Ethereum Price Analysis - Scaling pressures on the rise

Ether is the second largest cryptocurrency, with a market capitalization of ~US$26b. The asset was recently selling for a record high of ~US$360, before dipping to ~US$300 — marking a staggering 555% increase in the past six months — and dwarfing Bitcoin's gains over the same period.

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Much of this is due to the rise of the ERC20 tokens, and Initial Coin Offerings (ICOs) that use them. However, many countries around the world are currently tackling legislation, mostly in regards to consumer protections and scam prevention. China recently banned ICOs outright.

This ban will likely be lifted sometime in the future, when governing bodies have a better handle on how to better delineate projects which are scams from those which seek legitimate fundraising for a company or an idea.

The ballooning number of ICOs has also had major downstream network effects on transactions per day, hashrate, block size, average transaction fees, and blockchain size.

Many of these issues are soon to be addresses. The network is due for a scheduled hard fork, Metropolis, sometime in late September. Improvements will include; the ability to make transactions public or private, simplified smart contracts, and decreased Gas costs.  

After Metropolis, Ethereum development will focus on Casper, the beginning of a five phase move from Proof of Work (PoS), or mining, to Proof of Stake (PoS). PoS would lock Ether in a smart contract, and provide the user with interest. The process would require much less electricity and no mining software or hardware.

Further updates to address scalability will include the Raiden Network, which is analogous to Bitcoin’s Lighting Network, and will allow for hub and spoke off-chain channel-based transactions. Plasma will then address smart contract scalability, and Sharding, a type of database partitioning, to address the growing blockchain size.

In the mean time, the network already has more transactions per day than Bitcoin, having surpassed the leading cryptocurrency sometime in mid April.

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A spike in average transaction fees on May 21st corresponded with a clogged network due to ICOs that day, most notably Bancor. This also corresponded with a flash crash on many exchanges.

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Ethereum has a dynamic block size which changes as a function of the number of transactions, as opposed to the fixed block size limit found in Bitcoin. Ethereum miners also determine the Gas limit, or transaction cost, dynamically as a function of the number of pending transactions.

The overall size of Ethereum’s blockchain has also outpaced Bitcoin, since January, and is now over 300GB.

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The ethereum networks node distribution shows ample decentralization, with the highest concentration of nodes in Moscow, Russia. However, as blockchain size increases, less full nodes will be able to provide the extra storage capacity. If the blockchain bloat is not addressed, it will lead to an increase in node centralization on the network.

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The Ethereum hash rate has also grown, from ~5TH/s at the beginning of this year to almost 100TH/s.

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The cryptocurrencies exchange traded volume essentially mirrors Bitcoin, with the exception of the Yen. ETHJPY is not currently a widely available trading pair, and JPY volume is likely absorbed through the ETHBTC market.

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ETHUSD trading volume is lead by the usual suspects, Bitfinex and GDAX.

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Despite the exchanges hemorrhaging user base, Poloniex continues to lead ETHBTC trading volume, even as Bittrex continues to gain market share.

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Technical Analysis

On the weekly timeframe, with price structure alone, there is the threat of a double top with heavy resistance above US$370 and descending volume. The “M for Murder” double top would be confirmed if the support at US$134 is breached on heavy volume. There are no indications of a bearish divergence as price did not make a higher high, nor did it make a higher high on RSI.

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This key weekly support zone becomes more obvious on the daily chart, where strong support wicks are present between ~US$120-150.

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To refute the double top hypothesis on the daily timeframe, there is an active Cup and Handle with a roughly matching descending volume profile, a bullish continuation chart pattern, with a ~US$550-650 target.

This pattern will become invalid if price breaches the 50% pullback mark at ~US$273. Whether or not to include the wick as part of the size of the cup, and therefore the measured move, is completely subjective.

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There is also an active Descending Triangle on the four hour timeframe, with a matching descending volume profile. This bearish continuation chart pattern offers a ~US$170-200 target.

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Exponential moving averages (EMAs) are showing sideways to bearish price action ahead. The 200 period EMA typically denotes whether price is in a bullish or bearish trend. A 50/200EMA cross on the daily is significant enough to be named either a bullish ‘golden cross’ (green) or a bearish ‘death cross’ (red).

A golden cross in February this year, around ~US$11, marked the beginning of a monumental bull run, which remains ongoing. 

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Price is currently breaking the 50 period EMA on the daily chart. This suggests a potential reach for the 200 period EMA currently at ~US$200, similar to July 16th. The bull trend remains intact as long as price remains above the daily 200EMA. There is also no threat of a bearish 50/200EMA death cross, which would signify the beginning of a bear trend.

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The four hour timeframe, however, is a different story. There is currently a bearish 50/200EMA cross, the last such cross occurred in July resulted and resulted in a ~50% pullback at its maximum.

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Another indicator we can use is the Pitchfork (PF). They provide diagonals that can be thought of as a potential reversal zones or support/resistance lines. The upper yellow diagonal zone being ‘most overbought,’ or the top bounds of the trend, and the lower yellow diagonal zone being ‘most oversold,’ or the bottom bounds of the trend.

Below is a viable PF drawn using recent price action. Due to the mostly vertical nature of Ethereum price structure, there are few anchors yielding a reliable PF. Even this PF is potentially invalid due to the position of price relative to the lower quartile.

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However, adding a 1.5 quartile keeps price with the bounds of the PF, for now.

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We can also look to the Ichimoku Cloud, which is a constant, auto-drawn indicator that quickly offers an immense amount of valuable information on any time frame. The Cloud is best used at higher time frames as more data generally provides more accurate signals and less false positives.

The indicator uses a moving average and dynamic support and resistance to make key zone projections. Its goal is to capture 80% of any given trend. While it may seem complicated when viewed on the price chart, it is really a straightforward indicator that is very usable.

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.

The best entry signals for the Cloud occur when the trend is obvious, but 1 or 2 signals have yet to become confluent with a higher time frame trend:

When the Tenkan (T) is over the Kijun (K) sentiment is bullish. K over T would indicate bearish sentiment. When the Lagging Span (LS) is above the Cloud and above the price sentiment is bullish, below the Cloud and below price would indicate bearish sentiment.

Additionally, in any given trend, price will continually attempt mean reversion to determine support levels. These pullbacks or corrections can be seen through touches of the Kijun, also known as the Kijun bounce.

All signals on daily timeframe are currently flat and bullish, therefore they should not be used as for current entry signals. Based on the Kijun position, there is strong support at US$266.

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Alt coin prices generally move quicker than Bitcoin. Faster moving charts often require faster signals to keep up with price on higher timeframes. Trading signals should always be as fast as they can be without too much noise or false positives.

Using faster Ichimoku Cloud settings on the daily chart, 10/30/60/30, there is a bearish TK cross above the cloud, which is a long exit signal. Singled Cloud settings on the daily time frame have been back tested on more than 50 alt coins. The data shows superior and improved entries for Kumo Breakouts and TK Crosses when compared to the double 20/60/120/30 settings (data not shown).

Price is also hovering above a Kumo Twist. Should downward momentum gain traction, there is a high probability price will fall through this time point.

A Kumo Twist should be seen as a period containing zero support or resistance. Price action through Kumo Twists are not always perfect, like the Twist that occurred in August, but are estimates for high probability zones of volatility.

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On the four hour timeframe, all signals are decidedly bearish, which occurs in the setting of a Descending Triangle as mentioned above. Although bearish continuation should be expected, should price break up, the Flat Kumo (50% mark from high to low) at US$335 is a high probability target.

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An ideal short entry would trigger when price either breaks the horizontal of the Descending Triangle, or price again touches the Kijun below cloud - a bearish Kijun Bounce.

Conclusion

Both fundamentals and technicals are entirely mixed. The Ethereum network is booming by every available metric, but is beginning to experience significant problems with scalability. There are several protocol changes in the pipeline to address this critical issue. ICOs, which brought Ethereum to meteoric heights, are under regulatory scrutiny in many parts of the world. Regulation is beginning to limit unaccredited investors more and more.

Higher timeframe technicals appear almost entirely neutral, with the exception of a potential Cup and Handle with a ~US$600 target. Lower timeframes are painting a decidedly bearish picture with a pending retest of ~US$200 psychological support.