Monero Price Analysis – Incremental upgrades

Created in April 2014, Monero (XMR) is classified as a privacy coin due to untraceable, unlinkable, private, and analysis resistant transactions. The cryptocurrency has dropped 88% from the all-time high of nearly $500, established in December 2017. The market cap currently stands at US$1.05 billion, ranking XMR 12th on the Brave New Coin market cap table, with US$28.43 million in trading volume over the past 24 hours.

XMR privacy features leverage Multilayered Linkable Spontaneous Anonymous Group signatures (MLSAG), ring confidential transactions (RCT), and stealth addresses. Other coins with the ability to send private transactions include Zcash (ZEC), DASH (DASH), PIVX (PIVX), which leverage Zero-Knowledge proofs or CoinJoin.

MLSAG signatures, as used by Shen Noether’s RCT, are based on Gregory Maxwell’s Confidential Transactions, and Nicolas van Saberhagen’s Ring Signatures. Ring signatures allow any member of a group to produce a signature on behalf of the group, without revealing the individual signer’s identity. RCT was initially implemented on XMR in January 2017 and improves upon ring signatures by allowing hidden transaction amounts, origins, and destinations with reasonable efficiency and verifiably trustless coin generation. The stealth address feature allows for single-use addresses which only reveal where a payment was sent to the sender and receiver. A multi-signature wallet function was also implemented in April 2018.

There are also two key XMR-related protocols in development, Tari and Kovri. Tari was announced in May 2018 and will introduce token creation, in a similar fashion to Colored Coins on Bitcoin, ERC20 tokens on Ethereum, and non-fungible tokens (NFTs) in general. Kovri has features that are similar to The Onion Router (Tor), and is currently in pre-alpha. Kovri will add additional user privacy by anonymizing geographical locations and IP addresses with an overlay network. Initially, Kovri will be implemented in the official XMR wallet. Eventually, all future transactions will be routed through Kovri.

XMR’s transactional privacy features have attracted increased mining malware and ransomware over the past few years. A report released in January 2019 found that nearly 5% of all XMR in existence was created by crypto mining malware. In response to the persistent and ongoing use of malicious software, the XMR community created a website to help users affected by these problems, including information for diagnosing and removing the malicious software.

There have also been several malware variants affecting different operating systems. KingMiner, targeting Windows servers, was discovered in June 2018 and likely accounted for the 86% increase in cryptojacking throughout Q2 2018, as reported by McAfee Labs. Linux.BtcMine.174, which targeted old Linux operating systems, was discovered in November 2018. Mining malware affecting cloud providers using Linux was discovered in January by Palo Alto Networks Unit 42. Recently, Trend Micro reported an increase in two mining malware variants affecting Windows servers, RADMIN and MIMIKATZ. Trend Micro also discovered the Linux malware Coinminer.Linux.MALXMR.UWEIU which eliminates any competing malware on the infected machine.

Further, Japanese and U.S. governments have expressed interest in “legislative or regulatory actions” to prevent the use of privacy focused cryptocurrencies, such as XMR and ZEC, for illicit purposes. In late 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) blacklisted two specific Bitcoin addresses for the first time, both of which had been used for ransomware. This decreases coin fungibility and increases coin surveillance, something not possible with XMR.

In a recent interview, Riccardo Spagni, a member of Monero’s core developer team, felt that the U.S. is unlikely to declare a privacy coin illegal. Spagni believes that so long as Tor remains open to U.S. users, then so will privacy coins. He believes that ZEC, which as managed by a U.S. company, is much more likely to be targeted by U.S. regulators.

On the network side, the XMR community has taken an aggressive approach to regain application specific integrated circuit (ASIC) resistance. Beginning in late 2017, the XMR hashrate began to increase substantially, suggesting stealth ASIC mining. This meant that CPUs and GPUs could no longer efficiently mine XMR. The increased use of ASICs on any chain can mean increased network centralization as less efficient hardware, like GPUs and CPUs, become unprofitable to use, allowing those with more resources to buy more ASICs.

The XMR Proof-of-Work (PoW) algorithm, CryptoNight, had been scheduled for slight changes through the use of planned hard forks every six months, which ideally decreased the use of ASICs on the chain. Future PoW algorithm changes will likely involve Random X in October 2019, pending audits. Random X was developed about six months ago and prevents ASIC or GPU mining, focusing on CPU mining. Another further distant option is SHA-3, an ASIC-friendly algorithm, which will act as a fallback if the Random X algorithm is not adopted or fails.

The most recent scheduled hard fork occurred on March 9th at block 1,788,000, which implemented Monero Core v0.14.1. The hard fork brought blockchain pruning and improves transaction efficiency, along with an immediate and significant drop in hash rate. A similar drop in hash rate occurred after the hard fork in April 2018, suggesting the possibility of significant ASIC use on the chain pre-fork.

Another possibility for the significant rise and decline in hash rate may be due to increased mining malware using the now defunct PoW algorithm. The October 2018 hard fork did not see nearly as drastic of a change in the rise and fall of hash rate when compared to the April and March hard forks.

Source: bitinfocharts.com

Despite the multiple hard forks, hash rate distribution remains widely varied between six major pools and several smaller and unknown pools. Since the March hard fork, hash rate has stabilized and is not increasing. Based on mining difficulty, overall miner participation is holding at a 16-month low. Although frequent PoW changes decrease ASICs on the chain, as total hash rate drops, risks of a 51% attack increase.

Over 90% of all XMR has now been mined. XMR has a two-minute targeted block time with a 3.47% annual inflation rate (line, chart below), which is among the lowest of all coins. Instead of the stepwise disinflationary curve that occurs after each Bitcoin block reward halving, XMR has a smoother emission curve until the block reward hits 0.3 XMR per minute, where it will remain indefinitely. This is known as tail emission and ensures a block reward in perpetuity, regardless of transaction fees.

Transactions per day (red line, chart below) have been above 4,000 throughout most of 2018 and broke above 4,000 earlier this month. Transactions per day sit at an 11-month high. Daily active addresses (red fill, chart below) have ranged between 12,000 and 50,000 over the past few months. Both transactions per day and daily active addresses may well correlate with the rise and fall of various mining malware activity. Because the transaction data on the XMR blockchain is private, a network value to transactions (NVT) ratio cannot be calculated.

Source: coinmetrics.io

Among all privacy-related coins, XMR has historically led the pack in regards to transaction fees (red, chart below). XMR transaction fees are currently higher than ZEC or DASH but lower than PIVX, however, XMR has more transactions per day than ZEC or PIVX, but fewer than DASH (not shown). In October 2018, XMR completed a hard fork to implement Bulletproofs, which reduced transaction sizes by 80% and immediately brought average transaction fees down to US$0.027. XMR’s average daily block size has also decreased significantly since the addition of Bulletproofs (not shown).

Source: coinmetrics.io

Turning to developer activity, XMR currently has 17 repos on GitHub. Most coins use the developer community of GitHub. Files are saved in folders called "repositories," or "repos." 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 total, 350 developers have contributed over 5,000 commits in the past year across all repos. Most of these commits have occurred on the main XMR repo (shown below). In January, the XMR wallet and node software Monerujo v1.10.14 was released, allowing for increased privacy obfuscation for where payments are sent and how much is held in the wallet. Monerujo v1.11.4 was released in March which fixed scanning and syncing errors.

Source: https://github.com/monero-project/monero/graphs/contributors

Exchange traded volume has been led by the Bitcoin (BTC) and Tether (USDT) pairs. The dominance of the BTC trading pair is largely due to the lack of direct fiat gateways for XMR. Earlier this year, Binance added XMR/BNB and XMR/USDT trading pairs. XMR/BTC margin trading was added to Poloniex on April 24th.

As exchange services like Shapeshift and Changelly begin to register customers for KYC/AML requirements, XMR volume on decentralized exchanges (DEXs) will likely continue to increase. The XMR/BTC pair on Bisq, a peer to peer private DEX, currently accounts for 62.43% of the total exchange volume. In 2018, the U.S. Securities and Exchange Commission announced that DEX owners need to be registered as exchanges, which may keep unregistered DEXs out of the U.S. entirely.

In the future, XMR may be delisted from centralized exchanges and relegated to DEXs entirely. Although, in August 2018, XMR was listed as a potential addition to Coinbase. ZEC was added to Coinbase with its optional privacy feature disabled. Hardware wallet solutions currently available for XMR include the Trezor Model T and the Ledger Nano S. There were reports of users losing funds on the Ledger wallet, but funds were recoverable and the bug is now fixed.

Google Trends interest regarding the term "Monero" remains down sharply over the course of 2018 and early 2019, currently sitting at a multi-year low. A slow rise in searches for "Monero" 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 bitcoin price, while a 2017 study concluded that when the U.S. Google "bitcoin" searches increase dramatically, bitcoin price drops.

Technical Analysis

XMR has followed the broader market by finding bullish strength after a year long down trend. As price shifts from strictly bearish to looking more and more bullish, a roadmap for price can be deduced using exponential moving averages (EMAs), Pitchforks (PFs), Volume, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the 50-day EMA and 200-day EMA have been bearishly crossed since May 2018, resulting in a steady decline of over 80%. Although the EMA cross is bearish, price has returned to the 200 EMA and sits slightly above the 50 EMA. A bullish 50/200 EMA cross should signify the beginning of continued bullish momentum. Further, long/short open interest on Bitfinex (top panel, chart below) is currently net long with longs decreasing over the past month and shorts essentially unchanged over the past few months. There is an active bullish RSI divergence which suggests waning bearish momentum.

Price has also been bound by a bearish PF for the past year, with anchor points in December 2017, February 2018, and April 2018. While inside the PF, the median line (yellow), currently at US$63, will be continually tested as either support or resistance. Based on the local bottom, price has a maximum upside of US$120, until a new bull trend emerges. This diagonal resistance also matches historical volume resistance (horizontal bars). Price is currently above the high volume zone of US$44-US$50 and below the high volume zone of US$85-US$90.

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 trade entry always occurs when most of the signals flip from bearish to bullish, or vice versa.

Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals are 100% bullish; price is above the Cloud, the Cloud is bullish, the TK cross is bullish, and the Lagging Span is above price and in the Cloud. Price has also recently retested the Kijun at US$62 suggesting further upside.

Lastly, on the XMR/BTC daily chart, the trend is significantly bearish. The 50-day EMA and 200-day EMAs have been bearishly crossed since May 2018 and the Cloud metrics are also 100% bullish (not shown). A recent denial at the 200 EMA resistance and breach below multi-month diagonal support suggests a move towards the psychological support of 0.01 BTC. If buyers do not hold this level, there is no significant support until the previous local highs near 0.004 BTC.

Conclusion

Fundamentals show active and continued incremental upgrades over the past two years, including decreased transaction costs, improved transaction efficiency, blockchain pruning, and improved custody solutions. Network activity shows a rising trend in transactions per day over the past month and daily active addresses have remained essentially unchanged over the same time period. Thanks to XMR’s ironclad privacy, darknet traffic continues at a fever pitch with new mining malware attack vectors being discovered almost monthly. The large oscillations in network metrics likely represents mining malware going online and coming offline after being patched or turned off.

Technicals for the XMR/USD pair suggest a nascent bull trend with a recent successful support test, although price remains below the 200-day EMA and bound to a bearish Pitchfork. However, this represents the first bullish Kumo breakout on the Cloud in over a year. Based on volume and previous levels, US$85 represents a significant zone of resistance. Technicals for the XMR/BTC pair on the other hand are extremely bearish with price falling below the Cloud on significant momentum. Critical support stands at the 0.01 psychological level, which if breached, will likely result in significant downward momentum, potentially towards 0.004.