ETHEREUM (ETH/ETC) Market Analysis

Technology, Technicals & Trading

ethereum logo

Currency name(s): Ether (ETH), Ether Classic (ETC)
Genesis Block: July 30, 2015
Total Supply: Unknown
Available Supply: ~84.8 million Algorithm: PoW (Ethash)
Features: Smart Contracts, Applications
Website: https://www.ethereum.org/, https://ethereumclassic.github.io/

1.) What is Ethereum?

Ethereum is a smart contract platform and turing complete scripting language that operates the Ethereum Virtual Machine (EVM) which executes peer-to peer contracts using the cryptocurrency Ether (or Ether Classic, which is discussed below). This translates to an ability to create, fund, launch, and operate decentralized applications (DAPPS) on the Ethereum platform using Ether as the currency of the ecosystem. Technologists, programmers, and futurists alike praise Ethereum for its potential to create not only a new internet, but a new economy, however economists have criticized is still uncertain monetary characteristics (such as total supply). Nevertheless, the project is an ambitious and respectable one which offers the possibility of a new and more exciting future for the web.

Ethereum's main value proposition at this point in its development its relatively easy to use and extensible application language, as well as built in ecosystem security via the Ether token. There are already many projects under development utilizing Ethereum, although unfortunately the most famous (or infamous) one is the DAO. The DAO, or Decentralized Autonomous Organization, was funded to the tune of $150 million in order to create a governance and investment structure based soley on computer code. "Code is Law" was the motto, that is until the DAO was hacked for over a third of its total value.

This massive hack created a controversy in the Ethereum community considering many large Ether holders were also large DAO investors, which eventually led to a hard fork which essentially voided the hack. Not all went as planned, unfortunately, as many in the community felt the hard fork violated one of the key tenants of all blockchain-base cryptocurrencies, immutability, which is what precipitated the creation and validation of the orphan chain, now known as Ether Classic (ETC). We now have two separate, yet functioning, projects and development teams, as well as two mineable and tradable tokens/coins.

2.) The Ethereum Technology

On traditional server architectures, every application has to set up its own servers that run their own code in isolated silos, making sharing of data hard. If a single app is compromised or goes offline, many users and other apps are affected. On an open peer-to-peer (p2p) network which utilizes a blockchain to synchronize nodes, anyone can set up a node that replicates the necessary data for all nodes to reach an agreement and be compensated by users and app developers. This allows user data to remain private and apps to be decentralized like the Internet was supposed to work.

Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference. These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middle man or counterparty risk.

One of the notable features of Ethereum's scripting language versus other cryptocurrencies such as Bitcoin's is that Ethereum's language is "turing complete." When a programming language is turing complete, it allows programmers more flexibility, but, as with anything in life, there are tradeoffs for this flexibility. One of the biggest tradeoffs, as evidenced by the DAO, is that when utilizing a turing complete programming language to create and execute smart contracts, it is incredibly difficult to prove properties about the contracts themselves. For example, it is difficult, if not impossible, to determine, in an automated fashion, whether a given smart contract is guaranteed to terminate or that it does not contain bugs of a certain type (such as the type that could be exploited by a hacker). Ethereum has a somewhat novel solution to the former issue (ie: does a given contract terminate) but not yet a practical solution to the later (ie: is a contract guaranteed to be free of certain classes of bugs). The termination problem is solved by feeding a contract small amounts of ether, known as gas. Every contract stored and executed on the Ethereum network requires some amount of gas to continue functioning properly. So, in addition to checking their contracts for loopholes that might be exploited by hackers, developers of smart contracts on Ethereum's platform also need to be aware of the gas requirements of their contracts. A poorly written contract might run out of gas too quickly. That being said, the convenience (and increased usability) of a turing complete language might outweigh the risks -- especially when something needs to be implemented quickly.

ethereum diagram

3.) Ethereum Markets

Since its launch in July of 2015, Ether has been a very liquid and highly valuable coin in terms of trading and market cap. It can be bought and sold on many altcoin exchanges, as well as on most fiat exchanges as well, and spreads are typically low while volume is relatively high. The hard forked token, Ether (ETH), is still traded under the name it has since launch, however the new coin (old chain) is also trade on most exchanges under the name Ether Classic (ETC). Despite having a 1/10th of the value, price, and mining capacity of its elder sibling Ether, it still pulls almost just as much daily trading volume making it a favorite of daytraders (particularly algos). We will refrain from make any value judgements regarding either coin in this piece, so we will be looking at examples of both markets in order to get a better idea of how these two markets operate independent of one another (although both still operate based on technicals).

ethereum exchange

4.) Ethereum Trading

​​In terms of price action, both Ether & Ether Classic act fairly well on all timeframes, particularly the short to medium term. Both scalp and swing trades off of local and regional highs and lows can be very profitable for those with agility and objectivity, while longer term traders may find the day to day volatility unnerving. With that in mind, BBA has been covering Ether since the summer of 2015 and Ether Classic since the day it was traded on exchange, and has executed on many highly advantageous setups on both the long and the short side over the past few months and years so our familiarity with this particular coin and its markets is unmatched.

The aforementioned Ether and Ether Classic trade setups have been and continue to be determined strictly via BBA's proprietary technical analysis of the charts. BBA synergizes analysis from multiple timeframes that stretch from the very short term (minutes/hours) to long very (years), which is unique in the world of cryptocurrencies due to their current nascent nature. We believe that taking both a broad survey of the trading landscape, as well as a detailed look at each perspective individually is the only way to get a clear picture of what is going on in the markets.

Below we will take a quick look at some of the more basic tools BBA uses to evaluate the Ether markets on a day to day basis...

5.) Ethereum Charts & Technical Analysis

The primary vehicle via which all technical analysis is performed is known as the chart. A market chart simply tracks price movements over a specified period of time. Below is an example of the most common type of financial chart, the candlestick chart. ​​

ethereum 2 day pillar chart

​Along the X-axis is the timeframe and along the Y-axis is the price of the security. Each “candlestick” represents a summary of the price action within a given period of time (in this case, a day). The very top and bottom of the line extending through each candlestick are the highs and lows for the given time period, and the body of the candlestick is where prices opened and closed during that time period.

There are many more types of charts that we will get into in future educational material such as Renko, Kagi, and point and figure charts, but we have enough to move forward for now.

5a.) Timeframe

There are a theoretically infinite amount of potential timeframes (TF's) we could analyze for any given market, however there are some common ones that a majority of market participants and technicians use for their analysis: the monthly, weekly, daily, 4-hour (240min), 2-hour (120min), 1-hour (240min), 30 minute, and the 15 minute charts. We occasionally use the 1 and 5 minute charts when markets are moving fast, however during normal market conditions they provide too many false signals to make them truly effective.​

To give you a better idea of how much of an impact these timeframes can have on how we view the market we will be showing a series of charts, all of Ether (ETH) and Ether Classic (ETC), in which we will describe what is occurring in each one. First lets have a look at the shorter term as this is usually where most new traders and investors begin their journey (hint: do the opposite! We always approach the market from the top down, meaning we start from the highest TF and work down to the lowest).

ethereum 6 hour pillar chart

​As you can clearly see, this market is heading down. If you were unaware of what security this is referencing or in what temporal context it is in, you would definitely say this is a bear market (a bear market is defined as a >20% move down from the highs). In a vacuum, this security looks like it is most certainly in a bear market and heading lower, however lets back up a step and look at a slightly longer term timeframe.

ethereum 2 day pillar chart

​Now it doesn’t look as bad, right?! From this perspective the market appears to be in a bull market consolidation, whereas on the 6-hour chart above we were most certainly in a bear market. What a difference a six hour adjustment to timeframe can make! Let's zoom out even more to see what happens when we look at price action in its entirety.

ethereum daily pillar chart

​If we step back to this longer term view of the market we can see that in fact the market was in a trendless consolidation phase since inception until it broke above the upper resistance line and made a run for 0.04, which was a clear uptrend and hence bull market. Since the all time high (ATH) top was put in back in March of 2016, however, the market has been in a descending consolidation formation that indicates this market is once again trendless.

It’s pretty amazing that simply changing the length of time that we are analyzing can have such a dramatic effect on how we view and potentially trade the market.

5b.) Support, Resistance, & Trend

One of the most basic, but perhaps most important, tools that technicians utilize are lines of support, resistance, and trend. These are important because they give us reference points to key off of as we trek through these frontier markets.

Let’s start by defining terms which are often misused, so that we are all starting from the same place. Support levels (lines) are prices at which there should be a floor underneath the market due to buyers clustering around historically significant levels. Resistance refers to price levels at which there should be a ceiling on the market as sellers tend to cluster around historical levels above the current market price. When we refer to trend, we are simply talking the direction in which the market is heading over a specific timeframe (think back to our discussion on Timeframe). The market can either be moving from the lower left to the upper right on the chart (bullish), from the upper left to the lower right (bearish), or within a range between support and resistance levels (trendless).

One more thing to discuss is the idea of a breakout or a breakdown, depending on directionality. A breakout typically refers to a situation in which prices move above a well known resistance level thus having the effect of accelerating the move higher. Conversely, a breakdown occurs when a well know support level is breached to the downside, thus having the effect of driving prices even lower at a faster rate​

Now that we have that out of the way, let’s get to some examples so that you can see how useful these tools can be!

ethereum 2 day pillar chart

You can see the we have identified the 0.013 level as an area of serious resistance lasting from early June to late July of this year (2016). This is typical when markets are attempting to breakout above longer term resistance, just know that the more times a level is touched the more likely it is to be broken.

Also of note is the fact that shortly after the 0.013 level was taken out and the market moved higher, that resistance level then became support on the next substantial selloff (known as a test of support). Since then, 0.013 has been support going forward and will remain so until it is broken to the downside once again.​ This is a common phenomenon in financial markets, support becoming resistance.

Next up we'll take a look at trend...

ethereum 12 hour pillar chart

It is pretty difficult to misinterpret this chart, which is one of the great things about trend analysis: that it is simple and straightforward. You can see that from the July 25th low to the August 2nd high the market was in a clear and tradeable uptrend, as well as a Wyckoff sell model. Then from the 2nd on through the beginning of September price was in a descending wedge which never really resulted in a breakout, after which the market went into a slow descending channel which is where it still resides today. As far as the trend channel goes, the implication is the same whether the trend is up or down. A break above the upper trendline of the channel means the market is heading higher, while a break below the lower trendline and down she goes.

In this instance we have yet to break above the current trading channel so there is no reversal signal yet, however once that occurs you can bet that buyers will return to the market to drive price higher. Again, these are very informative, yet easy to implement and interpret tools that can provide invaluable insights into how you should be positioned in a given market.

5c.) Momentum & Volume

The final aspects of Ether trading that we want to explore are the ideas of momentum and volume. Tools that allow us to track and analyze price momentum and trading volumes are often referred to as "indicators", and they come in a variety of forms that range from mathematical moving averages to adjusted measurements of buy vs. sell volumes.

Before we delve deeper into this topic we must warn you that there are literally hundreds of different indicators, all of which examine the market in a slightly different way. For our purposes, which indicator is selected will be less important than being able to recognize the trend and identify what are know as "divergence" patterns. This is due to the fact that each indicator is calculated differently, but they all tell essentially the same story about price and volume respectively.

Below we will be showing some examples of what are some of the most popular and applicable indicators for active traders. We will start with the MACD as it is probably the most popular indicator these days. The MACD consists of two signal lines and a histogram. You can interpret this indicator in a number of ways. First, when the shorter MA line crosses over the longer MA line it means that a reversal could be occurring. Next, a zero-line crossover can be interpreted just like any other crossover in that when zero is crossed coming from the downside to the upside, this is a bullish confirmation (and vise versa).​

Additionally, when the MACD is trending with the overall market price then the current trend is being confirmed by it. On the other hand, a divergence between market price and the indicator signals that a change in pattern is occurring and a reversal in trend is becoming more likely.

ethereum 2 day pillar chart

​Next we show the Relative Strength Index (RSI) which is interpreted the same way as MACD, except that the RSI adds numerical values to overbought and oversold levels. You can see on the chart below that as the RSI moves closer to oversold territory (20 and below) at least a minor rally ensues, and when the market is approaching overbought (over 80) a pullback materializes. Also, note the big bearish RSI divergence on each incremental leg up of the bull market. You could tell the end was nearing via this signal alone.

ethereum 6 hour pillar chart

​Lastly are indications of volume, the main one being a simple running total of exchange volumes known as "volume". There are also volume indicators which account proportionally for buying and selling volume, one of the most popular of which is the A/D line (Accumulation/Distribution line). Like momentum, the main thing to keep an eye out for here is divergences from the prevailing price trend as this is a sign that there may be more or less conviction behind a move than it would appear on the surface. We can see an example of this, as well as examples of the A/D line and volume profile, on the chart below.

ethereum daily pillar chart

Notice that volume was diverging from the uptrend in price from February all the way through March, another sign of a diminution of buying power at that time. Conversely, the A/D line was, and has been, confirming the bull market since it began early this year due to the fact that there were and are not major divergences to speak of. Finally, volume profile looks very healthy with a single point of control (PoC), above which price is currently. Volume is an important confirmation tool for any technical trader so reading the signals on these indicators is a valuable skill for analyzing Ether and/or Ether Classic.

Combining trend analysis, support and resistance levels, momentum and volume indicators, and a knowledge of how to interpret these signals gives us a solid foundation from which to create a profitable trading plan, not just for Ethereum but for any market.

6.) Conclusion

Overall, Ethereum is probably the best option in existence in terms of building, launching, and maintaining smart contracts and applications via a public blockchain. Its flexible scripting language along with its EVM and currency functions makes it a great playground for developers looking to create the most innovative and disruptive IoT-based technology on the planet. Despite technical issues related to the DAO and subsequent hard fork, we think there is room for at least one of the two Ether coins to exist and thrive over the long term, however we will leave it up to the market to decide.

BBA has an edge in the Ether markets due to the length of time we have been involved, as well as the synergistic approach that BBA takes. Additionally, due to the broad ranges that ETH and ETC trade in, as well as the good liquidity recently, there are typically outsized risk/reward setups that BBA can effectively take advantage of (and hence so can you!).

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Disclaimer: Please always do your own due diligence, and consult your financial advisor. Author owns and trades bitcoins and other financial markets mentioned in this communication. We never provide actual trading recommendations. Trading remains at your own risk. Never invest unless you can afford to lose your entire investment. Please read our full terms of service and disclaimer at the BullBear Analytics Legal.