Ethereum Price Analysis – Tokenization or Securitization

Ethereum (ETH) has experienced a 20% jump this week, returning to prices last seen in early March. The market cap now stands at US$77.51 billion, with exchange-traded volume of US$1.94 billion in the past 24 hours. Transactions per day have also begun to increase, after sliding to less than half of the record high seen in December. The average transaction fee has also risen slightly.

The network value to estimated on-chain daily transactions (NVT) ratio remains elevated when compared to the previous twelve months. A clear downtrend in NVT suggests a coin is undervalued for its utility and should be seen as a bullish indicator for price.

Hash rate and difficulty increases began to slow slightly in April. This is likely due to the dramatic decrease in mining profitability recently. ETH Proof of Work (PoW) mining will eventually become entirely unprofitable and impossible through the Casper Proof of Stake (PoS) transition.

In October 2017, the Metropolis hard fork protocol changes decreased the ETH block reward to 3 ETH from 5 ETH, with the difficulty lowered accordingly to maintain near the same mining profitability. Bitmain, a prominent ASIC developer, recently announced a batch of Ethash miners, priced at US$800 each and set to ship in mid-July. The company explicitly states that no refunds will be given for the order.

According to coinschedule.com, Initial Coin Offering (ICO) raises have slowed significantly since April. Nonetheless, just five months into 2018 the total amount of funds raised in ICOs has surpassed the 2017 total by more than US$2.88 billion. The ballooning total was largely due to the Telegram ICO. After raising US$1.7 billion privately, Telegram has decided against moving forward with a public ICO.

The Telegram cancellation comes in the setting of increased regulatory scrutiny. This week, the US Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) will discuss cryptocurrency regulatory classification, and specifically ETH. In an interview with The New York Times, ex-CFTC chairman Gary Gensler said there is a “strong case” that ETH is a noncompliant security, which usually comes with heavy financial penalties and jail time.

A response, led by Andreessen Horowitz and Union Square Ventures, asked the SEC for safe harbor from securities law, suggesting that the law does not apply to ETH due to its decentralized nature. Current SEC chair Jay Clayton has already said, "I believe that every ICO I have seen is a security,” and has implied that ETH is not a security, although ETH did have a token sale of its own in 2014. Joseph Lubin, co-founder of Ethereum, has said he’s “extremely comfortable” that ETH is not a security.

In a poignant commentary on the state of ICOs, Michael Flaxman argues that they have several common goals; cleverly navigating government regulations, increasing access to liquidity, connecting investors to startups, and profit-sharing with investors. He posits that they fall short due to lack of investor protections, misaligned incentives, and an inability to understand complex navigations.

Despite the regulatory and community concerns surrounding ICOs, the municipal bond ICO, or initial community offering, has begun to emerge as a funding vehicle. The concept couples muni bonds with tokenization on the blockchain. The first project, approved in Berkeley, is a micro bond sale for a US$3 million seven-year note to pay for a new fire engine. Other muni bond ICOs are also in the works around the US.

According to dappradar.com, the top decentralized applications (dApps) by volume over the past week have been decentralized exchanges, IDEX, ForkDelta, and Bancor. Decentralized exchanges help mitigate custodial and regulatory risk, but often lack the liquidity most traders have come to expect while using centralized exchanges.

IDEX has become so popular that the exchange has had difficulty keeping up with demand and has responded by deploying patches, increasing hardware infrastructure, and hiring additional engineers. Compared to December, CryptoKitties mania has waned substantially.

ETH exchange traded volume in the past 24 hours is predominantly led by the Bitcoin (BTC), Tether (USDT), and U.S. Dollar (USD) pairs. The majority of trading occurring on Bitfinex, OKEX, Huobi, GDAX, and Binance. In Asia, the KRW trading pair holds a 3.3% premium, JPY volume as a percentage is down from the prior week, and CNY volume negligible.

The Over The Counter (OTC) exchange LocalEthereum, available in 100+ countries, averaged less than ~200ETH per day in transaction volume over the past week, according to dappradar. In comparison, LocalBitcoins averaged 7,549 BTC worldwide 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 risen quickly from the previous consolidation zone, suggesting heavy ongoing buyer interest. The status of this trend can be determined using Exponential Moving Averages (EMA) and the Ichimoku Cloud indicator. Further background information on the technical analysis discussed below can be found here.

On the daily chart, a bullish EMA recross, or Golden Cross, has occurred relatively quickly after a bearish cross. In general, EMA crosses can heavily lag market movements, making and entries based on the crosses alone suboptimal. However, the bull cross does give credence to a resuming bullish trend. Open interest on Bitfinex is currently net long by a 2:1 margin (top panel, chart below).

The Ichimoku Cloud uses four metrics 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 weekly time frame with singled settings (10/30/60/30) for quicker signals are mixed; price is above Cloud, TK cross is bearish, Cloud is flipping bearish but is currently bullish, and Lagging Span is bullish. A long re-entry would occur if TK and Cloud recross bullishly.

The status of the current Cloud metrics on the daily time frame with singled settings (10/30/60/30) for quicker signals are bullish; price is above Cloud, Cloud is bullish, the TK cross is bullish, and the Lagging Span is below Cloud but above price.

A traditional long entry signal occurred with the break above Cloud, known as a Kumo breakout. However, price currently sits far above the Kijun, suggesting price has risen quickly without a significant pullback to the mean. The most conservative long entry would occur at a support test of the Kijun, known as a Kijun Bounce. Fibonacci extensions suggest a long term price target of US$2,000.

The status of the current Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals is mixed; price is in Cloud, Cloud is bearish, TK cross recently flipped bullish (yellow arrow), and the Lagging Span is below Cloud but above price.

Again, a traditional Cloud long entry signal will not occur until price is above Cloud with volume. The flat Kumo at ~US$890 represents a 50% retracement from the all time high in December to the recent low in April and should act as a magnet for price.

The Edge-to-Edge long trade, which was triggered when price broke Cloud resistance and TK crossed bullishly, remains active with a target of ~US$890. Price has pulled back on an RSI bearish divergence, which suggested waning bullish momentum, and will likely consolidate at the current level before moving higher.

On the ETH/BTC pair, Cloud signals have all recently flipped bullish (not shown). The pair remains in a multi-year bullish pattern with a potential upside of 0.5BTC. The mean of the trend (yellow) has held as support or resistance several times since 2016. Currently, a return to mean would bring the ratio to 0.2BTC

Conclusion

Regulatory clarity from US governing bodies is sorely needed in an environment full of questionable ICO tactics. The SEC has yet to crack down on any exchange for listing unlicensed securities in the form of an ICO. Doing so would be the quickest and most efficient way of making sure existing exchanges and ICOs fall in line. Often times, the most important step for the success of any ICO is being listed on a secondary market, even if the ICO is still active.

It is entirely possible ETH was a security in the ICO stage but is not any longer. If this is the case, the Ethereum Foundation may be fined for selling unlicensed securities, which they can easily pay. The decision from the SEC and CFTC working group, on how and what to regulate, may cause vast turmoil in the markets initially, especially erc20 tokens, with very little long-term impact to legitimate projects. Never waste a good crisis.

Technicals strongly support evidence of a nascent bull trend. A near term target of US$890, after consolidation in the current zone, remains highly likely. Over the next few months, a target of US$2,000 is possible based on the 1.618 fib extension from the all time high to April low. If the market decides the regulatory news is bearish, a panic wick between US$600-$700 is possible based on technicals.

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