Ethereum Price Analysis – SEC takes action on ICOs, dApps, and DEXs

Ethereum (ETH) has fallen a staggering 40% over the past week and is currently 91% down from the record high set in January. The market cap stands at US$14.27 billion, with US$2.54 billion traded in the past 24 hours. This leaves ETH ranked third by market cap, below XRP (XRP) and above Bitcoin Cash (BCH).

The current roadmap for Ethereum includes major changes to the consensus algorithm and block rewards in the coming months. EIP 1234 will reduce the block reward to 2 ETH/block and delay a difficulty increase, and will be implemented with the Constantinople hard fork. While the update was slated for release on October 30th, recent problems discovered while testing the changes on the Ropsten testnet have pushed back the hard fork to January 2019 at the earliest.

Further down the pipeline is Casper, which will drastically alter the ETH network, reducing the inflation rate significantly. The inflation rate (chart below) in 2017 and 2018 was 14.75% and ~7.40% respectively. Projected inflation rates for other cryptocurrencies at the start of 2019 include; ETH 4.70%, BTC 4.11%, BCH 3.77%, LTC 8.97%, ETC 8.60%, DASH 9.02%, and XMR 6.54%.

Source: coinmetrics.com

A white paper for Vlad Zamfir’s Correct-by-Construction Casper was released earlier this month. Vitalik Buterin’s hybrid version of Casper will change the consensus algorithm from solely PoW to PoW and PoS and is set for a 2020 release. The fork will also change the block rewards for PoW and PoS to 0.6 and 0.22 ETH/block, respectively. The full implementation of Casper is slated for release in 2022 and will remove PoW altogether, leaving the PoS block reward at 0.22 ETH/block for stakers.

On the network side, hash rate and difficulty have both declined significantly since early August, and are now at levels last seen in February 2018. Difficulty is still slightly higher than the peak in October, before the difficulty reduction. Block times, block reward, price, and transaction fees all effect mining profitability, which is currently at all time lows and falling.

The network node count is currently 12,369, 43% of which are located 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. ETH has several sync modes, with fast sync exceeding 114GB and full sync exceeding 1TB.

Source: bitinfochart.com

The current number of transactions per day on the network (line, chart below) stands at 550,000, up from a yearly low of 500,000. The average transaction value (fill, chart below) has fallen dramatically through the year, currently at US$752, down from a high of US$20,000 in June 2017. Pending transactions are also in decline and are currently below 80,000, with the average transaction fees also declining to a new yearly low at US$0.16 (not shown).

Source: coinmetrics.io

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) is on the rise, nearing the high seen in June, and also nearing a three-year high. An NVT holding below 20 would likely signify bullish market conditions. 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. Inflection points in NVT can be leading indicators of a reversal in asset value.

Daily active addresses (fill, chart below) have declined since January, but remain well above 2017 levels. Active and unique addresses are important to consider when determining the fundamental value of the network using Metcalfe’s law. Unique ETH addresses continue to grow at a rapid rate and are above 47.6 million. While addresses can never be deleted, this metric indicates a growing use of the Ethereum blockchain. ETH-related job postings on LinkedIn are slightly above 361, down from 1,000 postings in July. There are also more than 1.16 million members in 3,986 Ethereum groups on meetup.com.

Source: coinmetrics.io

According to CoinSchedule, there have been a total of 954 ICOs thus far in 2018, which have cumulatively raised a total of US$21.96 billion. The month of May saw the most ICOs, with 144, while September saw the least, with 56. In 2017, ICOs raised a mere US$3.88 billion, with only US$95 million raised in 2016. Total raises in 2018 still exceed US$10 billion even when the top 10 raises are excluded. However, ICO raises have dropped significantly over the past few months.

Last week, the U.S. Securities and Exchange Commission (SEC) announced a settlement regarding securities registration charges against Airfox and Paragon. Airfox raised US$15 million to develop blockchain technology for ad targeting and Paragon raised US$12 million to develop blockchain technology for the cannabis industry. Both must offer investors a refund, register their tokens as securities and file quarterly reports, and pay a US$250,000 fine. This ICO crackdown is a sign for many of of a wider sweep by the SEC, targeting ICOs which operated in the United States and did not register as securities.

Source: coinschedule.com

The top dApps over the past week, ranked by volume, continue to be dominated by decentralized exchanges and gambling apps. IDEX and ForkDelta had the highest number of users over the past week. Among all dApps in the game category, CryptoKitties continues to dominate user, volume, and transaction metrics. Over the past year, active dapps has increased each quarter while active users have declined each quarter.

Earlier this month, the U.S. SEC also fined the founder of EtherDelta DEX, Zachary Coburn, US$388,000 for operating an unregistered national securities exchange. The EtherDelta DEX remains in full operation. In February 2018, the EtherDelta DEX was forked to create ForkDelta, which remains one of the most popular DEXs on the market.

Source: dappradar.com

Source: dapp.com

Despite ETH pushing yearly lows, many dApps and large ICOs continue to hold large amounts of ETH. About 55,000ETH has been moved from ICO wallets over the past month (red bars, graph below) . 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. There are eight ICOs which continue to 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.

Source: app.santiment.net/projects/ethereum

Turning to developer activity, over 990 developers have contributed a cumulative 28,302 commits to the ETH project on GitHub over the past year. Most of these commits occured in Solidity repo (chart below), which is the programming language for writing smart contracts.

Most coins use the developer community of GitHub 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.

In the markets, ETH exchange traded volume in the past 24 hours has predominantly been led by the Bitcoin (BTC), Tether (USDT), and U.S. Dollar (USD) pairs. The majority of trading occurred on Bitfinex, OKEx, Huobi, and Binance. In Asia, the Yuan (CNY), the Korean Won (KRW), and the Yen (JPY) pairs hold essentially no premium over the USD pairs. Together, all three regions show relatively low interest in their fiat pairs, with ~3.5% of the total traded volume combined. Dai volume has continued to slowly increase over the past few weeks but continues to remain a fraction of total traded volume.

The over the counter (OTC) exchange LocalEthereum facilitated 1,879ETH in transaction volume over the past week, which is down when compared to the prior two weeks. In comparison, LocalBitcoins exchanged 8,941BTC in the past week.

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.

Google Trends for the term "Ethereum" remain down sharply over the course of the year and is currently sitting at yearly lows (not shown). However, over the past 30 days, interest in Ethereum has been relatively high. A slow rise in searches for "Ethereum" preceded the bull run in Q4 2017, likely signaling a large swath of 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

A period of high volatility following a period of low volatility, in an active bear trend, often indicates trend continuation. A roadmap for the upcoming trend continuation can be determined using exponential moving averages (EMAs), Pitchforks (PFs), and the Ichimoku Cloud. 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 164 days, resulting in a steady decline of over 80%. This bearish Death Cross and the opposing bullish Golden Cross are significant events for many traders and 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. Although the EMA cross is bearish, the 200EMA will act as a mean reversion level for price, currently at US$333.

Total long/short open interest is net long and near record highs on Bitfinex, with long positions at relatively elevated levels but decreasing. Shorts are also near record highs, but have begun decreasing recently. A significant price movement downwards will result in an exaggerated move as the long positions will begin to unwind. While there are no active RSI or volume divergences, RSI is the lowest ever recorded on the daily timeframe. Bitfinex daily ETH volume also hit a record high this week.

Price is now below the bearish PitchFork (PF) with anchor points in December, March, and May, suggesting invalidation. While price is bound within the PF, the the median line (yellow) is continually tested as as either support or resistance. A drop below the PF suggests a hastening of the bear trend. A break of the previous local low of ~US$120 would potentially see a decline to US$80-US$97 range based on historic price action. Daily volume is also currently at a 15-month high on the BraveNewCoin ELX.

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 faster signals are bearish; price is below Cloud, Cloud is bearish, TK cross is bearish, and Lagging Span is below Cloud and below price. A traditional long entry will not trigger until price is above the Cloud. Price has not been above the Cloud since May.

The status of the current Cloud metrics on the daily time frame with doubled 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 below price. Again, a traditional long entry will not trigger until price is above the Cloud. An imperfect Kijun bounce on November 9th represented the ideal short entry. As price moves further and further from the Kijun, a mean reversion back to the Kijun becomes more and more likely.

Lastly, on the ETH/BTC pair, much of the same analysis applies similar to the ETH/USD pair: the 50/200EMAs remained bearishly crossed and the Cloud is entirely bearish with a recent Kijun bounce. The ETH/BTC ratio has historic price support and pivot point support near the last local low of ~0.026-0.027BTC. A pivot point is calculated as an average of the high, low, and close from the previous month.

Conclusion

Network fundamentals continue to depend on the direction and speed of the PoW to PoS transition as well as the reduction in inflation. A delay in the Constantinople hard fork is a short term blow to the network as inflation will remain above 7% until next year. Network use hasn’t decreased or increased significantly in recent weeks, with the average value of transactions continuing to decrease. U.S. regulators, like the SEC, are just beginning to sink their teeth into the violations of the past two years and signify many more enforcement actions in the coming months. Many ICOs also continue to hold vast quantities of ETH, which represents additional sell pressure if those ICOs need to sell ETH to cover operational costs.

Technicals suggest bearish continuation with no end in sight. There are no candle stick or chart patterns to suggest an interim bottom. However, volume highs and a breach of the bearish PF do suggest potential capitulation, although buyers have still not come to the table. The next important psychological level will be US$100, which many buyers will likely defend on high volume. The next buying opportunity on the daily chart will likely be a bullish RSI divergence, with a lower low in price and a higher lower in momentum, which suggests bearish exhaustion.