Zcash Price Analysis – Continuing to progress and improve

Zcash (ZEC) is a privacy-oriented coin currently ranked 19th on the BraveNewCoin market cap table. The ZEC spot price is down 86% from the all time high set in January. The market cap currently stands at US$680 million with ~18% of the total market cap traded in the past 24 hours, or US$127 million.

The ZEC base protocol included Zerocoin, which was developed in 2013 and later turned into Zerocash, and a difficulty adjustment algorithm adopted from DigiShield v3. The ZEC cryptocurrency went live in 2016 with trading beginning in late October 2016. The ZEC blockchain currently targets a 2.5 minute block time and a block size limit of 2MB. The total supply is 21 million units.

Ten percent of the total coin supply will be distributed to stakeholders of the Zcash Company in the form of a "founders’ reward" shared between investors, developers, and the Zcash Foundation. The founders reward provides an alternative to the ever popular ICO model, which often raises money before a project is out of beta. The ongoing incentive was designed to encourage a dedicated team to develop the project over many years.

The founder and CEO of the Zcash Company is Zooko Wilcox. Notable advisors included Bitcoin developer Gavin Andresen, Ethereum founder Vitalik Buterin, and Tezos’ Arthur Breitman. Roger Ver was also one of the Zcash Company’s initial investors.

The Zcash Foundation, created in February 2017, is an independently operated 501(c)3 whose mission is "dedicated to building Internet payment and privacy infrastructure for the public good, primarily serving the users of the Zcash protocol and blockchain." Current foundation members include Andrew Miller, Peter Van Valkenburgh, Amber Baldet, Matthew Green, and Ian Miers. Green and Miers were both part of the original founding team of ZEC.

Several members of the ZEC ecosystem recently spoke at the Ethereum conference, DevCon4, in Prague. Wilcox spoke on recent on privacy advances and acknowledged a problem with transparent transactions on a blockchain, admitting that privacy is not just for criminals, but should be a right for everyone. Miers also spoke on the failures of on-chain privacy.

Josh Cincinnati, the executive director of the Zcash Foundation, spoke on ZEC’s path to decentralization and away from the Zcash company. Ethereum-focused Parity Technologies is partnering with the Zcash Foundation to create the first ZEC node software that isn’t built or managed by the Zcash Company.

Furthermore, Ethereum developers Vitalik Buterin and Vlad Zamfir have also floated the idea of chain mergers, with the example of ETH and ZEC. Zamfir admits that this would be difficult but probably not impossible and Buterin agreed that it would have the "complexities of corporate mergers and acquisitions times ten."

In June, the U.S. Secret Service recommended regulation of all privacy coins, including ZEC, Monero, and Dash. Japan’s Financial Services Agency has already pressured exchanges to drop the same assets, citing criminal activity. Coincheck, the most popular Japanese exchange, delisted all three coins in May.

The optional privacy element on ZEC occurs through the use of zk-SNARKs, or Zero-Knowledge Succinct Non-Interactive Argument of Knowledge, which are based on zero-knowledge proofs. ZEC addresses beginning with a "t" are transparent, and addresses that start with a "z" include privacy enhancements and are referred to these as "shielded addresses."

ZEC has had two protocol upgrades this year, "Overwinter" on June 26th, and "Sapling" on October 29th. Both upgrades were enacted through hard forks, and both enhanced transaction efficiency and scalability for shielded addresses. The Sapling upgrade has reduced the zk-SNARK proving time from 37 seconds to 2.3 seconds.

The shielded transaction count, or shielded pool, continues to represent a small fraction of total transactions, only around 3% currently (chart below). This is largely because many services and wallets did not support the use of shielded transactions until the Sapling hard fork. The upgrade also brought the introduction of zc (legacy shielded) and zs (Sapling shielded) addresses (distinction not shown below).

In December 2017, programmer jeffq discovered that shielded transactions, z-addresses, on ZEC can be linked to non-shielded transactions, t-addresses, unless both the sender and receiver are part of the "shielded pool" of anonymous transactions using z-addresses.

The current number of total transactions per day on the network (line, chart below) stands at ~3,000 transactions, down from a January high of 11,500 per day. The average transaction value (fill, chart below) is currently US$7,500, up from a September low of US$3,000, but down from a June high of US$24,000. Over the past 24 hours, the ZEC blockchain has transferred ~US$33 million in transaction volume from unshielded addresses.

Source: coinmetrics.io

The average block size per day has trended down since May, to nearly 22,000 bytes, and has never exceeded 1MB. Average transaction fees have also declined since May, and are currently at US$0.0000474. The small block size is directly related to the very small transaction fees, as block sizes increase, so will fees. The Sapling upgrade also made shielded transfers to be 100 times smaller in size than before the upgrade, which in turn now makes these transactions also cheaper to send.

Source: bitinfocharts.com

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has been rising since August and shows no signs of stopping. 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. However, inflection points in NVT can be leading indicators of a reversal in asset value.

Because ZEC uses shielded transactions, the on-chain volume and transaction count used to calculate the NVT ratio only reflects data collected for the transparent transactions. Although the total number of shielded transactions is low relative to total transactions, NVT likely slightly lower than the metrics suggest.

Active addresses are important to consider when determining the fundamental value of the network based on Metcalfe’s law. Daily active addresses (fill, chart below) have declined from the January high of 96,000 to the current 23,000. ZEC currently has fewer active addresses than Bitcoin, Ethereum, Litecoin, Doge, Dash, and Bitcoin Cash.

Source: coinmetrics.io

The ZEC network has 621 unique nodes, most of which reside in the United States, France, and Denmark. ZEC uses the Equihash Proof of Work (PoW) algorithm, which was originally thought to be ASIC-resistant. However, Bitmain developed ASIC miners for the Equihash algorithm, which first went live on the network in May 2018, and shipped broadly in June.

Hash rate and difficulty have continued to increase rapidly since September, after the release of Innosilicon’s A9 ZMaster ASIC in August. Equihash GPU mining on NVIDIA graphics cards is likely dominated by two software programs, Bminer and Cryptknocker, the latter is owned by GMO, is closed-source, and charges a 2% fee.

In May, the ZEC foundation announced an initiative towards researching ASIC resistance on the chain and the Zcash Company concluded that the "ultimate objective" is the broad inclusion of both hobbyists and professionals. In June, the ZEC community voted and decided to discourage ASIC resistance as a priority and instead focus on currently unused PoW algorithms. Any future changes will need approval through the ZEC Improvement Proposal (ZIP) process.

The use of ASICs to mine a cryptocurrency can mean that the network becomes much less decentralized over time as the hardware continually squeezes out miners with less hashing power. While constant PoW adjustments decrease ASIC use substantially, the process may also lead to a different type of centralization through constant node upgrades.

Source: bitinfocharts.com

Over 100 developers have contributed to the ZEC project on GitHub, with a cumulative 1,161 commits over the past year, mostly in the main repo (shown below). Most coins use the developer community of GitHub, which was acquired by Microsoft for US$7.5 billion earlier this year. 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.

ZEC exchange traded volume in the past 24 hours has predominantly been led by the Ethereum (ETH), Bitcoin (BTC), and Tether (USDT) pairs. The majority of trading has occurred on L-Bank, BitZ, YoBit, Huobi, and Binance. ZEC has not been added to Coinbase as of yet, despite being on the July roadmap for inclusion. ZEC was added to the Gemini exchange on May 14th. Bittrex added a ZEC/USD market on September 5th.

Google Trends data for the term "zcash" remains down sharply over the course of the year and is sitting at a yearly low. A slow rise in searches for "zcash" 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 BTC price. A May 2017 study concluded that when the U.S. Google "bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

Over the past 90 days, ZEC price action has correlated highly with the Ethereum, which has also flirted with finding a bottom. As the multi-month downtrend attempts to come to a close, having a trading plan for the potential upside can be found using moving averages, chart patterns, and Ichimoku Cloud. Further background information on the technical indicators discussed below can be found here.

Bitfinex open interest is massively net long, with longs reaching record highs recently (top panel, chart below). A significant price movement downwards will result in an exaggerated move as the long positions will begin to unwind. Price has fallen 70% since the bearish 50/200 EMA cross on March 21st, which occured 236 days ago. There are no active RSI divergences.

Although a bullish entry would not be warranted until a bullish 50/200EMA golden cross occurs, a price move towards the 200EMA is possible simply due to mean reversion. There is also a potential bullish reversal pattern, the inverted head and shoulders, which has roughly the same measured move as the 200EMA.

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.

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

A traditional long entry has triggered over the past few days with a bullish Kumo breakout and bullish Kumo twist. This is the first Kumo breakout since May.

The status of the current Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals are bearish to neutral: the price is in Cloud, the Cloud is bearish, the TK cross is bullish, and the Lagging Span is below Cloud and near the current spot price.

A traditional long entry will not trigger until price is above the Cloud. However, as the TK cross turns bullish and price enters the Cloud, a long reversal trade has triggered with an entry near ~US$129 with a target of ~US$165. This is known as an Edge to Edge trade.

On the ZEC/BTC pair, price has remained below the 200EMA since the assets launch. Price has also been significantly constrained by the 50EMA for the past few months. A break of the 200EMA, currently at 0.0253BTC, as well as a bullish 50/200EMA cross would be a strong signal for bullish continuation. Otherwise, price will likely remain below the 200EMA for the foreseeable future.

Conclusion

The privacy technology of ZEC continues to progress and improve, despite the chain seeing very little daily transactional usage. Furthermore, those who are using the chain almost never use the privacy function. This will likely change dramatically with the integration of Sapling and the improvement in privacy useability and cost broadly. To some, the optional privacy ZEC provides is currently vastly inferior to the default privacy of XMR, despite XMR’s transactions being more costly with a higher proving time. However, vastly expanding the shielded address pool will begin to quell this concern.

Technicals suggest a potential end to the six month downtrend following the Gemini announcement. The next large up move will also likely be fueled by an exchange listing announcement on Coinbase. Both the daily Cloud and the daily 200EMA suggest minimal price targets of US$165 – US$170.