Monero Primed for a Strong Q4 Performance: Price Analysis XMR-BTC
Monero (XMR) has been a top performer for the past seven days, gaining 27.34 percent against bitcoin and breaking back above the $100 handle on August 27. As bitcoin rebounds from yearly lows into the low-$7000 range, XMR is tagging along seeking higher highs.
In the following section we will look at the fundamentals of the Monero network, with some factors inspired by Chris Burniske and Jack Tatar’s book, Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond.
We will then outline the technicals for XMR and give some precise predictions.
The hash rate, the speed at which a computation is completing an operation in a cryptocurrency’s code, can indicate the relative safety of a cryptoasset; with more computers being added to the network, security is increased since it is a function of the number of miners and their combined hashing power.
The chart below shows the all-time hashrate graph for Monero, with the hashrate growing steadily over time, currently near 530 MH/s.
We see a sharp drop around April 2018, with the hash rate plummeting following the hard fork to nullify ASIC mining machines from the Monero network and the hashrate stabilized around 450 MH/s for the past few months, while in August/September, we have seen a continuation of the increase in hashrate, perhaps as some miners from Ethereum and Zcash switch over to Monero. Ethereum recently reduced the block reward to two ETH per block, while both Ethereum and Zcash have shown their unwillingness to combat specialized ASIC machines.
So despite the sharp drop in the hashrate, this factor is recovering and increasing once again, clearly shown by the hashrate over the past three months below.
Any sudden rise in hashrate could indicate that ASICs or FGPAs have come online, so it will be useful to keep an eye on this variable over the long-term. Since we see no abnormal activity now, we can deduce that ASIC manufacturers have most likely not produced new ASICs for the modified CryptoNight algorithm.
As an ASIC-resistant network, Monero is aiming to keep mining profitable and feasible for the realm of CPUs and GPUs. Another hard fork is scheduled for mid-October which will tweak the mining algorithm again to ensure that ASICs are not compatible with the network and keep the hash rate decentralized (which will be explained further along in the article).
It is also important that this hash rate is spread out across different miners and pools, and the more diverse the sources of hash power are, the more decentralized the network is. If we see an oligopolistic structure, then the network is prone to 51 percent attacks.
As we see below, hash rate is distributed amongst several entities, with the most significant being nanopool with 24 percent of the hash rate and an ‘unknown’ entity which also accounts for 24 percent of the hash rate. This could be mining farms conducting solo mining.
Using the Herfindhal-Hirschman Index, we find that the value for this index for Monero is 2,088 (small pools are calculated individually), meaning that the market is not highly concentrated to be an oligopoly but is at the same time not competitive (since it is higher than 1,500) and can be classified as ‘moderately concentrated.’ Therefore, there is some room for improvement in terms of decentralizing the hash rate.
Next, we look at node distribution and we see below that nodes are pretty evenly distributed across the world, most concentrated in Europe, North America, and Asia. Also, when looking at the number of nodes by country, we see that a four of the top 15 are part of the “Five Eyes,” (US, UK, Canada, Australia, and New Zealand) but we also see China, Russia, and Germany are high up on the nodes list, suggesting that the network is likely to be robust to surveillance from any one state.
Let’s not forget that the “Five Eyes” have targeted Princess Diana, Angela Merkel, John Lennon and Kim Dotcom in the past, so it’s probably not far fetched to assume that a decentralized network operating with a fungible currency is probably under close watch by this alliance too.
With a variety of countries with high numbers of nodes, the blockchain data for Monero is stored in countries around the world. Combined with the decentralization of the hash rate in the figure mentioned above, we can get a clearer picture of the decentralization of hardware supporting Monero.
When looking at user adoption, we would normally consider the number of active addresses, the number of transactions, the dollar value of those transactions and the network value to transaction ratio. However, since Monero utilizes confidential transactions, stealth addresses, and ring signatures to provide anonymity for their users, only the number of transactions can be deducted.
The chart below shows the number of transactions on the Monero network since its inception. We see that the transaction count peaked in early December at 10,833 transactions and has since fallen to around 4,770 for September 3, 2018.
For the past few months, the transaction count has been building a base near 4,000 tx per day, and looks to be on the upward climb again. Over the past six months, the number of transaction has remained fairly stable, indicating usage has not been growing that much over the same time period.
When looking at the monthly transaction count against bitcoin, we see an upward trend over time. From October 2017 to May 2018, the number of transactions in the Monero network rose from 1.35 percent of bitcoin’s transaction count to 2.71 percent.
In recent months, this ratio has fallen from its peak, suggesting a decline in usage, however, the estimated figure for September is 2.53 percent and may return to or exceed its peak during the last few months of 2018. Development factors, as explained in detail later on in the article, will most likely contribute to a higher ratio.
The currency pairs for Monero also indicate the uptake of the cryptoasset. The chart below shows the currencies used to buy Monero over time and, at present, we see that BTC accounts for more than 50 percent of Monero’s volume, followed by USD (19.16 percent), USDT (10.27 percent), KRW (4.19 percent), ETH (4.77 percent), and EUR (5.42 percent).
As the chart shows, the dominance of bitcoin has fallen since 2014, where it accounted for 99 percent of all Monero volume. The decreasing reliance on Bitcoin and the increasing significance of fiat currencies is a good sign that the adoption and acceptance of Monero is rising.
However, over the past six months, the volume accounted for by bitcoin has increased, while the KRW proportion has fallen from around 20 percent to near fivepercent, but this could be a result of Bithumb closing new registrations, and a hack on their platform in June 2018, as well as a general deflating of interest in cryptoassets as the market valuation declined since January. Similarly, the figure for USD has also fallen over the past six months, from near 30 percent to roughly 20 percent at present.
EUR has remained fairly stable, suggesting European traders and investors have remained interested in Monero. ETH has also remained fairly stable, fluctuating around four to five percent, with a slight increase in the past six months, suggesting some traders are somewhat convinced XMR will outperform ETH in the short-term.
Conversely, USDT has risen over the past six months.
Volatility in monero is relatively low at the moment, but looks to be rising, which is generally associated with an increase in the bitcoin valuation of XMR. The chart below shows that periods of rising volatility are correlated with periods of a rising price of XMR (denominated in BTC).
The inflation of the Monero network is falling over time at a quicker rate than bitcoin, due to the steeper emission curve to catch up to bitcoin. Consequently, the inflation rate of monero is continually converging with that of bitcoin.
The block reward for monero will fall below bitcoin’s for the first time ever in 2019.
On August 10, 2019, it is estimated that the daily inflation rate for Monero will fall below Bitcoin’s, which could start to be priced in by the market anytime in the next nine months, more likely in early/mid-2019. A lower inflation rate suggests a higher valuation, so we would expect XMR to increase against BTC over the long-term focusing on the inflation metric, and holding everything else constant.
As the differential gets larger into 2020, the ‘carry trade’ will get more populated and should lead to a tendency for XMR-BTC to rise over time.
At the start of 2019, the annual inflation rate for Monero will be 4.1 percent and will fall to 2.39 percent by the start of 2020. For bitcoin, the analogous figures are 3.9 percent and 2.6 percent, with 2020 a key year; Monero’s annual inflation falls below Bitcoin’s.
The correlation between bitcoin and monero has been rising and currently its above 0.80, a strong, positive correlation and is at record highs.
With bitcoin in a rising trend and many observers claiming the bottom is in, if the correlation holds up, as long as bitcoin increases in price, we should see monero move higher proportionally higher in percentage terms.
Another important fundamental factor is related to the software developers maintaining the Monero codebase. Innovation and technological advancements are suggested to be one of the main drivers of cryptoasset valuations.
On the horizon for Monero are several exciting developments. Firstly, the October scheduled upgrade is likely to include bulletproofs, a way of reducing the size and cost of transactions. For a typical two-output transaction, the size and fee reduction is estimated to be 80 percent, so it will be interesting to see what effect this will have on usage and number of transactions. Bulletproofs will also allow for quicker blockchain validation, making setting up a node easier.
According to the August 26 Monero Dev meeting, the tentative date for the next fork is October 18, 2018 and bulletproofs are in testing phase.
Another positive development is the introduction of the ‘blackball database’ which ensures privacy for its users. As a result of the continuation of the old Monero code that wasn’t tweaked to fork away from ASICs, a slight vulnerability in the ring signatures that Monero uses was introduced.
For instance, the failed fork MoneroV introduced some provably spent outputs, for those that claimed the fork, as the key image would be the same for a monero transaction and the associated MoneroV transaction. When a monero user uses them as mixins, or as decoys to obfuscate their true input, the mixins can be identified and reduces the anonymity set. In the worst case scenario all of your inputs are provably spent, the output which you spend is from then on also provably spent, further reducing the anonymity set of other transactions.
By using the blackball database it makes it less likely there is a chain reaction that makes monero more traceable. Recently released preliminary results from one researcher suggests that the forks did not affect the privacy of Monero and suggested several improvements to the blackball database.
Kovri is another development update the entire cryptocurrency community can get excited about. While the project is closely linked to Monero, the eventual aim is to provide greater privacy for any cryptocurrency. Kovri is based on I2P and will mask IP addresses that are related to monero transactions, to prevent the leakage of metadata and provide more rounded privacy.
Kovri is currently in alpha stage and will be integrated into testnet by the end of 2018. You can find more details about why Kovri is so important to monero and the wider cryptocurrency space in this article I wrote in August 2017.
The Monero hardware wallet is another unique project that will bring more attention to the cryptoasset, and you can read more about it here.
We now look at the technicals for XMR-BTC.
As mentioned in my previous Monero price analysis article, there were some key supports highlighted to enter buy positions at. The market tapped these levels and swiftly recovered. On August 31, the monthly candlestick showed a bullish hammer pattern, giving a bullish setup and showed how XMR-BTC hit the support levels outlined toward the end of July.
With the market breaking above the high of the bullish hammer candlestick for August, we obtained another bullish signal and we now look for a long-term move toward the conversion line (blue) at 0.0226 for the Kraken exchange or 0.0236 for the Binance exchange. The chart above shows that buy positions were motivated on the break of 0.016568 and 0.0172, with another support at 0.015803.
The conversion line represents short-term equilibrium, and since it is flat, the price should be attracted to this level. As we have seen in the past, XMR-BTC has frequently shot above equilibrium, past the conversion line, so we could exit long positions near the 0.030 handle.
The lagging line (purple) indicates support and resistance. On August, XMR-BTC formed a new higher support at 0.0158. Immediate resistance is seen at 0.0187 and a break of this level will open up 0.0261, 0.0276, and 0.0297. Another bullish indication is given by the volume indicator, which shows a rise in volume during August, after seven months of consecutively declining volume on the Kraken exchange.
Looking at the weekly timeframe for the Bitfinex exchange, we see that XMR-BTC is attempting to close above the conversion line this week, which will provide a weak bullish signal. Once complete, this signal will lead to Monero testing the lower span of the Ichimoku cloud, which lies just above 0.023.
The daily chart shows a bullish Ichimoku breakout and September 3 displayed the strongest gain since April 2018. The medium-term targets from this chart are 0.0201, 0.0212, and 0.02197.
Since September 3’s price action displayed a near perfect bullish Marubozu, we can use the open and 50 percent level of this candlestick to set limit buy orders and get in on the upward trend that is forming. Looking at the chart below, we should buy in if XMR-BTC hits 0.017536 and 0.016459 (on the Bitfinex exchange).
Along with the bullish breakout of the Ichimoku cloud, we see that momentum is also turning bullish, with the Awesome Oscillator moving into positive territory and the bars are green in color.
On August 31, we also got another buy signal according to the Alligator, where XMR-BTC closed above the Alligator for the first time on the daily timeframe since June. The buy signals are highlighted on the chart below, with a break above a fractal that lies above the Alligator providing further entry points.
The most recent fractal low suggests a sell position if XMR-BTC breaks below 0.014508. It is likely another fractal high will be printed in the next few days, so keep watching the daily chart and set a stop order if a fractal high is printed to capitalize on any breakout to the upside.
In summary, XMR is in a strong position for Q4 2018, both in terms of fundamentals and technicals. We should see previous highs against bitcoin tested near 0.030 as the monthly chart shows a significant reversal; a bullish hammer candlestick and key supports have been tested already. Moving forward, the path of least resistance will be to the upside.
Monero has completed a full 100 percent retrace from the run up toward the end of 2017, as shown below, suggesting the market will now target the Fibonacci level at $172.638. By the end of 2018, it wouldn’t be surprising to see XMR-USD trading in the $172.638 to $230.801 range. Resistance is shown at $151.26 and I expect a quick break of this resistance, leading to a charge toward $172.638 and the $200 handle.
We also see for the USD chart, there has been a close above the conversion line, giving an indication that the bottom is in for monero. Consequently, we should see a long-term drift toward the Ichimoku cloud, with the lower span near $240, providing resistance into November 2018.
Disclaimer: I am not a financial advisor, please do your own research before trading cryptocurrencies. I hold Monero, and other cryptocurrencies, as well as trading on longer timeframes.
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