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The road to all time lows » Brave New Coin

Since its launch a year ago, the ‘Quantum’ (QTUM) blockchain has offered a best of both worlds elevator pitch, given it has taken elements of the Ethereum and Bitcoin network protocols to build a hybrid type solution. It quickly gained ideological traction in crypto circles and built a wide web of nodes and transaction activity.

However, as with many other Altcoins, its price chart in recent times tells the story of an epic price uptick followed by a dramatic fall. From an initial listing price of $11.96 on August 18, 2017, QTUM rose to an ATH of $82.66 (Index) on January 7th 2018. Eight months later it currently trades at $4.33, just up from its August 14th all time low of $3.66.

Network fundamentals tell a similar fall from grace story with steadily decreasing performance and challenges increasing adoption. QTUM is a network with only a few thousand nodes less than Bitcoin (6,277, this number sat at ~7500 a few months ago), but it has witnessed a significant fall in the number of daily transactions while also seeing mining difficulty fall concurrently.

 

Daily transactions on the QTUM blockchain, decreasing steadily across 2018.

 QTUM difficulty

QTUM difficulty, steadily decreasing through 2018

Difficulty follows hashrate, and measures how long it takes miners to add new blocks of transactions to a blockchain, while hashrate measures how many hashes the miners do per second. Nodes determine difficulty based on their ability to generate hashes.

Hashrate generally follows price because a higher price means more money (relative value), that can be distributed amongst network nodes, meaning greater incentives to deploy more  mining hardware, leading to subsequent rises in hashrate.

A lower price, leading to lower difficulty, may indicate a migration of miners away from a blockchain. Decreasing network activity is concerning for the long term health of any network and QTUM’s falling node numbers support this theory.

Contrast this with the Bitcoin blockchain, which has shown strong fundamentals – growing hashrate and difficulty – despite a synchronous drop in Bitcoin price over the same time period.

Trading pairs & exchanges

 QTUM pairs

The most popular pairings to trade QTUM are crypto-to-crypto with Bitcoin, Tether and Ethereum making up close to 90% of the volume in the market. 24 hour volume between the three pairs exces USD 100 million. The most popular fiat-to-crypto pairs are the Korean Won and US dollar options. Bitfinex is the most popular exchange for USD/QTUM trading, while Bithumb is most popular for KRW/QTUM trading.

QTUMBTC x

The most popular exchange for trading BTC/QTUM, is Samoa registered zb.com. Globally, popular exchanges Binance and Huobi also offer the BTC/QTUM pair.

Innovating the hybrid blockchain

QTUM is a smart contract platform designed to be Ethereum compatible, using the same virtual machine and thereby the smart contracts. It does so while attempting to correct some of Ethereum’s perceived flaws.

QTUM jumped from an initial testnet in June 2017, Sparknet, to a main network, Ignition, in September 13th 2017, a less than three month turnaround. QTUM was able to launch this quickly because it built its blockchain using elements of code from the Bitcoin, Blackcoin and Ethereum blockchains.

From Blackcoin, QTUM takes a Proof-of-Stake consensus algorithm, while from Bitcoin it integrates the UTXO model.

In Bitcoin’s ‘Unspent transaction model’ every referenced input must be valid but not yet spent, with each transaction needing to have a signature matching the owner of the input, for every input.

This may seem like an obvious feature, however, with Ethereum’s account based system, a global state balance stores a list of all accounts with balances, code and internal storage. With Bitcoin ‘balance’ is tied to the total funds of an individual user, for which they are capable of providing a private key with a valid signature.

With the UTXO model, if individual A has 10 BTC in their wallet, this is associated with a single UTXO record of 10 BTC. If individual A wants to send individual B 1 BTC, their wallet is unlocked and the entire 10 BTC is used for the transaction, with 1 BTC being sent to B and 9 BTC being sent on to a new UTXO address owned by A.

Now if B, prior to the initial transaction, had 1 BTC stored in single UTXO, upon receipt of the new 1 BTC, the recipient B, needs to unlock both UTXO’s before the 2 BTC can be spent.

This is a more complicated system than Ethereum’s which can be both power and storage intensive. However, as users have access to new addresses for each transaction, it increases potential privacy and security compared to the Ethereum transaction model.

The model can also be considered scalable since multiple UTXOs can be processed at the same time, enabling parallel transactions and it encourages scalability innovation such as Segwit, which allows for the expansion of the UTXO database.

Improving performance with Proof-of-Stake

A number of Ethereum competitors have vaunted their ability to improve on Ethereum’s throughput and transaction costs by using alternatives to ETH’s current Proof-of-Work model.

Networks like EOS and TRON offer Delegated-Proof-of-Stake (DPoS) consensus, Cardano offers a unique Proof-of-Stake (PoS) method called Ouroboros, and QTUM joins this group of throne chasers, borrowing Blackcoin’s PoS method.

In QTUM’s blockchain, anyone staking QTUM tokens can produce a block, there is no minimum stake and there is no vote or vetting process for nodes – making mining on the QTUM blockchain a more inclusive system than on some other staked mining counterparts.

In order for QTUM to operate this style of PoS algorithm, a number of block production protocols have been borrowed from Bitcoin’s PoW method.

Within QTUM, block production is allocated to the first staker who is able to produce a hash to solve the block’s problem (below a target threshold), with difficulty increasing as hashrate increases (more power being used on the network) to ensure block production stays constant.

This means a staker’s chance of being allocated a block is only as good as their ability to allocate processing power to the network.

In the QTUM network processing power is determined, not by ability of a node to produce hashes, but by the amount of QTUM it has staked.

Rather than produce multiple hashes to solve for multiple inputs, nodes produce a single hash per UTXO they control, interacting with a fixed input. A lottery determines whether their hash falls below a weighted threshold, and if it does, the miner is allocated the block.

This algorithm is able to retain the competitive, impartial, winner-takes-all nature of Bitcoin mining, because the lottery is constantly being reset with new fixed inputs. This design means miners with higher stakes see their UTXOs split across multiple lotteries, which means more chances to compete for inputs but minimal changes in the probability of winning each individual lottery.

This system retains a decentralized, immutable, censorship resistant blockchain, while keeping a check on electricity consumption and mining difficulty with a staking protocol. This style of consensus is finely balanced, however. For example, if a high throughput and hashrate is not maintained, then this will eventually lead to multiple lottery winners (more solutions below threshold), this causes forks and wasted stake because of stale blocks.

Additionally, other Proof-of-Stake methods have protocols for guaranteed block allocations or mechanisms to ensure a high likelihood of block allocation, meaning staking is always ‘worth it’. These other Proof-of-Stake algorithms also have scalability advantages over QTUM, the same way they do over the Bitcoin network.

Block allocation and consensus is streamlined in networks like EOS and TRON, while the semi-PoW solution of QTUM has the potential to create bottlenecks, and extended transaction times as the network grows.

Similar to Ethereum and Bitcoin, QTUM is hoping to integrate light client protocols and leverage off-chain solutions like the Lightning Network, to solve its scaling challenges, rather than affect the integrity of QTUM’s settlement layer.

Technical analysis

Regression Channel and MACD

On the 1D chart, QTUM’s price shows a negative linear trend, with a Pearson’s R Correlation between time and price of 0.84 since March (regression channel). Additionally, the MACD indicator confirms the negative price momentum for QTUM. However, MACD is slowly trending upward, which may indicate an eventual momentum switch for price over the coming months.

QTUM TA6

On the 4H chart, the volume flow indicator (VFI) has consistently remained beneath 0 since March and has failed each attempt to breach above 0 (black circles). The VFI interpretation is a value above 0 is bullish and below 0 is bearish, with divergences between price and oscillator being high probability signals.

 QTUM TA2

On the 1D chart, the RSI is currently well oversold at 20, coupled with price being currently beneath its long term, regression mean. The aforementioned may provide a short term price boost to QTUM back towards the regression mean of ~$5.50. However, if the overall trend persists, price is expected to regress back towards its trend average of ~$3.50.

 QTUM TA4

Ichimoku Clouds with Relative Strength Indicator (RSI)

The Ichimoku Cloud uses four metrics 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, Lagging Span (Chikou), and Senkou Span (A & B).

The status of the current Cloud metrics on the 1D frame with singled settings (10/30/60/30) for quicker signals is bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and the Lagging Span is beneath the Cloud and price.

A traditional long entry would occur with a price break above the Cloud, known as a Kumo breakout, with price holding above the Cloud. From there, the trader would use either the Tenkan, Kijun, or Senkou A as their trailing stop.

QTUM is sitting at ~$4.30 after finding some support around the $4 level. As mentioned prior, RSI is currently at the oversold level of 20 and beginning to see an uptick in trajectory. The RSI may indicate that QTUM may develop enough buying pressure to at least attempt a Kumo breakout over the coming weeks and months. The near support levels for price are $4, $3.50, and $3. Price will need to break above $7.20 for a Kumo breakout with resulting price targets of $9 and $11.

 QTUM TA5

The status of the current Cloud metrics on the 1D time frame with doubled settings (20/60/120/30) for more accurate signals is bearish; price is below the Cloud, Cloud is bearish, TK cross is bearish, and the Lagging Span is beneath the Cloud and price.

Even considering the current oversold RSI levels for price, a successful Kumo breakout on the longer term settings is highly unlikely given the Cloud metrics. Price would need to break and hold above ~$15 (flat Senkou B) for a successful Kumo breakout with the resulting price target of ~$17 (flat Senkou B).

Conclusion

QTUM has taken some of the best elements of other blockchains, operable smart contracts, highly secure transactions, and the alignment of miner incentives, and has built a sizable network that continues run a wide ecosystem of Dapps and transactions.

Its price has taken a number of hits in recent times, and the QTUM blockchain, along with a number of other smart contract focused networks – including Ethereum – finds itself facing a market that appears to have fallen out of love with ICO and Dapp hosting networks.

It also seems that miners are choosing to opt out of the network as its price continues to fall. The falling node numbers may also be connected to the complexity of the QTUM consensus protocol, which possesses a certain ‘jack of all trades, master of none’ positioning – not having the straightforward accessibility of traditional PoW networks, or the guaranteed rewards of other PoS networks.

The technicals for QTUM are firmly bearish, but price may experience a short term reprieve given its current oversold levels. However, both, the prudent short term trader (10/30/60/30) and longer term trader (20/60/120/30) will await a positive TK cross and Kumo breakout above $7.20 and $15, respectively, before entering a long position. Both trader’s short term, support levels are $4, $3.50, and $3. In the unlikely events of successful Kumo breakouts for QTUM, the (10/30/60/30) trader’s price targets are $9 and $11, while the (20/60/120/30) price target is $17.

Disclaimer: This analysis has been designed for informational and educational purposes only. Readers are advised to conduct their own independent research into individual assets before making a purchase decision.

About the authors

BNC Christopher Brookins headshot pic4Christopher Brookins
Christopher Brookins is the founder and CEO of Pugilist Ventures, a quantitative investment firm focused on digital assets and blockchain technology. Chris has a deep knowledge and unique perspective on digital assets formed by his polymath experience in equity trading, credit investing, and business development at two West Coast startups (one acquired). He has been involved in the blockchain community since 2014. Follow @chris__brookins

 

Aditya Author Profile

Aditya Das
Aditya Das is Brave New Coin’s in-house market analyst. Raised in Dubai, UAE, he holds a post-graduate honors degree in Economics from the University of Auckland and a BA in Economics from the University of Sussex. Prior to joining BNC his most recent roles were as a researcher and Economics tutor at the University of Auckland. Follow @Quartlifecrypto

 

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