MONERO (XMR) Market Analysis

Technology, Technicals & Trading

monero logo

Currency name(s): Monero (XMR), formerly BitMonero (XMR)
Genesis Block: April 18, 2014
Total Supply: ~18.3 million
Algorithm: PoW (CryptoNight)
Features: Anonymity, Security
Website: https://www.getmonero.org/

1.) What is Monero?

Monero is a privacy focused cryptocurrency that was released in April of 2014 under the original name of BitMonero. BitMonero was a fork of the original CryptoNote cryptocurrency known as ByteCoin (BCN), a coin which still exists today yet has been fraught with fraud and controversy from its inception. BitMonero was also the subject of scrutiny given ethical questions about its initial developer which led to yet another community takeover of the coin and the final name change to Monero (XMR). The development of XMR is now entirely self-funded by the Monero community, a rare thing for altcoins in this day in age, and is driving by three guiding principles: Security, Privacy, and Untraceability.

Monero's main value proposition is advanced anonymity via passive protocol level mixing using a relatively new privacy scheme known as "ring signatures". This advance in cryptography was taken advantage of by the original CryptoNote developers, all of whom remain anonymous to this day, who incorporated it into their whitepaper for a cryptocurrency based on this technology. Despite providing a very high level of privacy for users there are still some things that need improvement, however for the time being XMR remains the industry standard in terms of transaction untraceability and unlinkability.

2.) Technology

​At the core of Monero is CryptoNote, a technology and set of concepts that utilizes ring signatures to provide an unmatched level of anonymity. CryptoNote-based coins are not forks of Bitcoin, the way they function is notably different than Bitcoin and most other altcoins, so there are several that have been built upon cryptonote from the ground up. As previously mentioned, the first iteration of the CryptoNote protocol was a cryptocurrency called Bytecoin (BCN), which launched in 2012 but has remained relatively unknown. Other altcoins based on the CryptoNote technology have emerged since Monero's launch in 2014, among them: Quazarcoin (QCN), Boolberry (BBR), DuckNote (XDN), and Moneta-Verde (MCN). Many of these are no longer with us.

CryptoNote provides anonymity by making transactions both untraceable and unlinkable. The use of ring signatures in CryptoNote achieves more or less the same result as Coinjoin does in Bitcoin and PrivateSend does in Dash, but using a different method that is not dependent on other users making transactions of the same size at the same time. The "ring signature" that is appended to each transaction is computed using the public keys of other users. This allows the sender to prove that he has the right to spend the amount specified, but at the same time they are indistinguishable from the other users' public keys in the ring signature. The untraceability aspect of CryptoNote can be summarized as such (taken from the CryptoNote website):

“if you encounter a ring signature with the public keys of Alice, Bob and Carol, you can only claim that one of these individuals was the signer but you will not be able to pinpoint him or her.”

monero diagram

The other level of anonymity that CryptoNote provides is absolute unlinkability of transactions (in a way very similar to DarkWallet’s “stealth addresses”). In a CryptoNote transaction the sender generates a one-time address specifically for that payment which is derived from the recipient’s public address and a chunk of data that is randomly generated by the sender. The sender can produce only the public part of the key, and the recipient is the only person who can compute the private key that corresponds to it. No one without the recipient’s private key can glean anything from the one-time addresses, inputs, or outputs that are publicly visible in the blockchain. Only the recipient can decode this information, to everyone else it is gibberish.

A CryptoNote blockchain reveals only amounts and one-time addresses that cannot be linked to any other transactions made by the sender or recipient, rendering blockchain analysis useless to anyone seeking to identify individuals transacting in these currencies.

3.) Monero Markets

Monero just recently received an influx of market capital and liquidity via a price bubble it underwent over the summer (2016). Greater than 20x gains over a matter of months has attracted many new users and traders, many of whom are using the more popular altcoin-only exchanges such as Poloniex and Bittrex. In fact, Poloniex has an entirely separate set of XMR markets that offer pairs trading again other crypto's (as opposed to being traded again bitcoin, for instance). Having said that, unlike many larger altcoins such as Ether (Ethereum), Monero is not yet listed on any fiat exchanges such as Bitfinex. We think this is due to the fact that the codebase is so much different from bitcoin's (and most altcoins) that developement costs can be prohibitively expensive, as well as the perception that Monero is a currency of crime.

monero exchange

4.) Monero Trading

​​In terms of price action, Monero acts 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 volatility unnerving. With that in mind, BBA has been covering Monero since the summer of 2014 and has executed on many highly advantageous setups on both the long and the short side over the past few years, so our familiarity with this particular coin and its markets is unmatched.

The aforementioned XMR trade setups have been and continue to be determined strictly via BBA's proprietary technical analysis of the charts, other than the fact that BBA has been fundamentally bullish over the long term. 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 market.

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

5.) Monero 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. ​​

monero 6 hour 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 just 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 Monero, in which we will describe what is occurring in each one. First lets look at the shorter term as this is usually where most new traders and investors begin (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).

monero 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 this is, 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 heading lower, however lets back up a step and look at a slightly longer timeframe.

monero 12 hour 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. 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.

monero weekly pillar chart

Wait, what the #$*& is going on here?! Well, 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 since inception until recently when it experienced a classic breakout (which we will get to later). 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.

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!

monero weekly 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.​

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

monero 6 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 August 22nd low to the September 5th high the market was in a clear and tradeable uptrend, as well as a Wyckoff sell model. Then from the 5th on through today the market has been in a clear downtrend that was to be expected following a 10x move in less than two weeks. 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 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 it 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 Dash 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 used 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.

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 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 MACD. 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.

monero 8 hour 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.

monero 8 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.

monero 6 hour pillar chart

Notice that volume was confirming the uptrend in late August, but was also progressively divergent hinting at a diminution of buying power. Additionally, volume has been relatively low during the correction indicating this is an extended bull market consolidation. Also notice the bullish market structure on the A/D line during the rally followed by stagnation after the top was put in. Finally, upper half of volume profile looks good however there is a notch around 0.01 which has created two separate points of control (PoC) which has acted as a magnet. Volume is an important confirmation tool for any technical trader so reading the signals on these indicators is a valuable skill for analyzing Monero.

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 Dash but for any market.

6.) Conclusion

Overall, Monero is probably the best option in existence in terms of private transactions. Its untraceability and unlinkability, along with coming confidentiality, create a passive and native system of anonymization that could be a viable solution to potential fungibility issues. Monero is also a great candidate for technical trading given its historical responses to technically significant events and levels over the short to medium term. BBA has an edge in this market due to the length of time we have been involved, as well as the synergistic approach to the market that BBA takes. Additionally, due to the broad ranges that XMR trades 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.