NEO Price Analysis – Bullish trend emerges despite little on-chain activity

NEO (NEO) is a decentralized smart contract network which is currently 19th on the Brave New Coin market cap table. NEO is down 93% from the record high established in January 2018, with a current market cap of US$908 million, and a total of US$270 million in trade volume over the past 24 hours.

Watch a summary of this analysis on YouTube

A quick comparison between coins using similar consensus mechanisms shows that NEO is in the middle of the pack of the metrics shown below, except for total daily transaction volume. Reliable on-chain transaction volume data or active addresses for EOS (EOS) could not be obtained.

The NEO project was previously known as Antshares and founded by Da Hongfei and Erik Zhang. The project was hailed as the “Ethereum of China.” An Initial Coin Offering (ICO) was run from August 8th to September 7th, 2016, which raised US$97,517 and 8,169 BTC. The ICO created 100 million NEO tokens, with 50% split between the crowdfund participants and 50% distributed to the NEO Council (now the NEO Foundation).

The Foundation released a financial report in June 2019 revealing holdings of US$871 million, including; NEO assets, non-NEO assets, and a fund. NEO assets accounted for 43,664,133 NEO tokens, currently US$487 million, which is just under 44% of the assets total supply. The non-NEO assets held by the Foundation include BTC, ETH, ONT, ONG, USD, and CNY, accounting for US$78.62 million. Fund assets include 4,313 BTC, which is currently equivalent to US$40 million. A more recent report has yet to be released by the Foundation.

NEO uses Delegated Byzantine Fault Tolerant (dBFT) for consensus, which yields 15-20 second block times. The network nodes are separated into two categories: consensus nodes and user nodes. There are currently seven consensus nodes, five of which are run by the NEO Foundation. The Foundation has plans to decentralize these nodes.

The nodes 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.

On the development side, There are 19 NEO repositories on Github with 319 commits in the main repo over the past year, mostly from Erik Zhang. The majority of projects in the crypto industry 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.

Source: Github

In April, NEO revealed a roadmap of network upgrades leading into 2020, which is aimed at alleviating longstanding network issues and improving network efficiency. The upgrades are also designed to expand the smart contract ecosystem by reducing deployment and execution costs. The network upgraded to dBFT 2.0 in May 2019, which provides improved network stability and adjusted the network fee mechanism.

Thus far, NEO smart contracts have had a tough start. In October 2018, 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 a bid to bolster the NEO ecosystem, Hongfei announced a US$100 million funding initiative in mid-May 2019, designed to help Decentralized Applications (dapps) and infrastructure development.

In contrast to other dApp platforms Ethereum (ETH), Tronix (TRX), EOS (EOS), Ontology (ONT), IOST (IOST), WAX (WAX) Waves (WAVES), LOOM (LOOM), and VeChain (VET), the NEO dApp ecosystem has struggled to bring any highly successful projects to market thus far. Funding on each platform for dapps shows that NEO is heavily lagging ETH, TRX, and EOS. However, the majority of dapps on any platform have very little user activity. The most popular across these various platforms are either gambling or exchange related.

On-chain metrics reveal the number of NEO transactions per day (line, chart below) has continued to decline since January 2018 and now sits at a multi-year low. Average transaction values (fill, chart below) have also declined since February 2018 and now sit at a multi-year low.

Source: CoinMetrics

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) is currently 21 and rising, which represents an all-time high. An NVT below 4.0 would likely indicate organic and sustained bull market conditions.

Inflection points in NVT can be leading indicators of a reversal in asset value. An uptrend in NVT often 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.

Active and unique addresses are also important to consider, specifically when determining the fundamental value of the network based on Metcalfe’s law. Monthly active addresses (MAAs) have declined since February 2018 (fill, chart below), and now sit at a multi-year low. A consistent and sustained decrease in MAAs paints a bearish picture for any asset.

Source: CoinMetrics

NEO exchange-traded volume has been led by Tether (USDT), Bitcoin (BTC), and Ethereum (ETH). NEO trading is available on Binance, Binance.US, Bitfinex, Bittrex, HitBTC, Huobi, and OKEx but the asset is not currently listed on Coinbase, Gemini, Kraken, or Poloniex. NEO hardware wallet functionality is available on Ledger but not Trezor.

Technical Analysis

As NEO moves up with the rest of the alt coin market, a potential bullish reversal has emerged. Exponential moving averages, pivots, the Volume Profile of the Visible Range, divergences, and the Ichimoku Cloud can help highlight a future roadmap. Further background information on the technical analysis discussed below can be found here.

On the daily NEO/USD chart, the 50-day Exponential Moving Average (EMA) and 200-day EMA crossed bullish this week signifying a bullish trend shift. The previous Golden Cross experienced muted bullish momentum after being denied at the US$20 level. The yearly resistance pivot also resides at US$17.50.

Volume Profile of the Visible Range (VPVR) shows substantial support volume in the US$6.50 – US$10.00 range. Upside VPVR resistance sits at US$18 – US$20, with much less volume above this zone. Additionally, there is an active bearish divergence suggesting waning bullish momentum.

Long/short open interest on Bitfinex (top panel, chart below) is currently heavily net long, with both longs and shorts rising over the past week. 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."

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.

Cloud metrics on the daily time frame, with doubled settings (20/60/120/30) for more accurate signals, are bullish; price is above the Cloud, the Cloud is bullish, the TK cross is bullish, and the Lagging Span is above the Cloud and above the price. A traditional long entry signal has now triggered with all these metrics having flipped bullish this week.

Lastly, on the NEO/BTC pair, trend indicators are also bullish. The pair will likely experience a Golden Cross this week and price has now definitively breached above the Cloud. Since 2018, NEO/BTC has only had two bullish Kumo breakouts, the last occurring in February 2019. VPVR (horizontal bars) suggests significant upside resistance from 0.0015 – 0.0030 BTC. Yearly pivots also show resistance at 0.0016 and 0.0023 BTC. There are no bullish or bearish divergences at this time.

Conclusion

As NEO continues a transition period towards NEO 3.0, on-chain metrics have continued to decline over the past year. Comparing NEO to other similar chains reveals weaknesses in almost every metric observed except for on-chain transaction volume, which has spiked significantly. In its current state, NEO appears to be much farther behind its smart contract competitors while maintaining high levels of centralization. However, the NEO project has plans to eventually implement decentralized consensus nodes and will likely continue to easily sustain itself due to the well-funded NEO Foundation.

Technicals for the NEO/USD and NEO/BTC pairs show a nascent bullish trend. Both pairs have or will likely have a Golden EMA Cross within the next week. Over the next few months, a move towards US$20 is likely for the USD pair, which shows a confluence of resistance. Beyond US$20 will likely require additional consolidation. For the BTC pair, significant upside resistance resides from 0.0015 – 0.0030 BTC, with the pair unlikely to move above this level in the near to mid term.