On the heels of a 25% rout the previous week, the U.S. government finally provided comments regarding regulatory clarity for Ethereum (ETH). The comments were interpreted immediately by the market as bullish. The market cap now stands at US$49.12 billion, with exchange-traded volume of US$1.25 billion in the past 24 hours.
Yesterday, William Hinman, the Director of Corporation Finance at the U.S. SEC, gave a speech at the Yahoo Finance All Markets Summit in San Francisco. The discussion was specifically focused on determining whether or not crypto assets are securities. Hinman specifically commented on Bitcoin and ETH as not representing securities, citing the decentralized nature of both networks.
“And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”
Current SEC chair Jay Clayton has already said, “I believe that every ICO I have seen is a security,” and has implied that ETH is not a security, although ETH did have a token sale of its own in 2014.
Hinman went on to say that enterprises, or ICOs, created and developed by a third party with an “expectation of a return” for the investor are more likely to represent securities. Regardless of whether an ICO represents a utility token, most ICOs fall under the umbrella of centralized enterprises where profit comes from the efforts of a promoter or third party, as stated in the Howey Test.
2018 ICO Stats
In May, ex-CFTC chairman Gary Gensler had said he believed there was a “strong case” that ETH is a noncompliant security. The comment was responded to by Andreessen Horowitz and Union Square Ventures, among others, who asked the SEC for safe harbor from securities law, suggesting that the law does not apply to ETH due to its decentralized nature. Joseph Lubin, co-founder of Ethereum, has long said he’s “extremely comfortable” that ETH is not a security.
The regulatory clarity was also seen as positive news by CBOE president Chris Concannon who told Bloomberg, “this announcement clears a key stumbling block for Ether futures.”
Even though the news was perceived as positive, lawyers across the cryptosphere, including Drew Hinkes and Stephen Palley, who were quick to remind the community that a speech is not law, but a good indication of the SEC’s regulatory position. The next hurdle is properly defining what “sufficiently decentralized” truly means. Palley added that “a bunch of ICOs will get taken down” for not complying with securities law.
Marco Santori, creator of the SAFT (simple agreement for future tokens), said the news was, “exceptionally bad news for custodial providers, exchanges and OTC desks who trade tokens” because they “will need to register as National Securities Exchanges or alternative trading systems and stop accepting non-accredited users.”
Overall, the regulatory discussion surrounding ICOs should not be a surprise. Most ICOs have now opted to incorporate in Switzerland or Singapore, have begun to use KYC/AML procedures, and do not accept non-accredited U.S. investors. More and more ICOs are now moving to private sales exclusively without a public sale. The Telegram ICO, the largest individual ICO to date, raised US$1.7 billion privately and was never sold to the public.
Whether or not the SEC will seek action against the Ethereum Foundation remains an open question. Preston Byrne agreed with Gensler that ETH was a security and that “decentralization does not terminate the initial investment contract”. He adds that, “decentralization is legally meaningless”, at least currently.
As Santori mentioned, exchanges and custodians are now at high risk of being in violation of securities laws. No exchanges currently in operation are registered as National Securities Exchanges. From an enforcement perspective, it is more effective to bring action against exchanges creating the secondary market instead of ICOs one-by-one.
On the network side, transactions per day and average transaction fees have declined slightly in the past week. Pending transactions have also declined to under 15,000 after peaking above 40,000 last month. A one hour 51% attack of the network would cost US$353,000. Hash rate has remained flat near ATH over the past week.
The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio has stopped climbing over the past week but remains at a two-year high. A clear downtrend in NVT suggests a coin is undervalued for its utility and should be seen as a bullish price indicator.
ETH exchange traded volume in the past 24 hours has predominantly been led by the Bitcoin (BTC), Tether (USDT), and U.S. Dollar (USD) pairs. The majority of trading occurred on OKEX, Bitfinex, and Binance. In Asia, the KRW trading pair holds a small premium, and CNY volume has exceeded JPY volume.
The over the counter (OTC) exchange LocalEthereum averaged less than ~200ETH per day in transaction volume over the past week, according to dappradar. In comparison, LocalBitcoins averaged 7,229 BTC in the past week, according to coin.dance. Traditional OTC desks often require a minimum order of between US$100,000 and US$250,000, whereas these peer-to-peer marketplaces have no minimum order size.
ETH continues to push lower lows with the next substantial support above US$350. Emerging actionable trading signals can be gleaned with the use of chart patterns, Exponential Moving Averages (EMAs), pitchforks, and Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.
On the daily chart, price structure and volume suggests the formation of a bullish reversal pattern known as the inverted head and shoulders. The hallmarks of this bullish reversal pattern include a descending volume profile and a series of three extreme lows, with the second low exceeding the first and third low. A long entry would not trigger until the neckline at US$522 is breached on high volume. The neckline also shows confluence of resistance with the 200EMA and a pitchfork diagonal. The pattern has a measured move and 1.618 fib extension of US$729 and US$824 respectively.
The pitchfork has anchor points in June 2017, January 2018, and April 2018 shows the previous local high being rejected at the pitchfork median line (ML). Price will continually attempt to return to the ML throughout any given trend. A breach of the ML on volume would suggest a move to the next diagonal resistance.
Open interest on Bitfinex is currently net short (top panel, chart above) and the 50/200EMA cross is currently bearish (not shown). There are no RSI divergences.
Turning to the Ichimoku Cloud, four metrics are used 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 singled settings (10/30/60/30) for quicker signals are bearish; price is below Cloud, Cloud is bearish, TK cross is bearish, and the Lagging Span is in Cloud and below price. A traditional long entry will not trigger until price is above the Cloud. The kumo twist on July 5th suggests an opportunity for a bullish move around this day.
The status of the current Cloud metrics on the daily time frame with double settings (20/60/120/30) for more accurate signals are also bearish; price is below Cloud, Cloud is bearish, TK cross is bearish, and Lagging Span is below Cloud and price. A traditional long entry will not trigger until price is above the Cloud. The position of the TK lines suggest a potential C-Clamp, suggesting oversold conditions. If price does not make lower lows, a target of US$644 is likely. A flat kumo at US$673 will also act as a magnet for price if the current lows are not breached.
Lastly, on the weekly chart, there is a potential harmonic setup known as the bearish bat. If the current lows hold, the pattern suggests a swift reversal to retest ATH before retracing 50% from high to low. As ATH is reached, sellers will likely pile-on the horizontal resistance near 88% of the X-A leg. Stop losses would be placed just above ATH.
ETH holders released a collective sigh of relief after the Hinman speech yesterday suggestive that the SEC will not define ETH as a security. Pursuing enforcement action against the Ethereum Foundation remains possible and pursuing enforcement action against ICOs and exchanges remains likely. If and when the SEC does announce an enforcement action, expect price and trading volumes to decline further, specifically on ERC20 tokens.
Technicals suggest that trend is likely leaning bearish but oversold. If local lows are breached, expect a run for the previous lows at ~US$350. If the local lows hold, expect a run to US$645 and ~US$800 based on Cloud and a developing inverted head and shoulders.