the six hour ETH/BTC chart there is a completed bullish harmonic (shark) with a bounce above the 1.272 fib extension at 0.025BTC. This harmonic holds a minimum expected target of 0.0457BTC.

Conclusion

With the wild success and mainstream press coverage of CryptoKitties expect many more crypto collectible type dapps to launch in the very near future. Anecdotally, I’ve had two face to face conversations with people regarding CryptoKitties in the past two days alone. The awareness and interest around this project could easily be underestimated.

Technicals suggest continued moves to US$650 and US$800 based on chart patterns. The ETH/BTC is also near a potential bottom but remains in a strong downtrend.