Ethereum (ETH) has attempted to find a bottom after falling below US$400 this week. The market cap now stands at US$40.73 billion, with exchange-traded volume of US$628.7 million in the past 24 hours.
The future direction of the ETH protocol continues to be hotly debated. A hard cap on the total ETH created is also in the cards, while concerns over decentralization, security, and scalability remain at the forefront.
Decentralization was recently addressed when Vlad Zamfir floated the idea of making ETH Application Specific Integrated Circuit (ASIC) resistant. ASIC mining hardware is often associated with mining centralization, where a few wealthy miners control large amounts of hashing power. Proof of Work (PoW) blockchains can remain ASIC resistant with regular changes to the consensus algorithm, discouraging development of ASICs. Monero recently implemented changes for this reason.
While stating that the idea is not a proposal, Zamfir polled Twitter users to ask if they would support “a hard fork that obsoletes ETH ASICs?” 57% of respondents said yes. However, ETH is currently in the process of transitioning from PoW to Proof of Stake (PoS), where ASICs can’t be used.
Unlike PoW, where miners are rewarded for solving a mathematical problem, PoS rewards holders of the asset. However, PoS coins are currently underutilized compared to PoW coins, in terms of transactions per day, which is in part due to the number of coins dedicated to staking. ETH creator and developer Vitalik Buterin has mentioned that ETH validators may require at least 1000ETH, or ~US$412,000 at current Prices. The siren song of staking may, in and of itself, be causing a decrease in network transactions and usage.
PoW has also become more and more location dependent, based on the cost of electricity and regulatory concerns. PoS would act to level the playing field for those who acquire or have acquired ETH, not ASICs. In this regard, PoS greatly decreases electricity consumption and environmental impact when compared to PoW.
PoS would also likely carry less regulatory risk, as it’s easier to discover a mining farm through electricity usage or noise levels, whereas staking is much harder to discover and could obfuscate law enforcement more easily.
Security concerns are also being addressed. Buterin, Zamfir, and other ETH developers are attempting to mitigate risk with Casper. Two versions are currently being developed, Buterin’s Friendly Finality Gadget (FFG) and Zamfir’s Correct By Construction (CBC), and will likely be combined in some form. In a recent presentation in Singapore, Buterin said that FFG is “pretty close” and currently has an active testnet. Zamfir’s CBC is currently in use on Rchain.
Scalability is also being worked on, and will help decrease transaction fees and unconfirmed transactions. There are currently three main mechanisms under development; Sharding, Plasma, and the Raiden Network.
Sharding will allow for more transactions to be validated at once, with nodes only needing to store certain segments of the blockchain. The storage space for an ETH full node, including all parity operation modes with various chain data, currently requires more than 600GB. While public distributed databases, such as blockchains, often require each full node to sync and store the entire blockchain, Ethereum nodes have various alternatives that reduce this number dramatically.
Plasma and the Raiden Network are both off-chain solutions. Plasma interacts with a series of smart contracts to create hierarchical trees of sidechains. The Raiden Network, similar to Bitcoin’s Lightning Network, uses bidirectional peer to peer state channels secured through digitally signed and hash-locked transfers called balance proofs. By some estimates, the Raiden Network will substantially increase ETH’s transactions per second capacity.
In spite of the transition to PoS, hash rate and difficulty had been posting record highs. However, they have begun to pull back somewhat — likely due to the dramatic decrease in mining profitability recently. In October 2017, the Metropolis hard fork protocol changes to address the inflationary distribution curve decreased the block reward to 3 ETH from 5 ETH, with the difficulty lowered accordingly to maintain near the same mining profitability.
As difficulty rises and transactions remain unchanged or decrease, mining profitability will continue to decrease. A transition to make ETH PoW mining entirely unprofitable through various stages is planned with Casper implementation.
Initial Coin Offerings (ICOs) continue to drive network adoption. In just over three months, 2018 ICO raises have quickly exceeded the total amount raised in all of 2017, averaging US$1.98 billion per month. The Telegram ICO alone raised US$1.7 billion in two rounds. By comparison, Alibaba, the largest IPO of all-time, raised US$21 billion.
ICO raises near a market nadir also have the added effect of appreciating with the Price of ETH. ICO participants, on the other hand, may suffer hidden loses over the same period with funds locked in the ICO before tokens are distributed.
According to dappradar.com, the top decentralized application (dApp) by daily active users (DAU) is Proof of Weak Hands 3D. The project is reminiscent of both a decentralized Ponzi and/or Pyramid Scheme with the website’s own verbiage including the phrases; “enjoy multidimensional gains”, “volume based income, kinda like UBI (universal basic income), but less of a joke” and “trust us, way easier”.
CryptoKitties, a crypto collectible dApp, takes the number four slot behind the decentralized exchanges Fork.Delta and IDEX. Kitty sales have totaled US$23.63 million so far, with the average cat setting you back US$68. Most of the top 100 cats auctioned by Price occurred in early December, when kitty mania reached fever pitch.
The value of Ethereum traded on exchanges in the past 24 hours, US$628.7 million, is predominantly from Bitcoin (BTC), Tether (USDT), and U.S. Dollar (USD) pairs. The majority of trading has been conducted on OKEX, Binance, Huobi, and Bitfinex. The Korean Won (KRW) trading pair holds a premium of 1.4%. The decentralized exchanges, IDEX and Fork.Delta, facilitated the highest volume over the past week amongst their peers.
The Over The Counter (OTC) exchange LocalEthereum averaged less than ~200ETH per day in transaction volume over the past week, according to dappradar. In comparison, LocalBitcoins averaged 8,537BTC worldwide in the past week, according to coin.dance. Traditional OTC desks often require a minimum order of between US$100,000 and US$250,000, whereas these peer-to-peer marketplaces have no minimum order size.
ETH currently stands on a key technical level, with a potential trend transition looming. The status of this trend can be determined using Ichimoku Cloud, Moving Averages, Support Zones, and Chart Patterns. Further background information on the technical analysis discussed below can be found here.
On Bitfinex, since March 25th, ~US$54.21 million worth of longs have been opened. Open interest is currently net long ~US$45.45 million (top panel, chart below).
On the daily chart, a bearish 50/200 EMA cross has occurred, known as the Death Cross, only the second in ETH history. The previous Death Cross occurred in late November 2016, around the same time as an emergency hard fork to fix a Geth and Parity desync. The EMAs recrossed bullish 77 days later after a 38% Price drop from the time of the Death Cross.
Any further drop in Price at the current level would likely find support in the previous consolidation zone (green rectangle, chart below). Although a bullish EMA recross, or Golden Cross, is likely many days away, it should be seen as a bullish re-entry signal depending on market structure. In general, EMA crosses can heavily lag market movements, making the entries based on the crosses alone suboptimal.
The Ichimoku Cloud uses four metrics 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 entirely bearish; Price is below Cloud, Cloud is bearish, the TK cross is bearish, and the Lagging Span is below Cloud and Price. However, Price has broken above the Tenkan, ending the streak of Tenkan rejection, for the past three days, for the first time since breaking the Tenkan on March 7th. Much like a Kijun bounce, a Tenkan bounce indicates trend continuation to an extreme.
The first potential Price target sits at the mean, or Kijun, around US$535. The yearly pivot also sits at the same level (not shown). This can be traded with two strategies; a long trade from current Price to the Kijun with a stop loss below local lows at US$368, and a short entry with asks placed at the level of the Kijun with a stop loss at the level of Cloud resistance. If the local lows continue to hold, a Price touch of the flat Kumo, or 50% retracement from local high of US$960 to local low of US$368, is likely at US$672.
The status of the current Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals, is also entirely bearish; Price is below Cloud, Cloud is bearish, the TK cross is bearish, and the Lagging Span is below Cloud and Price. Much like the reversal potential with the singled settings, mean reversion to the Kijun is also favored in this case due to a TK disequilibrium.
A long reversal trade opportunity is warranted when a C-Clamp forms between the Tenkan and Kijun lines indicating Price being oversold, which is currently the case. A stop loss for this long trade would trigger if Price does make a lower low, below local lows at US$368. The longer the C-Clamp holds, the higher the probability of a successful reversal to Kijun, or US$674 currently.
If the local lows continue to hold, a Price touch of the flat Kumo, or 50% retracement from the all-time high to the local low of US$368, is likely at US$893. This setup can also be traded as a short entry with asks placed at the level of the Kijun with a stop loss at the level of Cloud resistance.
When deciding between the singled or doubled Cloud settings for trade entries, exits, and stop losses, the doubled settings may be preferable as the signals tend to be more accurate. However, risk appetite, trade size, and leverage need to be considered when determining trades based on faster or slower signals. The success of doubled or singled Cloud settings with backtesting varies depending on the type of Cloud strategy or trade type being implemented.
The status of the current Cloud metrics on the four hour time frame with doubled settings (20/60/120/30) have begun to flip bullish; Price has entered Cloud, Cloud remains bearish, TK cross is bullish, and Lagging Span is above Price but below Cloud.
A long entry based on traditional Cloud rules does not occur until the Cloud is breached by Price, currently at US$467. However, a long reversal trade opportunity occurs when Price breaches Cloud resistance, with the target being the opposite edge of the Cloud, or US$467. This is known as an Edge-to-Edge trade.
A long entry for this trade has triggered with a candle close inside of Cloud. Edge-to-Edge trades have a higher probability of success if they are accompanied by a bullish TK cross, which is currently the case. The stop loss for Edge-to-Edge trades should be placed near the Kijun or Cloud support, or US$395.
Additionally, between the 200 EMA, Pitchfork resistance diagonal, and Cloud Edge, there is a large confluence of resistance surrounding US$440-500 (yellow circle). If Price cleanly breaks this zone, which is not likely on the first attempt, expect the higher timeframe targets (illustrated above) to quickly come to fruition.
Breaking this zone would also represent bullish invalidation of the bearish Pitchfork which began after Price dropped from the all-time high. A failure to invalidate the bearish Pitchfork would suggest a retest of the Median Line (yellow arrow), representing bearish mean reversion.
Lastly, on the twelve hour ETH/BTC chart, the bearish momentum for the Head and Shoulders pattern may have ended. Despite not reaching the level of the measured move, 1.618 Fibonacci extension, or monthly pivot (not shown), a potential double bottom has formed with an Adam and Eve, indicating bullish reversal. Although this is a small pattern in size, it may lead to a much larger move. A trailing stop loss or stop loss just above the 1.272 Fibonacci extension would be indicated if currently in a short trade.
The daily Cloud for this pair (not shown) has also formed a C-Clamp, indicating the potential for bullish reversal as well.
Never before has the Ethereum protocol been in the process of undergoing such drastic changes. As the PoS transition comes closer and closer, the emergent need for changes to the consensus algorithm due to potentially disruptive ASIC takeover also increases. Apart from network security, ETH is also juggling changes to its scalability and monetary policy.
Meanwhile, ICOs continue to raise record-setting amounts of money. Investors and speculators have not been deterred from the fear of these projects with large raises never coming to fruition.
Technicals strongly suggest bearish momentum has abated and a bullish reversal is imminent. While the trend remains bearish based on high timeframe Cloud signals and EMAs, a retest of support turned resistance levels is highly likely in the near term.
Once the PoS details are finalized, and the amount of ETH required for a validator is known, accumulating ETH for this purpose may occur, soaking up supply and raising Price. How and when this will be priced in is difficult to determine.