NEO Price Analysis – A potential trend reversal

NEO (NEO) is a decentralized smart contract network which is currently 16th on the BraveNewCoin market cap table, having recently surpassed MakerDAO. NEO is down 96% from the record high established in January 2018, with a current market cap of US$537 million, and a total of US$214 million in trade volume over the past 24 hours.

While previously known as Antshares, NEO was founded by Da Hongfei and Erik Zhang, and is touted as the "Ethereum of China." The NEO ICO, from August 8th to September 7 in 2016, raised a total of 6119.53BTC. The ICO created 100 million NEO tokens with 50% split among the crowdfund participants and 50% distributed to the NEO council, who are the founding members of the project. Among the NEO council’s 50% share, 15 million NEO are held in reserve for contingency planning.

The NEO council tokens, which were unlocked in October 2017, serve a few purposes to promote the NEO ecosystem. Twenty million tokens are used for payment of NEO development and 15 million are used to invest in other blockchain products. In May last year, NEO was willing to pay US$170 million for BitTorrent, which it planned to use for a decentralized file-storage system, but ultimately lost the bid to Tron (TRX).

NEO uses the Delegated Byzantine Fault Tolerant (dBFT) consensus mechanism and has 15-20 second block times. The networks nodes are separated into two categories: consensus nodes and user nodes. Currently, there are 53 consensus nodes, which are delegated by the network and earn a cryptocurrency called GAS through the block reward. Other nodes are simply users of the network. User nodes can earn GAS by holding NEO in a wallet, a process similar to staking. NEO GAS is used to interact with the network and is comparable to Ethereum GAS and EOS RAM.

In a bid to increase network decentralization, NEO will replace four of its seven consensus nodes this year with applicants who have passed a screening process and completed a six-month trial on the networks testnet. By the end of 2019, each consensus node on the NEO mainnet may be operated by a separate organization. This structure is similar to the network validators of Ripple (XRP) and EOS.

NEO smart contracts have had a tough start. In October, smart contract audits found major code vulnerabilities in NEO NEP-5 contracts, which are most commonly used for ICOs on the NEO network. One flaw allowed users to artificially add to the total supply of a major NEO project, Deepbrain chain, by transferring their tokens to an unspecified address.

In contrast to Ethereum (ETH), EOS (EOS), and Tronix (TRX), the NEO ICO and dApp ecosystem has struggled to bring any successful projects to market thus far. Among the top NEO-related crypto tokens by market cap, only Ontology (ONT) cracks the top 50, whereas ETH-related crypto tokens account for more than 10 top 50 projects. ndapp.org lists a total of 75 NEO dApps with no user statistics. dApp totals on dappradar.com for ETH, EOS, and TRX stand at 1387, 323, and 151 respectively, with very little user activity on a majority of those listed. The most popular dApps across all platforms are either gambling or exchange related.

Despite different transaction fee structures amongst the four projects, NEO (green) has the lowest transaction per day at 6,200. while EOS (black) has over 5.2 million transactions per day, TRX (blue) has approximately 2 million transactions per day, and ETH (purple) has over 475,000 transactions per day.

Source: coinmetrics.io

NEO also has the fewest daily active addresses (DAA) among the four projects. For NEO and ETH, DAA peaked in late January and early February 2018, whereas DAA for EOS and TRX has continued to rise throughout 2018. The peak in DAA for NEO and ETH coincide with record prices, which suggests user demand was due to heavy speculation at that time.

Source: coinmetrics.io

The NEO 30-day Kalichkin network value to estimated on-chain daily transaction ratio (NVT) has begun to rise again after sitting at a local low in late December. A rising NVT is bearish and suggests declining network utility. April’s all-time low in NVT corresponded with a local high in price, suggesting heavy user-driven demand.

The average transaction value (fill, chart below) has declined substantially since April 2018 but remains substantially higher than ETH, EOS, or TRX (not shown). The relatively high average transaction values suggest that the dApp economy has yet to materialize, as dApp transactions typically decrease average transaction values.

Source: coinmetrics.io

On the development side, NEO has 17 repositories on GitHub with 174 commits in the main repo over the past year, mostly by Erik Zhang. 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.

This week, NEO also announced it has plans to open a global development office in the city of Seattle, the United States, headed by ex-Microsoft executive John deVadoss.

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

NEO exchange traded volume has been led by Tether (USDT) and Bitcoin (BTC) on Bitforex, BitMart, and Binance. NEO has been listed on Bitfinex, Bittrex, and Poloniex for over a year. Being a Chinese based product, the Chinese Yen (CNY) volume is higher than most coins.

At NEO’s Devcon 2019 this week, Fabio C. Canesin announced NASH, a decentralized exchange coming to NEO, with a beta scheduled to launch on March 31st. NASH will be a rebrand of the Neon Exchange and use the same token, NEX.

Technical Analysis

NEO has been under selling pressure throughout the entirety of 2018. As price finds a potential bottom, exponential moving averages (EMAs), Pitchforks, Chart Patterns, and Ichimoku Cloud can illuminate bullish trend reversals. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the 50/200EMA has continued to hold a bearish cross since late May. Price is currently far below the 200EMA and sitting just above the 50EMA. A sustained break of the 50EMA resistance suggests a push toward the 200EMA at US$16.20, which also matches previous horizontal support. A bullish Golden Cross is not likely to occur for several months, but it would suggest further upside strength and a definitive trend reversal. There are no active volume or RSI divergences at this time.

The VPVR from September 2017 to date shows that most of the trading volume is in the US$5.00-US$10.00 range. The volume profile also shows relatively little volume above US$9.50, with substantial volume near US$18.00. Long/short open interest (top panel, chart below) on Bitfinex is currently heavily net long, with longs near record highs. A significant price movement downwards will result in an exaggerated move as the long positions will begin to unwind. This is known as a "long squeeze."

Since mid-2018, price has been tightly bound to a bearish Pitchfork with anchor points in February, April, and May. Recently, price has moved above the uppermost resistance zone which suggests an end to the months-long bear trend.

Price has also formed an Adam and Eve double bottom, a bullish reversal pattern, which is nearly complete. The hallmarks of the pattern include a V and U-shaped price action which increased in volume once resistance is broken. The 1.618 fib extension and measured move yield price targets of US$11.00 and US$12.70 respectively.

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.

Cloud metrics on the daily time frame, with singled settings (10/30/60/30) for faster signals, are nearly all bullish; price is freshly above the Cloud, the Cloud is bearish, the TK cross is bullish, and the Lagging Span is in Cloud and on price. A traditional long entry will trigger over the next few days as price is cleanly above the Cloud. This is the first bullish Kumo breakout in over a year.

Cloud metrics on the daily time frame, with doubled settings (20/60/120/30) for more accurate signals, are also bearish to neutral; price has recently punched through the Cloud, the Cloud is bearish, the TK cross is bearish, and the Lagging Span is below Cloud and on price.

Again, a traditional long entry will not trigger until price is above the Cloud, which has not been the case since early 2018. A Kumo twist or Kumo breakout does not appear likely until after March of this year. If price remains in the Cloud with a bullish TK cross, price will likely move toward the opposite end of the Cloud at US$12.

Lastly, on the NEO/BTC pair, trend indicators also show the potential for the beginning of a bull trend. Price is above the 50EMA, with a bearish 50/200EMA cross, and is headed for a bullish Kumo breakout. Previous horizontal support turned resistance stands at 2400 sats. A break of this level on high volume will likely lead to a test the 200EMA resistance at 2800 sats.

Conclusion

Fundamentals suggest declining user metrics over the past year, especially when compared to competitors ETH, EOS, and TRX. GitHub commits, although a poor measure of overall developer activity, are also extremely low. Changes to the NEO ecosystem, including increased node decentralization and a global development office, will likely improve user adoption and developer interest. However, in its current state, NEO is much farther behind its competitors.

Technicals suggest the potential for a bullish trend reversal. After a year-long bear trend, EMAs, Pitchfork, and Cloud all show bullish strength. Further, a double bottom chart pattern should resolve and bring price to US$12 over the next month or so. Whether increased speculative demand will carry over into long-term sustained price growth and increased adoption metrics remains to be seen.