Ethereum Price Analysis – Consolidation likely in the near future

Ethereum (ETH) has continued to push North, having gained 77% this month alone. The market cap now stands at US$73.2 billion with US$3.4 billion in trading volume over the past 24 hours.

Recent talking points include a blog post by Preethi Kasireddy, “fundamental challenges with public blockchains.” The post outlines several problems faced by blockchain platforms at the moment; limited scalability, limited privacy, lack of formal contract verification, storage constraints, and unsustainable consensus mechanisms – to name a few.

Scaling issues on Ethereum became apparent in a post-CryptoKitties world. The Decentralized Application (Dapp) helped pushed an already busy network to its limits upon release. In the span of four days, CryptoKitty transactions went from 3% of all Ethereum transactions to 11.77%. This resulted in transaction backlogs, network delays, and higher gas fees. The backlog of transactions currently stands at over 14,000 transactions. Ethereum is capable of running 10-30 transactions per second.

Vitalik Buterin, Vlad Zamfir, and other Ethereum developers are currently working on a variety of scaling solutions, the most drastic being a switch from Proof of Work (PoW), or mining, to Proof of Stake (PoS).

The decision between PoW and PoS circles back to the issue with consensus mechanisms. PoW favors those who can amass the most mining technology with the cheapest electricity whereas PoS favors those who accumulated assets early in the coin’s life cycle. PoS coins are currently underutilized compared to PoW coins in terms of transactions per day.

There has been increasing concern lately over the amount of electricity being soaked up around the world to run these PoW networks. While some see this as inevitable destruction of the planet, others suggest this will hasten the process towards developing efficient and renewable energy sources.

Ethereum’s PoS protocol, Casper, will lock Ether in a smart contract and provide the user with interest. The process will require much less electricity and no mining software or hardware.

Other scaling solutions include the Raiden Network, Plasma, and Sharding. Raiden proposes to scale the Ethereum network with off-chain transactions using state channel technology. A simplified version, called µRaiden, is active on the ETH mainnet.

Plasma will use a series of smart contracts to create hierarchical trees of sidechains. An off-chain scaling solution, like Raiden, Plasma offers the benefits of faster and cheaper transactions.

Sharding will allow for more transactions to be validated at once, with nodes only needing to store certain segments of the blockchain. Before Sharding can be implemented, the Ethereum protocol must be upgraded to Casper.

The ETH development team has a track record of successful protocol improvements. The Metropolis hard fork included Zero-Knowledge Succinct Non-Interactive Argument of Knowledge or ZK Snarks, based on zero-knowledge proofs, which allow for completely anonymous transactions.

Edward Snowden recently stated that “Zero-knowledge proofs may be the future of private trade.” They have already been successfully implemented in the Byzantium code on the Ropstentestnet, thanks to help from the Zcash (ZEC) dev team.

However, a lack of formal verification of smart contracts built in Solidity, the Ethereum programming language, has shown the world that certain smart contracts were neither smart nor contracts. The decentralized autonomous organization (DAO) hack is a prime example, where funds were recursively drained from the smart contract.

The Parity multisig bug is the most recent example of several millions of dollars being lost. Smart contracts are immutable, meaning they cannot be retroactively changed, and a hard fork is required to fix any problems. This fix resolved the DAO situation, but has not occurred for Parity. Parity remains optimistic that it will reach a solution to the manner.

The storage space for an ETH full node, including all Parity operation modes with various chain data, currently requires more than 500GB. While public distributed databases, such as blockchains, often require each full node to sync and store the entire blockchain locally Ethereum offers three alternative options which can reduce the data to around 12-15%.

On the exchange side, ETH trading volume has been led by Bitcoin (BTC), the US Dollar (USD), and South Korean Won (KRW) trading pairs on Poloniex, Bitfinex, and Bithumb respectively.

Technical Analysis

After breaking above of the multi-month Ascending Triangle, which signaled bullish continuation while forming, the price retested the horizontal resistance level and established it as support. This is a frequent occurrence for every chart pattern and is known as a throwback. The US$800 established last month has been reached.

The fractal stop loss level on the daily time frame (red arrows above) for an active long trade remains at US$403.90. This lagging indicator appears after a high-low-high, or low-high-low in candle structure. During a bull trend, the price should not be breaking horizontal levels of bearish fractals (high-low-high), if it does, this would signal a long exit.

The fractal levels established around US$400 held the long trade open appropriately, and did not signal a long exit. Any current longs will likely have stops below US$595-$614 (yellow arrow above).

There was also a bullish flag which formed after the breakout from the ascending triangle. The target of US$650 was quickly reached, and the price is now pushing beyond several Fibonacci extensions.

The Ichimoku Cloud on the daily chart using singled settings (10/30/60/30) for faster signals shows all bullish Cloud metrics, with a strong upward slope. This indicates that the trend remains heavily bullish with no indication of a long exit.

The Cloud uses a moving-average-type system with dynamic support and resistance to make projections of key zones, as well as capturing 80% of any given trend. As long as the price remains above the Cloud, sentiment remains bullish. Price in the Cloud indicates a neutral trend, and below the Cloud indicates a bearish trend.

When the Tenkan (blue) is over the Kijun (red) sentiment is bullish, as shown below. When the Kijun is over the Tenkan sentiment is bearish. When the Lagging Span (dark green) is above the Cloud and current price sentiment is bullish, as shown below. When the Lagging Span is below the Cloud and current price sentiment is bearish.

The best entry signals when using this indicator occur when the trend is obvious, but 1 or 2 of the signals have yet to become confluent on a higher timeframe trend.

The Ichimoku Cloud on the daily chart with doubled settings (20/60/120/30) for a more accurate and smoother signal also shows strongly bullish Cloud metrics with an upward slope.

As the price gets further and further away from Kijun (red), it will eventually want to retest the mean as support. So either; price goes flat allowing the Kijun to play catch up, or, price falls towards the Kijun. There is no immediate indication of the outcome for the current cloud on this timeframe.

The Ichimoku Cloud on the four hour chart shows all bullish metrics, but there is a flattening of both the Tenkan and Kijun suggesting a pending pullback to the Kijun at US$648. Bids in this zone are representative of mean reversion, which often occur throughout a trend.

Conclusion

Scaling continues to be a major concern for all blockchains, especially those recently thrust into the mainstream zeitgeist. In Ethereum’s case, several protocol upgrades are purely focused on scaling. Growing pains will likely continue until all options are fully implemented and utilized.

Technicals suggest that targets have been hit on several chart patterns, with consolidation likely in the near future. The markup phase will continue so long as the trend, and market for that matter, remains bullish. There are no immediate likely targets, but the trend is your friend.