Ethereum Analysis July 2018 UPDATE: Bubble Deflation Is Just Getting Started

You can find this post and more of my work on Medium.

July 28, 2018 Update

So far my ETH/BTC prediction is playing out quite well. ETH/USD losses have been offset by the 32% increase in BTC’s value up from $6400 to the $8000-$8500 range. This has kept ETH/USD from falling to $350 or so from the 20% loss in true value. If we see a BTC price correction back to the $6000 range or lower, ETH could face as much as a 40% loss in USD value or more. Those hodling ETH should be quite concerned right now. If you take a look at my Bitcoin analysis from June here, you can see that we have yet to break out. Bitcoin is struggling and a failure at this level will be extraordinarily bearish leading into the fall. If Bitcoin nosedives, expect further ETH/USD losses.

As for the ETH/BTC pair, we are rapidly approaching diagonal and horizontal support at 0.054 BTC. If this level fails as Bitcoin corrects, expect significant ETH/USD losses. See charts below.

Chart from original article
Current chart. Rapidly approaching horizontal fib and log uptrend support.
Chart from original article
Current chart. Rapidly approaching purple support line.

 


Original
article from July 4, 2018 below:

Ethereum (ETH) Market Overview:

Position: $435/0.070 BTC Short

  • Large range showing distribution on ETH/BTC and ETH/USD pairs.
  • A bubble formed inside of the ETH market after Bitcoin’s blow off top
  • ETH facing 40%-60%+ losses over the coming weeks/months
  • ETH could return to 9–10% market dominance
  • ETH will likely have issues competing with alternatives
  • ETH could face a mass exodus of projects from its chain to alternative chains
  • Targets: $200 or 0.04BTC.
  • Worst Case Scenario: Sub $100 or 0.024BTC

As most readers know, over the last few months, the cryptocurrency market has suffered significant losses. However, going forward, I feel that Ethereum will continue to lose value. I believe that the Bitcoin rally, Ethereum being used as an ICO platform, and gross overspeculation inflated a relatively large bubble in the Ethereum market that is on the verge of popping. To support this claim, I’ll be looking at some historical price behavior relative to Bitcoin, some of Ethereum’s fundamental issues, how Ethereum stacks up against its competitors as a potential DApp platform, and some technical analysis on both the ETH/BTC and ETH/USD pair charts.

Historical Ethereum (ETH) Analysis

In order to get a better idea of how and when the Ethereum bubble formed, let’s take a look at the historical data. In December 2017, while Bitcoin was at all time highs, Ethereum fell to 9% market dominance and was in the midst of a steep downtrend on the ETH/BTC pair. The rapid run up in Bitcoin’s price artificially inflated the USD value of Ethereum to over $800 even though the satoshi value was steadily trending down finding a bottom near 0.024 BTC.

This run up in USD value attracted new investors, and the surge of demand pushed the price above $1000 just as Bitcoin began to fall from all time highs. This surge also increased the true value of Ethereum pushing to near all time highs above 0.1 BTC. By January 26, 2018, Ethereum dependent tokens accounted for 91% of total market capitalization of all cryptocurrency tokens.

By March 2018, that number had fallen to around 88%. Due to the fact that the vast majority of these token ICO’s were purchased with Ethereum, this also contributed to its surge in valuation. The vast majority of these ICO’s are speculative assets with no working products. Moreover, these projects are highly dependent on a functioning Ethereum network that due to its scaling issues cannot actually support the majority of said projects. We will go deeper into this further down. For now, review the charts below.

*see below for images of each individual chart

The chart above compares BTC/USD, ETH/USD, and ETH/BTC pairs before, during, and after Bitcoin reached $20k. The importance of using BTC pairs to track actual growth across the altcoin market is something I’ve written about extensively, and I will not go into great detail about it here. That said, this chart is a perfectly good example of why BTC pairs are far more reliable than USD pairs when attempting to track changes in a coin’s actual value.

The quick version of how this works is:

  • If the satoshi value of an altcoin is increasing while Bitcoin is either growing or moving sideways, that altcoin is gaining value. It is becoming worth more Bitcoin even as Bitcoin gains value or holds its present value.
  • If the satoshi value of an altcoin is increasing while Bitcoin is losing value, that altcoin is either holding its value or slightly gaining value. You can determine which by using calculating the difference between Bitcoin’s percentage loss and the altcoin’s percentage gain in satoshis.

Examples:

  • BTC/USD -10% and ETH/BTC +10% = 0% gain, holding
  • BTC/USD -20% and ETH/BTC +10% = -10% loss
  • BTC/USD -20% and ETH/BTC +22% = +2% gain
  • BTC/USD 0% and ETH/BTC +10% = 10% gain
  • BTC/USD +20% and ETH/BTC +10% = 30% gain
  • BTC/USD +20% and ETH/BTC -10% = -30% potential loss

This is why trading altcoins can create quite high returns, but also much more significant losses than simply trading bitcoin. Typically, Bitcoin sell offs trigger deeper sell offs in the alt market due to the initial drop in USD value. These sell offs lower the satoshi value and the USD value loss is worse as a result, but I digress.

Starting from the left on the previous chart, the BTC pair reached all time highs in June-July 2017 at 0.154 BTC. Afterwards, Ethereum fell into a downtrend suffering an 84% loss in actual value relative to Bitcoin while its USD value was being artificially inflated by Bitcoin’s growth as I mentioned above. Bitcoin’s growth was so significant that it offset some of Ethereum’s actual losses in dollars. ETH/USD broke above resistance pulling in new investors driving up the satoshi value as evidenced by the reversal on the BTC pair. However, this buying occurred at the TOP of the market rally. This is the point where ETH fell to 9% market dominance. The period that soon followed is where I believe Ethereum formed a bubble.

As Bitcoin entered its correction, FOMO combined with ICO’s and over-speculation pushed Ethereum to new all time highs. Many Ethereum longs were trapped in positions around February-March of this year when Bitcoin failed to break $11.7k and again recently when Bitcoin failed to break $10k. During the $10k attempt ETH/BTC saw 60% gains, and growth decoupled from Bitcoin was about 14%. This can be calculated by subtracting the percentage gain of Bitcoin from the percentage gain of ETH/BTC, then subtracting that result from the ETH/USD percentage gain. This bounce is likely where trapped longs from the failed $11.7k run up exited their positions. Those still trapped are waiting to exit on the next “bounce”.

If one doesn’t come, Ethereum hodlers will begin to sell off their tokens. In fact, if Bitcoin does fall deeply into a bear market, most altcoin holders will begin selling off their tokens. If the decline is bad enough, we will begin to see many weak, overvalued projects simply go bankrupt. And to be honest, many ERC20 tokens are weak projects with no working products. Companies and project teams with products and/or ICO’s on the Ethereum network will likely begin dumping their ETH in an attempt to preserve capital. This will drive the value of Ethereum down even further in the presence of low investor confidence.

It is important to note that ETH/BTC has been making lower highs while Bitcoin has been losing value. This is NOT a good sign for the strength of Ethereum. I believe that Ethereum’s correction is lagging behind Bitcoin’s correction due location of its bubble’s inflation. It is entirely possible that to complete this correction, ETH/BTC could see as much as a -60% loss.

If Bitcoin doesn’t rally during this drop, Ethereum’s losses from the current price could be more than -60% of the current ETH/USD value. This could mean sub $100 Ethereum. However, what I expect is Bitcoin will rally to $7500 or so and offset some of this USD value loss limiting Ethereum’s losses in USD value to between -40% and -60%. This jump to $7500 would be a 20% increase and coincides with my point of failure target for Bitcoin discussed in my last article. And finally, if Ethereum were to return to its last low of 9% market dominance, that is a 40%-50% loss from its current share of the market at just over 19%.

Ethereum’s Competition

Quite a lot of second and third generation platform tokens are giving Ethereum a run for its money. In fact, if we were to take all of the platform projects and compare them in terms of speed, security, ease of adoption, design fundamentals, language choice, developer attraction, etc., Ethereum would actually fall closer to the bottom than to the top of the list. Alternatives to Ethereum’s slower and more costly model have been making waves over the last few months, the most recognizable being EOS. According to Dan Larimer, Ethereum dependent projects can be ported to EOS in about two weeks.

Over the next few months, it is highly probable that EOS will begin to appeal to many developers with projects on the Ethereum chain due to EOS’s fast and fee-less transactions. As a result, we could see a mass exodus from the Ethereum blockchain to the EOS blockchain or any number of its faster competitors long before Ethereum can implement a workable scaling solution.

Raiden, Plasma, and Sharding have been proposed as possible scaling solutions though none have been implemented. There’s is also the issue requiring hard forks to correct fundamental problems, security issues with Ethereum’s smart-contract language Solidity, fee-based transactions, the fundamental flaws with the Casper protocol, and so on. As a result, it is highly unlikely that Ethereum will reach enterprise level adoption. Projects like NEBL that’s offering simple and easy-to-use enterprise level blockchain solutions and others like AION and ARK which are focusing on cross-chain compatibility are light years ahead of Ethereum as well.

At present, Ethereum’s best use case is as an ICO platform and a network for some lower end applications. Ethereum will likely be surpassed by its competitors which will deepen its coming correction substantially over the coming months or years.

Method Of Analysis

Here I’ve added an overview of the type of analysis I use. This section was not part of my original article.

Wyckoff theory plays a large role in how I look at price action, volume, etc. The aim of Wyckoff analysis is more or less to determine what large investors are doing–accumulating new positions or distributing held positions–and attempt to trade with them rather than being cannon fodder for their stop hunts, sell offs, and buy ups after panic-induced selloffs.

I will not go into enormous detail about Wyckoff, but it is a powerful tool when used correctly. It is NOT a pattern system. It takes a long time to master, and I learn more and more every single day.

The following are some basic terms you will see referenced in my charts:

1) The selling climax (SCLX) is the point at which a downtrend stops and the price falls into a new range.

2) The automatic reaction (AR) is the change of character that establishes the upper resistance of the new trading range after a downtrend, and the SCLX establishes the lower support the same. These are two of the most important aspects of Wyckoff trading.

3) A change of character (COC) is when the direction and momentum of the price action changes.

4) A secondary test (ST) is a test of either support or resistance in the new range.

5) A spring happens when the price breaks the lower support of the range and immediately reverses upwards followed by a volume expansion in the direction of the upwards price action. This is the reversal point of an accumulation range and the start of a new uptrend.

6) A sign of weakness (SOW) is when price breaks below the trading range with increased volume and little evidence of buying at this level. These are simplified explanations of a few Wyckoff characteristics, but they will do for this article.

7) A last point of supply (LPSY) occurs after a sign of weakness and serves as the last opportunity for longs to exit their positions before the price falls through support and enters into a downtrend.

Ethereum ETH Technical Analysis

Finally, let’s take a look at some technical analysis. It appears that on both Ethereum pairs, we have fallen into a range that is showing numerous characteristics of distribution. See charts below.

On the ETH/BTC chart, we had a flash crash that made defining certain aspects of the range a bit difficult. That said, we had a buying climax at around 0.12BTC that immediately wicked -50% from the peak. Price retraced to find support at 0.034BTC forming the AR. The ST is questionable due to the flash crash. This was followed by a test of the upper resistance of the range.

Price retraced and broke below support on high volume for a sign of weakness. Price bounced off of the log uptrend to test resistance yet again, but volume contracted as the price moved up qualifying this as a LPSY. Price retraced from here to find support on the 0.236 Fibonacci Retracement, bounced, and has presently made a lower high. Volume has been quite low during this last bounce. Price will likely retrace to the log uptrend from here.

See chart below.

By looking closer at the last few moves of the range, we can better identify a few targets. This area can be viewed as a symmetrical triangle. We could bounce off of the base of the triangle and retest the downtrend line before continuing down or simply break through the triangle and continue down. A bounce off of the log uptrend could happen around the 0.236 fib reversing this upwards to test the highs of the range, but I feel that the probability of breaking the log uptrend and continuing down to the to around 0.038 BTC is higher.

The 6 hour chart gives even more evidence supporting a move down. We can see a local range forming off of the last bounce. It is quite clearly showing characteristics of distribution including the formation of a small double top pattern that recently broke to the downside forming a new sign of weakness for this range. Volume is contracting with each rise in price and expanding with each fall. This smaller range is quite bearish.

As for the ETH/USD chart, we have a very similar situation, except on this most recent down move where we saw a volume contraction. This volume/price behavior could be read as a somewhat bullish. However, you could also make an argument for a descending triangle here. We are also seeing volume surges at resistance which is evidence of institutional selling above the range. We could bounce off of the upper resistance of the range turned support for a third time and test the downtrend and uptrend lines as resistance before continuing down.

I will add to my short when price breaks the upper resistance probably around $395, and price will likely bounce between $135 and $200. However these values are heavily dependent on what Bitcoin does going forward. If Bitcoin pumps significantly, the ETH/BTC pair will have to suffer losses large enough to offset Bitcoin’s gains for the USD pair to actually fall. I will be watching the ETH/BTC moves much closer than the ETH/USD moves.

Lastly, let’s take a look at the Daily 50–100–200 EMA’s.

ETH/USD is showing a death cross on the Daily now that the 100 EMA has fallen below the 200 EMA with the 50 EMA below both.

ETH/BTC shows price has fallen through all three daily moving averages and a death cross is imminent. If we take a look at the 6h ETH/BTC, we find a death cross here as well. See below.

Though moving average crosses are lagging indicators, combined with the rest of the analysis I’ve mentioned, these crosses further justify my bearishness.

Putting It All Together

Due to a combination of factors, Ethereum could be facing significant losses over the coming months/years. More and more competitors are entering the marketplace offering better and more diverse solutions to the problems Ethereum is meant to solve. There is evidence of an Ethereum bubble resulting from over-speculation, ICO overvaluation, etc.

Technical analysis also points towards a coming decline, though the severity of the USD value loss will be highly dependent on what happens with Bitcoin over the coming months/years. Though Ethereum was the first application platform, it may soon outlive its usefulness as we see more and more technological advancements. Its ability to adapt to keep up with the current pace just isn’t there, but who knows? Though I am thankful for Ethereum’s accomplishments, I don’t see a bright future for the platform.


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