Zcash Price Analysis – (Sometimes) private transactions

Zcash (ZEC) is currently 19th on the BNC market cap table, just below two other two privacy-oriented coins Monero (XMR) and Dash (DASH). The market cap currently stands at US$594 million with US$97.5 million in trading volume over the past 24 hours.

ZEC is the most recent iteration of the Zerocoin protocol, developed in 2013. The protocol was transformed into Zerocash and then ZEC in 2016. The ZEC blockchain currently targets a 2.5 minute block time, has a difficulty adjustment algorithm adopted from DigiShield v3, a block size limit of 2MB, and a total supply of 21 million units. 10% of the total supply will be distributed to stakeholders of the Zcash Company in the form of a founder’s reward. The founder and CEO of Zcash Company is Zooko Wilcox-O’Hearn. Notable advisors include Bitcoin developer Gavin Andresen, Ethereum founder Vitalik Buterin, and Tezos’ Arthur Breitman.

The founders’ reward is a stark contrast to the ICO model, which often raises money before a project is out of beta. The ongoing incentive was designed to encourage lasting development over many years with a dedicated team. Although critics of ZEC have described the founders reward as a measure of centralization, Arjun Balaji argues that “the difference between ZEC and other crypto-asset projects is that ZEC is operating at the cutting-edge of cryptography, requiring and producing novel research across zk-SNARKs/STARKs/etc., which is then freely shared with the rest of the ecosystem, including competitors.”

zk-SNARKs, or Zero-Knowledge Succinct Non-Interactive Argument of Knowledge, are an optional privacy feature based on zero knowledge proofs. ZEC addresses that start with a "t" are transparent, and addresses that start with a "z" include privacy enhancements and are referred to these as "shielded addresses."

Since both types of addresses occur on the same chain, it is possible to send ZEC between both address types. In December 2017, programmer jeffq discovered that private transactions on ZEC are able to be linked to non-private transactions unless both the sender and receiver are part of the “shielded pool” of anonymous transactions. Only 3.5% of the available coins met the criteria at that time.

The most recent protocol upgrade to the ZEC protocol was a hard fork dubbed “Overwinter,” which went live on June 26th. The fork enhances transaction efficiency and scalability for shielded addresses. Before the hard fork occurred, the sole maintainer of the Windows ZEC wallet, David Mercer, issued a statement in a plea for funding to the Zcash company and threatened to contentiously fork ZEC and start a separate project if he was not adequately paid. The Zcash company obliged and a crisis was averted. The next upgrade, “Sapling,” will increase scalability and privacy and is set for release in October.

On the network side, transactions have been steadily declining over the past month and average transactions fees have spiked several times over the course of the year. ZEC has fewer transactions than both XMR and DASH, and cheaper fees. ZEC’s shielded transactions currently account for <10% of total transactions.

The adjusted 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio has been flat over the past few days, and is historically lower than average. Because ZEC uses shielded transactions, on-chain volume and transaction count used to calculate the NVT ratio only reflect data collected for the transparent transactions. Although the total number of shielded transactions is low relative to total transactions, NVT and exchange to transaction value is even lower than the graph suggests.

A low NVT is suggested of increasing economic activity on a blockchain, and that the coin is undervalued based on its utility. ZEC’s NVT is lower than DASH. The XMR NVT cannot be calculated due to the transactions being confidential in nature.

The ZEC network currently has 1,476 public nodes, opposed to XMR which has 1,691 and DASH which has 4,649. Hash rate and difficulty have continued to increase since June, hitting new all time highs earlier this month. The hash rate is likely increasing due to the AntMiner Z9 mini, an Equihash-focused ASIC, which shipped in late June.

In May, the Zcash foundation announced an initiative towards researching ASIC resistance on the chain and the Zcash company concluded that the “ultimate objective is 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 a “thermodynamically efficient (not ASIC-resistant!), currently unused proof-of-work algorithm.”  The algorithm is slated to be included in a hard-fork between September 30 and December 31, 2020.

The use of ASICs to mine a cryptocurrency can mean that the network becomes much less decentralized over time. The hardware simply squeezes out miners with less hashing power. StopAndDecrypt recently argued that ASIC resistance is nothing but a blockchain buzzword. The process includes repeatedly changing the consensus algorithm, which is similar to the XMR approach. While this method decreases ASIC use initially, it may also lead to a different type of centralization through constant node upgrades.

The ZEC project on GitHub has had a cumulative 564 commits over the past year. The XMR project has had 1,143 commits, while DASH has had 549 commits. 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.” Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity.

ZEC exchange traded volume in the past 24 hours has predominantly been led by the Bitcoin (BTC), Ethereum (ETH) and Tether (USDT) pairs. The majority of trading has occurred on Huobi, Bitfinex, and HitBTC. ZEC is also available through Grayscale, which is a fund that issues shares backed by ZEC.

The exchange Gemini, which operates in New York with a Bitlicense, announced the addition of ZEC to the platform on May 14th. ZEC was also mentioned by Coinbase, on July 13th, as a possible addition to the platform.

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

Technical Analysis

The entire crypto market has been in decline over the past month. ZEC and BTC have a Pearson Coefficient of 83%, suggesting that the two cryptographic assets have been moving together. After a large down move, deciding on whether to buy now, known as catching a falling knife, or sit on the sidelines is crucial. Trend-based indicators like Ichimoku cloud and exponential moving averages (EMAs) can help determine optimal entry points. Further background information on the technical analysis discussed below can be found here.

On the daily chart, price has formed a large concave shape with prices recently falling. A 2014 paper on Investor Attention, Visual Price Pattern, and Momentum Investing found that separating charts into convex vs concave, or long vs short, led to a 23.1% annualized return, suggesting price structure plays an important role in future price direction. The head and shoulders bearish reversal pattern is also reminiscent of a concave shape.

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 bearish: price is below Cloud, Cloud is bearish, TK cross is bearish, and Lagging Span is below Cloud and price. A traditional long entry will not trigger until price is above the Cloud. Price fell 25% after the recent bearish TK cross, before rebounding.

The status of the current Cloud metrics on the daily time frame with double settings (20/60/120/30) for more accurate signals are also bearish: price is below Cloud, Cloud is bearish, TK cross is bearish, and Lagging Span is below Cloud and price. Again, a traditional long entry will not trigger until price is above the Cloud. A recent bearish TK cross below the Cloud (red) is suggestive of strong bearish continuation.

On the ZEC/BTC pair, price has remained below the 200EMA since inception. Price has also been significantly constrained by the 50EMA for the past few months. A break of the 200EMA and 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. As the pair makes lower lows there is no bullish divergence, suggesting bearish exhaustion. A target of 0.017 is possible based on the previous extreme low.

On the ZEC/XMR pair, the 50/200 cross is bearish but squeezing price tightly. A bullish 50/200EMA cross would represent a long entry signal. Price is also currently showing all bullish Cloud metrics. The pair suggests that ZEC will likely continue to gain on XMR price for the foreseeable future.

The ZEC/DASH pair is the most bullish of any pair listed above. The bullish 50/200EMA has completed and price has been above the Cloud for several weeks. ZEC is likely to continue to make gains on DASH in the near term, potentially above 2x the price of DASH.

Conclusion

ZEC has taken a somewhat controversial and unique approach of heavily incentivizing founders and the existing ZEC team to promote ongoing protocol improvements. DASH also uses a similar treasury system for development and marketing. XMR uses neither system. As opposed to default privacy on the protocol layer, optional privacy has been shown to reveal users transactions through linking if transacted between non-shielded addresses. As zk-SNARK technology becomes available in other protocols like BTC and ETH, ZEC will need to set itself apart through scalability and low transaction fees.

Technicals suggest that the ZEC/USD pair is showing continued signs of bearish continuation with potential targets below US$100. Among the top privacy coins, ZEC is likely the most bullish based on the pairs above. However, the macro trend against BTC remains heavily bearish, suggesting ZEC will not keep the same pace during the next bull market. If and when ZEC is added to Coinbase, price will likely need to discover a new equilibrium with the other pairs as fresh retail fiat is able to be injected directly into ZEC, bypassing BTC entirely.

ZEC has taken a somewhat controversial and unique approach of heavily incentivizing founders and the existing ZEC team to promote ongoing protocol improvements. As opposed to default privacy on the protocol layer, optional privacy has been shown to reveal users transactions through linking if transacted between non-shielded addresses. Aszk*-SNARK technology becomes available in other protocols like BTC and ETH, ZEC will need to set itself apart through scalability and low transaction fees.*