Zcash Price Analysis – Privacy upgrades fail to gain traction

Zcash (ZEC) is a privacy-oriented coin currently ranked 22nd on the BraveNewCoin market cap table. The ZEC spot price is down 88% from the all time high set in January 2018. The market cap currently stands at US$736.89 million with a reported 39% of the total market cap traded in the past 24 hours, or US$288.63 million.

A quick comparison between coins with privacy capabilities shows that ZEC is leading the total daily transaction volume by a wide margin. Other coins with privacy features include Monero (XMR), Zcash (ZEC), Grin (GRIN), and PIVX (PIVX). However, both XMR and GRIN obscure the blockchain transaction values and addresses used.

The ZEC protocol is based on Zerocoin, which was developed in 2013 and later turned into Zerocash, with a difficulty adjustment algorithm adopted from DigiShield v3. The ZEC cryptocurrency went live in 2016 and trading began in late October 2016.

The ZEC blockchain currently targets a 2.5 minute block time and a block size limit of 2MB. The eventual total supply is 21 million, with a current annual inflation rate of 38% (brown, chart below). The ZEC inflation rate is among one of the highest of any cryptocurrency. To contrast, the current annual inflation rate of BTC, XMR, DASH, GRIN, and PIVX, are 3.54%, 4.15%, 7.04%, 219%, and 4.60%, respectively.

Source: coinmetrics.io

Ten percent of the total coin supply will be distributed to stakeholders of the The Electric Coin Company (ECC), in the form of a "founders’ reward" shared between investors, developers, and the Zcash Foundation. The founders reward provides an alternative to the 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 ECC was previously known as the Zcash Company, which was rebranded in February. The founder and CEO is Zooko Wilcox. The Company is described as “the creators and stewards of the Zcash currency.” 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 ZEC founding team.

The Foundation has implemented several improvements to the ZEC ecosystem over the past few months. The Foundation announced Zepio in May, which is a privacy-focused wallet that sends shielded transactions by default. In June, the Foundation announced a partnership with Parity Technologies to release a new software client, Zebra. Written in Rust, the open-source client is an alternative to zcashd and brings redundancy should zcashd fail. The client is also designed to detect problems related to the consensus mechanism and implementation-specific bugs. ETH also has two clients, Parity and Geth, for similar reasons.

The ZEC protocol leverages zk-SNARKs, or Zero-Knowledge Succinct Non-Interactive Argument of Knowledge, which are based on zero-knowledge proofs. The protocol uses zk-SNARKs for optional privacy elements. 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."

The ZEC protocol saw two upgrades in 2018, “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, and introduced zc (legacy shielded) and zs (Sapling shielded) addresses. The shielded transaction count continues to represent a small fraction of total transactions, currently around 2.3% (chart below).

The shielded pool would be much larger if exchanges did not disable the optional privacy functionality when sending ZEC. In December 2017, programmer jeffq discovered that shielded transactions on ZEC can be linked to non-shielded transactions unless both the sender and receiver were part of the “shielded pool” of anonymous transactions.

Source: https://explorer.zcha.in/statistics

The current number of total transactions per day on the network (line, chart below) stands at nearly 4,300 transactions, which is down from a January 2018 high of 11,500 per day, but up from a February 2019 low of 2,000. Overall, transactions per day are, on average, down from levels seen in 2018. The average transaction value (fill, chart below) is currently US$6,600, up from an April 2018 low of US$62, and recently reached a new all-time high of nearly US$11,000.

Source: coinmetrics.io

The average daily block size (line, chart below) has continued to push all-time lows since February. Average transaction fees (fill, chart below) have declined since June 2018, but have risen since May, and are currently US$0.0387. The Sapling upgrade made shielded transfers 100 times smaller in size than before the upgrade, which in turn now makes these transactions cheaper to send.

Source: coinmetrics.io

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has been ranging wildly over the past year, and is currently 55. A clear downtrend in NVT suggests a coin is undervalued based on its economic activity and utility, which should be seen as a bullish price indicator, whereas an uptrend in NVT suggests the opposite. The 5.2% of total transactions which are shielded are not included in this calculation, meaning the true NVT is likely slightly lower than the metric suggests.

Daily active addresses (fill, chart below) have declined substantially from the January 2018 high of 96,000 to the current 18,000. Active addresses are important to consider when determining the fundamental value of the network based on Metcalfe’s law. ZEC has fewer daily active addresses than Bitcoin, Ethereum, Litecoin, EOS, Doge, Dash, Bitcoin Cash, and Ethereum Classic.

Source: coinmetrics.io

The ZEC network currently has 394 unique and active nodes, which is down from 600 in December. Most of the nodes reside in Denmark, the United States, and France. 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 2018.

In response, 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. 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.

Hash rate and difficulty have continued to increase rapidly over the past few months, setting a new all-time high. Since June 2018, nine ASICs have been released for the Equihash algorithm, all of which are profitable at US$0.13 cents per kilowatt hour. 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.

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 the need for constant node upgrades.

Source: bitinfocharts.com

The ZEC project on GitHub has 16 repositories with 552 commits on the main repo in the past year (top chart, shown below). The Zcash Improvement Proposals repo (bottom chart, shown below) has also been fairly active over the past year. Both repos mainly consist of commits by developers Daira Hopwood and str4d.

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.

The upcoming “Blossom” upgrade is slated for October 28th, 2019 and will include shorter block times. The ECC also has some early plans to build a new chain with sharding and privacy by default. This process would also involve a chain migration, which is similar to the pending migration from ETH 1.0 to ETH 2.0.

Source: https://github.com/zcash/zcash/graphs/contributors

Source: https://github.com/zcash/zips/graphs/contributors

ZEC exchange traded volume over the past 24 hours has predominantly been led by Tether (USDT) and Bitcoin (BTC) pairs. ZEC has continued to gain exchange listing over the past two years, being added to; Gemini exchange in May 2018, Bittrex in September 2018, Coinbase in December 2018, and eToro earlier this year. Binance also added ZEC/BNB, ZEC/USDT, ZEC/PAX, ZEC/TUSD and ZEC/USDC pairs in March.

In June 2018, the U.S. Secret Service recommended the 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, one of the more popular Japanese exchanges, delisted all three coins in May 2018.

Google Trends data for the term "zcash" has remained flat since July 2018, with a slight uptick recently. 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.

Google Trends data has been found to have some correlation with crypto prices. A 2015 study found a strong correlation between the Google Trends data and BTC price, while a 2017 study concluded that when the U.S. Google "bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

Over the past eight months, ZEC has followed most of the other mid-cap assets, with a bottoming late last year and a recent resurgence. As the bullish trend calcifies, the trend can be evaluated using exponential moving averages (EMAs), volume, and the Ichimoku Cloud. Further background information on the technical indicators discussed below can be found here.

On the daily chart, the 50-day and 200-day EMAs crossed bullishly on June 18th, ending the 455-day bear market. The 200-day EMA at US$85 should now act as support as well as the large volume node from US$60 to US$70. There are no active volume or RSI divergences. Bitfinex open interest is 91% long (top panel, chart below), with longs declining since late May. A significant price movement downwards will result in an exaggerated move as the long positions will begin to unwind.

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 doubled settings (20/60/120/30) for more accurate signals, have remained bullish since April; price is above the Cloud, the Cloud is bullish, the TK cross is bullish, and the Lagging Span is above Cloud and above price. The Kijun support currently sits at US$91. The trend will remain bullish so long as the price remains above Cloud.

On the ZEC/BTC pair, price has remained below the 200-day EMA since the asset’s launch, as well as being firmly bound by a bearish pitchfork (PF) since 2018. Price has also been significantly constrained by the 50-day EMA for the past few months. The median line of the PF (yellow) and the 200EMA will act as both a mean reversion point and strong resistance.

A break of the 200-day EMA, currently at 0.014BTC, 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 with 0.005 BTC acting as a psychological support. There are currently no bullish divergences or reversal chart patterns developing at this time to indicate waning bearish momentum.

Conclusion

Fundamentals show an increase in on-chain use over the past few months, with daily active addresses stagnating over the past few months. Even with the integration of Sapling, shielded addresses are not being utilized by a majority of transactions. The inflation rate of ZEC will likely continue to quell any attempt at a long term bull trend, especially without any mainstream adoption. Future protocol upgrades for ZEC include shorter block times as well as potential long term plan to radically change the privacy functionality and scaling mechanism.

Technicals for the ZEC/USD pair suggest a strong bullish trend, based on daily Cloud and high timeframe moving averages. Prices above the US$115 resistance level should see significant bullish momentum. The ZEC/BTC pair shows a continued steep decline with nothing to indicate otherwise. Significant price action above the 200-day EMA would be a sign of life.