IOTA Price Analysis – A Tangled Skein

IOTA is designed to usher in machine-to-machine payments and data transfer in the Internet-of-Things economy. The new protocol promises to fix the scalability issues that ail blockchain technology with fast, zero-fee, quantum-immune, and secure transactions.

IOTA was founded in 2015, by entrepreneurs David Sønstebø and Dominik Schiener, and mathematicians Sergey Ivancheglo and Serguei Popov. Ivancheglo is also the creator of NXT, a Proof of Stake coin. In 2017, IOTA opened a German-based non-profit foundation focused on research, development, education, and standardization of the economy of things. The foundation recently added Dr. Rolf Werner, a Fujitsu business executive, while IOTA recently added Porsche to its growing list of partnerships and corporate interests.

Instead of a blockchain, IOTA uses a Directed Acyclic Graph (DAG), or Tangle, as part of its consensus mechanism. Each transaction acts independently and non-chronologically as a single block, which then connects to other blocks. Each transaction must confirm two previous transactions. Theoretically, more transactions only improve scalability with this model.

Network nodes act as sentinels to ensure there are no conflicting transactions. While in the bootstrapping phase, the IOTA foundation controls a centralized node coordinator which acts as the chief validator for the entire network by signing transactions at a designated rate, known as Milestones.

The IOTA protocol is theoretically able to provide private transactions. A Proof of Concept for Flash channels, which are analogous to Bitcoin’s Lightning Network and Ethereum’s Raiden Network, has also been released. These channels enable “instant and feeless” off-tangle, bidirectional payments.

The project started as part of a hardware company which surfaced in 2014, and has been linked to a low-power microprocessor called JINN. While the processor remains in stealth mode, JINN is thought to be capable of a trinary calculation (+1, 0 and -1), as opposed to binary (0 and 1), and will integrate physical devices with a Tangle network.

However, the project quickly attracted criticism. IOTA initially used a custom ternary cryptographic hash function called Curl, based on cryptographic sponge functions, which was selected to be compatible with the JINN microprocessor. Neha Narula, the Director of the Digital Currency Initiative at the MIT Media Lab, subsequently posted an article on Medium describing “a serious vulnerability and textbook insecure code.”

According to Ivancheglo, flaws with the Curl hash function were an intentional “copy-protection mechanism” and written by an AI. Sønstebø added that “no user funds were ever at risk.”  The IOTA team then swiftly switched from Curl to Keccak-384 on August 8th.

Blockchain developers and engineers continue to discuss IOTA security, and the development team’s inability to embrace constructive criticism. Topics include; design choices, centralization, motives to be an open-source project, and concerns regarding incentives.

During October last year, the platform suffered an attack on the node coordinator, controlled by the IOTA foundation. Schiener explained that “confirmations have stopped, but the network did not shut down.” The coordinator was reactivated on October 23rd and a new IOTA client released on October 25th.

In December and January, users reported delayed transaction confirmations, likely due to high network traffic at that time. There were also multiple reports of lost user funds as well as difficulty using the native wallet UI. On December 19th, IOTA released a new wallet client, v2.5.5, to help address these concerns.

In February this year, researcher Joseph Rebstock stated that IOTA was vulnerable to Replay Attacks if addresses were reused. This vulnerability was confirmed by an IOTA foundation member on the IOTA subreddit, calling it an “edge case” with no further plans to address the issue. In March, a San Francisco based security firm, Lekkertech, revealed another vulnerability, this time related to broken private key generation and not address reuse, which allowed for one user’s funds to be stolen.

An alpha version of the Trinity Wallet was released on March 29th to help alleviate issues with unconfirmed transactions and using the wallet UI. The wallet is currently under a seven week audit process, led by German security analysts accessec GmbH. The Ledger hardware wallet has also added IOTA support to its roadmap.

On the network side, the full bundle per day history, which is similar to packaged transactions, could not be obtained, but according to iotasear.ch, the most transactions occurred on June 2nd, 2017.

According to AreWeDecentralized.com, a website developed by DogeCoin creator Jackson Palmer to elucidate transparent metrics for decentralization, IOTA has 23 public nodes and the top 100 addresses control 62% of the IOTA money supply. The total number of public nodes are unknown currently based on constraints within the IOTA protocol.

The IOTA ICO took place over 27 days starting in November 2015 and raised 1,337 BTC, or US$584,000 at that time. The token generation event created 2,779,530,283,277,761 IOTA or ~2,800,000 gIOTA. No additional tokens will be created. The tokens were sold at a price of 0.0063 BTC or US$0.0001798865 per mIOTA token. There was a 15% bonus for the first nine days of the sale, a 7.5% bonus during the next nine days, and no bonus in the last 9 days of the crowdsale. Exchanges have listed the token as mIOTA, with each mIOTA being equal to one million IOTA.

On June 13th, 2017, Bitfinex was the first large exchange to list IOTA. The exchange was also an investor in the project, according to Bitfinex CSO Phil Potter. IOTA claims the protocol has transacted at least US$10 billion, most of which occurred after being listed on exchanges, specifically Bitfinex.

IOTA’s total market cap now stands at US$6.7 billion with a trade volume of US$253 million in the past 24 hours. Exchange traded volume in the past 24 hours is predominantly led by the Bitcoin (BTC), U.S. Dollar (USD) and Tether (USDT) pairs. The majority of trading occurring on Binance, Bitfinex, and Huobi. The KRW trading pair holds a 4.8% premium.

Technical Analysis

IOTA has undergone several clean trends and multiple trend shifts since being listed on Bitfinex in 2017.  The status of this trend can be determined using Exponential Moving Averages (EMA), Chart Patterns, and the Ichimoku Cloud indicator. Further background information on the technical analysis discussed below can be found here.

On the daily chart, a bullish EMA recross, or Golden Cross, occurred relatively quickly after a bearish cross. In general, EMA crosses can heavily lag market movements, making entries based on the crosses alone suboptimal. However, the bullish cross does give credence to a resuming bull trend. Open interest on Bitfinex is currently net long by an 8:1 margin, with longs approaching an all time high (top panel, chart below).

Price structure also has a history of multi-month falling wedges, a bullish reversal chart pattern. The first of which initially reached its 1.618 fib extension and moved higher in December 2017 on substantial volume, along with the entire crypto market. The 1.618 fib extension for the resolution of the current falling wedge is US$8.13.

Turning to the Ichimoku Cloud, the 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 doubled settings (20/60/120/30) for more accurate signals, are mixed; price is in Cloud, Cloud is bearish, TK cross is bullish, and the Lagging Span is in Cloud but above price.

A traditional Cloud long entry signal will not occur until price is above Cloud with volume. The flat Kumo between US$2.71 and US$3.40 represents a 50% retracement from the all time high in December to the recent low in April, and should act as a magnet for price.

The Edge-to-Edge long trade, which was triggered when price broke Cloud resistance and TK crossed bullishly, remains active with a target of US$2.71-US$3.40. Price has pulled back on an RSI bearish divergence (above), which suggested waning bullish momentum, and will likely consolidate at the current level before moving higher.

The status of the current Cloud metrics on the daily time frame, with singled settings (10/30/60/30) for quicker signals, are bullish; price is above Cloud, Cloud is bullish, the TK cross is bullish, and the Lagging Span is below Cloud but above price.

A traditional long entry signal occurred with the break above Cloud, known as a Kumo breakout. However, price currently sits far above the Kijun, suggesting price has risen quickly without a significant pullback to the mean. The most conservative long entry would occur at a support test of the Kijun at US$1.83, known as a Kijun Bounce. Ledges on the Cloud act as resistance targets after a trend reversal and also show potential price targets for the long term trend.

For the IOT/BTC pair, a bullish EMA cross after a prolonged downtrend suggests a new bull trend forming. A retest of the December high is likely based on the fib extensions from the December high to the March low.

Conclusion

IOTA launched its ICO in late 2015, before the ERC20 mania, and became widely known after its Bitfinex listing in June 2017. IOTA claims to be “infinitely scalable”, “working on the cutting edge of a new sector”, and expects “to have bugs in release software.” Unfortunately, the project has been fraught with problems ever since. Much of the criticism around IOTA involves the Curl hash function, which was removed in August 2017.

Issues remain regarding several properties of IOTA that appear to be contrary to blockchain best practice; a single closed-source node validator sitting on top of the network hierarchy, for example, as well as reports of lost or stolen user funds, and known vulnerabilities which remain unaddressed.

Technicals suggest an active bull trend with a retest of December highs. Near-term, momentum indicators suggest price is slightly overbought in this zone without any threat to the trend. In a vacuum, targets of US$8.13 and 448,000 satoshis are likely. However, IOTA will remain on my ‘don’t buy’ list until critical protocol fundamentals are addressed and fixed by the IOTA team.

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