Monero Price Analysis - Mining malware on the rise
Network fundamentals and cyber security reports suggest that all XMR statistics have been heavily influenced by a significant uptick in mining malware.
Monero (XMR) has dropped 91% over the past year, after establishing an all-time high of nearly $500 on December 20th, 2017. The market cap currently stands at US$737 million, with US$11.28 million in trading volume over the past 24 hours.
XMR is classified as a privacy coin with untraceable, unlinkable, private, and analysis resistant transactions. XMR achieves these privacy features through the use of Multilayered Linkable Spontaneous Anonymous Group signatures (MLSAG), ring confidential transactions (RCT), and stealth addresses.
MLSAG signatures, as used by Shen Noether's RCT, are based upon Gregory Maxwell's Confidential Transactions, and Nicolas van Saberhagen's Ring Signatures. Ring signatures allow any member of a group to produce a signature on behalf of the group, without revealing the individual signer's identity.
RCT improves upon ring signatures by allowing hidden transaction amounts, origins, and destinations with reasonable efficiency and verifiably trustless coin generation. RCT was implemented on XMR in January 2017 and made mandatory in September 2017.
XMR also has a stealth address feature, which leverages single-use addresses where only the sender and receiver can determine where a payment was sent. After a hard fork in April 2018, XMR also implemented a multi-signature function on wallets for joint ownership.
XMR-related protocols also include Tari and Kovri. Tari was announced in May 2018 and will introduce token creation, similar to Colored Coins on Bitcoin, ERC20 tokens on Ethereum, and non-fungible tokens (NFTs) in general. Kovri has features that are similar to Tor, and is currently in pre-alpha. Kovri will add additional user privacy by anonymizing geographical locations and IP addresses with an overlay network. Initially, Kovri will be implemented in the official XMR wallet. Eventually, all future transactions will be routed through Kovri.
XMR's transactional privacy features have attracted mining malware and ransomware. The WannaCry ransomware, which infected many parts of the world in 2017, initially collected funds in Bitcoin and then exchanged that Bitcoin for XMR. McAfee labs reported an 86% increase in cryptojacking in Q2 2018. An XMR mining malware program targeting Windows servers, KingMiner, was then discovered in June 2018. Two improved versions have since been released. Another XMR cryptojacker was found in November last year, called "Linux.BtcMine.174," which targeted old Linux operating systems. Last week, new mining malware affecting cloud providers using Linux was described in a report by the cybersecurity firm Palo Alto Networks.
A report released earlier this month found that nearly 5% of all XMR in existence was created by crypto mining malware. In response to the persistent and ongoing use of malicious software, the XMR community created a website to help users affected by these problems, including information for diagnosing and removing the malicious software.
Japanese and U.S. governments have expressed interest in "legislative or regulatory actions" to prevent the use of privacy focused cryptocurrencies, such as XMR and ZEC, for illicit purposes. In late 2018, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) blacklisted two specific Bitcoin addresses for the first time, both of which had been used for ransomware. This decreases coin fungibility and increases coin surveillance, something not possible with XMR.
Other coins with the option of private transactions include ZEC and Ethereum (ETH) which offer private or confidential transactions if needed through the use of Zero-Knowledge Proofs. DASH (DASH) uses a PrivateSend feature which anonymizes transactions through CoinJoin, a process similar to batching. PIVX (PIVX), a DASH fork, implemented the ZeroCoin protocol late last year and also uses Zero-Knowledge proofs to achieve private transactions.
Among all privacy-related coins, XMR had consistently led the pack in regards to transaction fees (green, chart below). On October 18th 2018, XMR completed a hard fork to implement Bulletproofs, which reduced transaction sizes by 80% and brought average transaction fees down to US$0.027. Average daily block size has decreased by over 50% since the addition of Bulletproofs. XMR transaction fees remain slightly higher than ZEC and DASH, both of which do not offer equally robust privacy features.
Transactions per day (red line, chart below) held above 4,000 for several months but have declined recently. Daily active addresses (red fill, chart below) rose significantly in mid November and early December but have also declined significantly. Both transactions per day and daily active addresses may well correlate with the rise and fall of various mining malware software. Because the transaction data on the XMR blockchain is private, a network value to transactions ratio cannot be calculated.
Beginning in late 2017, the XMR hashrate began to increase substantially, suggesting stealth application specific integrated circuit (ASIC) mining. XMR uses the proof-of-work (PoW) consensus algorithm, CryptoNight, which had been ASIC resistant for many years. This meant that CPUs and GPUs could efficiently mine XMR. The use of ASICs can mean increased network centralization as less efficient hardware, like GPUs and CPUs, become unprofitable to use, allowing those with more resources to buy more ASICs.
In response, the XMR team announced an emergency hard fork to change the PoW algorithm and stop any ASICs that were mining XMR. The team plans to hard fork every six months, changing the PoW algorithm each time, and preventing ASIC use indefinitely. Ideally, it's easier to change a PoW algorithm than rework, build, and ship ASICs. The hard fork in April and October 2018 dropped both the hashrate and difficulty substantially. Hashrate appears to have stabilized since the last hard fork and has returned to levels seen prior to the fork.
Over the past month, XMR hashrate has risen substantially, which may be due to FPGA or ASIC miners which are not yet publicly available. This suggests that six months between hardforks may not be quick enough to guarantee ASIC resistance. Unknown mining malware may be another possibility in the sudden rise in hashrate.
About 90% of all XMR ever created has now been mined. XMR has a two-minute block time with a 6% annual inflation rate (line, chart below), which is among the lowest of all coins. Instead of the stepwise disinflationary curve that occurs after each Bitcoin block reward halving, XMR has a smoother curve until the block reward hits 0.3 XMR per minute, where it will remain indefinitely. This is known as tail emission and ensures a block reward in perpetuity.
Turning to developer activity, all XMR repos on GitHub have had a total of 350 developers who have contributed over 5,200 commits over the past year. Most of these commits have occurred on the main XMR repo (shown below). An XMR wallet and node software, Monerujo v1.10.14, was released earlier this month which allows for increased privacy obscuring where payments are sent and how much is held in the wallet.
Most coins use the developer community of GitHub. Files are saved in folders called "repositories," or "repos." Changes to these files are recorded with "commits," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity and interest.
Exchange traded volume has been led by the Bitcoin (BTC) pair, the U.S. Dollar (USD) and Tether (USDT) pairs. The dominance of the BTC trading pair is largely due to the lack of direct fiat gateways for XMR. The majority of trading has occurred on DragonEx, Exrates, Binance, HitBTC, and Bitfinex.
As exchange services like Shapeshift and Changelly begin to register customers for KYC/AML requirements, XMR volume in decentralized exchanges (DEXs) will likely continue to increase. The XMR/BTC pair on Bisq, a peer to peer private DEX, currently accounts for 95% of the total exchange volume. The U.S. Securities and Exchange Commission announced last year that DEX owners need to registered as exchanges, which may keep unregistered DEXs out of the U.S. entirely.
In the future, XMR may be delisted from centralized exchanges and relegated to DEXs entirely. Although, in August 2018, XMR was listed as a potential addition for Coinbase custody. ZEC was added to Coinbase with its optional privacy feature disabled. Hardware wallet solutions currently available for XMR include the Trezor Model T and the Ledger Nano S.
Google Trends interest regarding the term "monero" remain down sharply over the course of the year and are sitting at a yearly low. A slow rise in searches for "monero" preceded the bull run in Q4 2017, likely signaling a large swath of new market participants at that time. A 2015 study found a strong correlation between the google trends data and bitcoin price, while a 2017 study concluded that when the U.S. Google "bitcoin" searches increase dramatically, bitcoin price drops.
Technical Analysis
XMR has continued to drift in a tight downward range, largely in lockstep with the entire crypto market. The question over the next few weeks is whether there is an opportunity for trend reversal. A roadmap for price can be deduced using exponential moving averages (EMAs), Pitchforks (PFs), Ichimoku Cloud, and Volume. Further background information on the technical analysis discussed below can be found here.
The 50/200EMAs on the daily chart have been bearishly crossed since May 20th, 2019, resulting in a steady decline of over 80%. Although the EMA cross is bearish, the 200EMA will act as a mean reversion level for price and is currently at US$92. Further, long/short open interest on Bitfinex is currently slightly net long. There are no active RSI or volume divergences.
Price is also bound within the bottom zone of a bearish PF with anchor points in December 2017, February 2018, and April 2018, suggesting potential oversold conditions. While price is bound within the PF, the the median line (yellow), currently at US$84 will be continually tested as as either support or resistance. A further drop below the PF suggests a hastening of the bear trend.
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 trade 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 doubled settings (20/60/120/30) for more accurate signals are bearish; price is below Cloud, Cloud is bearish, TK cross is bearish, and Lagging Span is below price and below Cloud. A traditional long entry will not trigger until price is above the Cloud. A potential TK cross within the next week or so will represent a short exit signal and not a long entry signal.
The status of the current Cloud metrics on the twelve hour time frame with doubled 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 price and below Cloud. Again, a traditional long entry will not trigger until price is above the Cloud. However, the previous Kumo breakouts have all failed to generate any bullish continuation, which suggests that the daily timeframe is preferred in order to prevent false breakouts. Additionally, Edge to Edge trades have also failed to reach the intended target.
Lastly, on the daily XMR/BTC pair, the Cloud metrics are also bearish (not shown). Price is also far below the historical volume support at 0.0173 BTC. The 50/200 EMAs have also been bearishly crossed since May. A breach of the 50EMA would likely result in significant further upside towards the 200EMA at 0.0158 BTC.
Conclusion
Despite the negative public perception of darknet traffic, recent protocol upgrades and consensus algorithm changes have brought XMR to the forefront of the privacy coin arms race. Network fundamentals and cyber security reports suggest that all XMR statistics have been heavily influenced by a significant uptick in mining malware. The oscillation in these metrics likely represents mining malware going online and coming offline after being patched or turned off.
Technicals suggest a continued bear trend with the potential for a relief rally to ~US$85 based on a long standing Pitch Fork median line, daily 200EMA, and historical volume support turned resistance. Cloud and EMA signals suggest no trend reversal in the near future. While minimal exchange exposure decreases speculation potential, threats of banning the trading of XMR suggests a strong use case for a specific privacy purpose, which may increase XMR's value.
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