Ethereum Price Analysis – Tether and DeFi continue pushing ETH on-chain use higher
Technicals are bullish for the ETH/USD pair based on current trend metrics, as the spot price is currently above both the 200-day EMA and the daily Cloud. Over the next few months, a target of US$285 to US$300 is likely based on VPVR, yearly pivots, and a newly established bullish pitchfork.
Ethereum (ETH) is a distributed ledger and decentralized computing platform with smart contract capabilities. Eth is second on the Brave New Coin market cap table, with a market cap of US$26.8 billion and US$734 million in trade volume over the past 24 hours.
The ETH project was proposed by Vitalik Buterin in 2013. Other co-founders include Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Wood, and Jeffrey Wilcke. An Initial Coin Offering (ICO) followed in 2014. 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 network mainnet went live in July 2015 with 72 million pre-mined coins, which currently accounts for 65% of the circulating supply. On Christmas day 2019, Wilcke sent 92,000 ETH, US$11.5 million, to the Kraken exchange, presumably to sell. ETH was launched with no vesting schedule or lock-in period for the pre-mined coins.
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, Metropolis Part 2: Constantinople in February 2019, Istanbul in December 2019, and Muir Glacier in January 2020.
Ethereum is upgraded through a series of Ethereum Improvement Protocols (EIPs), which are then bundled into each hard fork. The Github repository for EIPs has been extremely active since January 2019.
Source: Github – EIPs
In total, almost 1,000 developers have contributed a cumulative 28,300 commits to the ETH project in the past year, across 235 Github repos. Most of the commits over the past year have occurred in the Solidity repo, the programming language used to write smart contracts on Ethereum.
Source: Github – solidity
An adjacent 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 Q3 this year. Both versions of ETH will exist concurrently for some time before a migration is completed. Danny Ryan, Justin Drake, and Vitalik Buterin have the most commits in the ETH 2.0 repo.
Overall, ETH related repos have had more commits than any other crypto project over the past year. In December, Buterin released an alternative proposal for merging ETH 1.0 to ETH 2.0 on an accelerated schedule and less re-architecturing. Buterin also explained earlier this year that the “initial deployment of ethereum’s layer 2 scaling strategy has basically succeeded” and needs further refinement and deployment.
Source: GitHub – eth2.0-specs
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
While the network is still PoW based, Programmatic PoW (EIP 1057) was also being discussed as a poison pill to reduce ASIC mining on a network by increasing the efficiency of GPU and FPGA mining. ProgPoW is only likely to be implemented if future hash rate increases are driven by ASICs Bitmain, Innosilicon, and PandaMiner all have at least three ASIC miners available for the EtHash algorithm, while a new ASIC mining chip from a fourth mining company, Linzhi, was released in October 2019.
If implemented, EIP 1057 will make all current Ethash ASICs unable to mine the 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.
At US$0.04/KWh, all of the currently available Ethash ASICs are profitable. Mining profitability has increased dramatically since March, now nearing a two-year high. However, if ETH prices fall, hash rate will likely decline.
Source: asicminervalue
Hash rate (solid line, chart below) has steadily increased from January lows. Difficulty (dashed line, chart below) had risen steadily since April 2019, becoming disconnected from hash rate in October. This rise in difficulty despite a fall in hash rate is coded into Ethereum and known as an Ice Age, or difficulty bomb, which has activated twice before on Ethereum, once in 2017 and once in late 2018.
The most recent Ice Age was meant to serve as a transition from ETH 1.0 to ETH 2.0 and phase out PoW mining completely. However, because ETH 2.0 was not ready for deployment, the Ice Age was pushed back another four million blocks, to block 13.2 million, via a hard fork on January 2nd.
Source: BitInfoCharts
Average block times are currently 13 seconds with blocks per day (line, chart below) currently at an all-time high. There are nearly 111 million ETH in circulation with inflation per annum currently at 4.46% (fill, chart below), which sits near an all-time low. Despite record fast block times, pending transactions have been ranging around 125,000 over the past few weeks, with only a few smart contracts accounting for most of the transactions.
Source: CoinMetrics
Tether (USDT) was originally issued on the OMNI chain in 2015, but has been aggressively swapped to an ERC-20 token over the past year. In total, nearly 60% of all circulating USDT is now on the ETH chain. ERC-20 transfers are both cheaper and faster than OMNI transfers, thus many exchanges have added the option for ERC-20 USDT in recent months.
ERC-20 USDT transactions per day (light green line, chart below) and average transaction values (light green fill, chart below) have quickly surpassed OMNI transactions per day (dark green line, chart below) and average transaction values (dark green fill, chart below). ERC-20 USDT transactions per day are now 34x OMNI USDT transactions per day. ERC-20 transfers also account for 21% of all daily transactions on ETH currently.
Source: CoinMetrics
The Ethereum network currently has 8,000 active network nodes, 26% of which are located in the United States and nearly 70% of these nodes are running through Cloud hosting services. 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 as the blockchain continues to grow.
Nodes have several sync modes, with fast sync requiring approximately 419 GB of storage and a full archival node requiring over 4.66 TB of storage. A full node stores a snapshot of the entire network in every contract at every point in time. To contrast, a Bitcoin full node requires just over 335 GB of storage.
Source: Etherscan
The average number of on-chain transactions per week (line, chart below) is currently 1.05 million, increasing from the late January low of 490,000. This remains up from a multi-year low of 430,000 in February 2019, but slightly down from the record high of 1.24 million on January 9th, 2018.
Average weekly transaction fees (fill, chart below) in June were heavily skewed thanks to two transactions which sent $2.6 million each in fees, likely related to a gas extortion attempt or white hat hack of a ponzi scheme. However, fees on ETH had been rising significantly over the past two months even before these two transactions were sent and have continued to rise since early June.
In September 2019 and June 2020, miners voted to increase gas limits by 25% (bottom chart, below), which has alleviated some fee pressure. Gas limits are once again near maximum capacity, increasing the possibility of further raises in the Gas ceiling. Overall, fees are now nearing a two year high.
Source: CoinMetrics
Source: Etherscan
The 30-day network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) is currently 63 and falling. 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 NVT holding below 30 would likely signify bullish market conditions, as was the case from April 2017 to May 2018. NVT does not take factor in most DeFi-related transactions.
Monthly active addresses (MAAs) have risen to 500,00, representing a two-year high (fill, chart below). MAAs are up from a yearly low of 192,000 in February, but slightly down from an all-time high of nearly 610,000 in January 2018. Overall, MAAs remain above levels seen throughout 2017 and earlier. Unique addresses continue to grow at a rapid rate, and are just over 105 million (not shown). However, addresses can only be added to the network, and are never deleted.
Source: CoinMetrics
The month of May 2019 marked an almost 12 month high for ICO funding, 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 also increasing in popularity. However, these IEOs typically do not use ETH or have a native blockchain.
Globally, ICOs are increasingly moving away from public sales, likely due to fear of regulatory reproach and a shifting regulatory landscape. 2018 saw the highest number of ICOs, at 1,075, and the largest USD sum raised in one year, at US$21.48 billion. In 2019, over 120 token sales ended, raising a total of US$3.265 billion. In contrast, the total USD raise in January 2018 was US$2.81 billion.
Transparent ICO treasury balances have reduced significantly from 2018 to present, both in USD value and in ETH quantity. May 2019 saw outflows totaling over 327,000 ETH, the largest of the entire year. In 2019, ICOs withdrew 1.24 million ETH and continued to hold just under one million ETH.
Since January 2020, ICOs have withdrawn nearly 814,000 ETH with Aragon, Kyber, Monetha, Mysterium, SingularDTV, Gnosis, and Status all withdrawing at least 10,000 ETH from their respective treasuries in January alone. Request (REQ) withdrew 15,000 ETH over the past 30 days. DigixDAO stakeholders also approved a measure to return all treasury funds to investors, which occurred in Q2 this year.
Over the past 120 days, Gnosis withdrew 58,000 ETH and Monolith withdrew 44,000 ETH. The three largest remaining treasuries are Golem, Polkadot, and iExec RLC at 346,000 ETH, 306,000 ETH, and 107,000 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.
The top Ethereum based dapps over the past week, ranked by volume, are led by DeFi and exchange dapps. The Forsage dapp had the most transactions over the past week at a reported 70,000. NEST and Synthetix have had the most transactions over the past week in the DeFi and exchange category.
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. In February 2019, Twitter user Kevin Rooke pointed out that of the 1,375 ETH dapps, 86% had zero users and 93% had zero transaction volume. There are currently 1,926 dapps listed on dappradar, 83% of which have zero reported users or transaction volume in the past week.
Source: DappRadar
The Decentralized Finance movement, or DeFi, has increasingly gained in popularity with the total ETH held in DeFi currently at 3.45 million ETH or US$2.5 billion. Lending and so-called “yield-farming” dapps, like Compound, have seen the biggest influx of money as their products began to provide a return for users. The Maker DAO, which uses collateralized debt positions to back the semi-stablecoin Dai and Sai, currently holds around 58% of all ETH in the DeFi ecosystem.
Several DeFi incidents this year highlight the need for robust DeFi infrastructure and testing. bZx, the fifteenth-largest DeFi protocol with over US$2.5 million worth of funds locked currently, lost $350,000 and $645,000 worth of ETH in two separate exploits related to flash loans and price oracle manipulation. To remedy the exploit, bZk absorbed the losses and directed future cash flows to an insurance fund until the outstanding debt is paid.
Maker DAO also experienced a US$4.5 million loss this year following a price feed delay. Maker DAO has since added USDC as collateral and MKR governance tokens were diluted and auctioned to raise funds to cover for the shortage. The loss has now been fully paid.
Source: DefiPulse
In the markets, ETH exchange-traded volume over the past 24 hours has predominantly been led by Tether (USDT) pairs on Binance, Huobi, and OKEx. Non-USDT stablecoin volume has slowly increased over the past six months, including USD Coin (USDC), Dai (DAI), Paxos-Standard (PAX), Gemini-dollar (GUSD), and TrueUSD (TUSD), but continues to remain a fraction of total traded volume. A CME Group ETH futures product is also rumored to be approved sometime this year by the U.S. Commodity Futures Trading Commission.
In Asia, the Korean Won (KRW) and Japanese Yen (JPY) pairs have ETH at approximately US$237 and US$241, respectively. Together, both regions show relatively low interest in their fiat pairs, with nearly 1.30% of the total traded volume combined. A return of a significant premium in South Korea would signify a return to bull market conditions. Both the lack of premium and drop in trading pair percentage suggest a significant drop in retail trading on these South Korean exchanges.
In November 2019, the South Korean exchange Upbit reported 324,000 ETH, or about US$50 million, stolen during a cold wallet migration. Upbit has announced it will reimburse users through company funds. Over the past few years, South Korean exchanges have become a prime target for North Korean hackers, although no suspects for the most recent loss of funds are currently being released.
Worldwide Google Trends data for the term "Ethereum" spiked in July 2019 and February 2020, which matched a swift increase in price. Worldwide Google Trends data for the terms “ Defi Crypto” and “Yield Farming” have increased massively in recent weeks.
Overall, searches for “Ethereum” remain down significantly from early 2018. 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.
Source: Google Trends – “Ethereum”
Source: Google Trends – “Defi Crypto”
Source: Google Trends – “Yield Farming”
Technical Analysis
The current ETH price is down 83% from the all-time high set in January 2018, and down 20% from the February local high. However, the crypto asset remains up 157% from the March lows. Most crypto assets have held a 90%+ correlation with one another since the beginning of the year.
As a potential bullish trend resumes, roadmaps for future market movements 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 for the ETH/USD pair, the 50-day Exponential Moving Average (EMA) and 200-day EMA Golden Cross on February 11th was quickly followed by a bearish Death Cross on March 19th. On May 6th, these key EMAs recrossed bullish, suggesting the 200-day EMA at US$206 will now act as support.
Based on the Volume Profile Visible Range (VPVR – horizontal bars, chart below), the current spot price now sits just above US$215 to US$230 resistance node. Yearly Pivots, or mathematical support and resistance based on the highs and lows of the previous year, also sit at US$200 and US$295. There are no RSI or volume divergences on the daily chart at this time.
The long/short open interest on Bitfinex (top panel, chart below) is currently 92% long with long positions continuing to push new all-time highs over the past few weeks. Notional long open interest is also at an all-time high of US$435 million (not shown). 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 Ethereum price action.
This market has also potentially established a new bullish Pitchfork (PF). Once the trend is defined, the spot price will continually attempt to return to the median line (yellow), currently at US$288. A bullish PF is invalidated once the Ethereum price falls below the lowest support, currently at US$117. The uppermost resistance currently sits at US$712.
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.
The status of the current Cloud metrics on the daily time frame with doubled settings (20/60/120/30), for more accurate signals, are bullish; the spot price is above the Cloud, the Cloud is bullish, the TK cross is bullish, and the Lagging Span above the Cloud and above the current spot price.
Although Cloud metrics favor a long position, a bearish TK cross may occur over the next week, acting as a long exit signal. The next long entry signal is likely to occur with a bullish TK re-cross above the Cloud.
Lastly, on the two-day ETH/BTC chart, trend indicators are neutral to bullish with price above the 50-period and 200-period EMAs, as well as above the Cloud. The spot price is now re-entering a key long term support and resistance and Yearly Pivot level of 0.025 BTC. Further upside will likely find resistance at the VPVR and psychological level of 0.03, as well as the Yearly Pivot at 0.0345 BTC. There are also no bullish or bearish divergences on RSI or volume at this time. ETH/BTC open interest on Bitfinex is 99% long (not shown).
Conclusion
On-chain fundamentals including hash rate, transactions per day, and daily active addresses, have increased since January, now up significantly from year-end 2019 lows. The ProgPoW consensus algorithm change is not likely coming this year, a change that would drastically alter the current Ethash mining landscape. Although ETH 2.0 is still in the early stages of development, the new protocol is actively being discussed, debated, and coded, with a phase zero release slated for sometime later this year.
The amount of ETH locked in DeFi apps has increased significantly over the past year as ETH held by ICO treasuries continued to decrease, potentially providing a new avenue to decrease the circulating ETH supply. New ICOs on the ETH chain have trended toward zero throughout 2019 and early 2020. As DeFi usage increases, on-chain metrics need to be retooled to better represent and include smart contract activity, such as Dai and Sai transfers. NVT, an inverse metric of economic utility, is currently decreasing slightly, despite significant DeFi activity.
Technicals are bullish for the ETH/USD pair based on current trend metrics, as the spot price is currently above both the 200-day EMA and the daily Cloud. Over the next few months, a target of US$285 to US$300 is likely based on VPVR, yearly pivots, and a newly established bullish pitchfork.
Technicals for the ETH/BTC pair are neutral to bullish based on trend metrics, as the spot price is currently above the 400-day EMA and above the two-day Cloud. In the near term, the spot price will need to cleanly breach resistance and consolidate near the 0.025 BTC level. Overall, this may lead to the first sign of bullish continuation for the pair since ICOs peaked in mid 2018.
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