Bitcoin Price Analysis – Bullish price action in the horizon

Bitcoin (BTC) has gained ~30% from the recent low in December and volatility has begun to decline over the past few weeks. However, the cryptocurrency is down ~80% from the all time high set in December 2017. The market cap currently stands at US$70.56 billion, with US$2.48 billion traded in the past 24 hours. Since mid-December, Bitcoin has underperformed in comparison to every other top 10 cryptocurrency in the BNC Market Cap table.

BTC is the only coin, with transactions fees, that has experienced steadily increasing transactions per day since April (line, chart below. Transactions per day have declined throughout 2018 for most cryptocurrencies and assets. The average transaction value in USD (fill, chart below), on the other hand, has continued to decline after reaching US$79,000.

A rise in transactions per day with a decline in the average value of those transactions clearly shows that more transactions with smaller amounts are being sent through the network. However, average transaction value remains high, historically, matching two previous highs in December 2013 and February 2016.

Source: coinmetrics.com

Bitcoin days destroyed (BDD) spiked in December, hitting an all time high, and surpassing the previous record set in November 2018. BDD can be used to measure coin velocity over time. For example, if someone has 10BTC that they received 10 days ago, and then they spend or move the BTC to another wallet, 100 BTC days have been destroyed. This metric accrues over time and resets any time the coins are moved.

The months with the highest BDD have historically correlated with highs or lows in price. A spike in BDD in July 2017 was likely related to the Bitcoin Cash hard fork. On June 20th, a spike in BDD preceded a drop in Bitcoin price two days later. However, this should not be seen as a 1:1 correlation. A rise in BDD can also represent custodial providers moving coins between wallets, which is typical of major exchanges or over the counter (OTC) brokers.

Source: oxt.me

The 30-day Kalichkin network value to on-chain transactions ratio (NVT) has fallen significantly after being near record highs for the past few months (line, chart below). Despite the decline, NVT remains in the upper-third of the historic range.

While inflection points in NVT can correlate with extreme highs or lows in price, a falling NVT should be seen as bullish due to increasing network utility. Kalichkin’s NVT does not account for inflation or the use of off-chain transactions, which would decrease the overall NVT ratio.

Daily active addresses (DAA) have increased since the lows in April but have declined over the past month (fill, chart below). A large uptick in DAA should be seen as a bullish indicator for price as it suggests an increase in on-chain BTC demand. As off-chain transaction facilities increase, daily active addresses may stagnate or decline. Further, there continues to be grassroots interest in BTC, as suggested by 1,689,486 members and 5,592 meetups worldwide on meetup.com.

Source: coinmetrics.com

The network hash rate has increased significantly since December 21st, indicating a substantial increase in mining activity. The increase follows a 35% decrease in difficulty across four difficulty adjustments late last year. Difficulty then increased 10% on December 31st reflecting the added hashing power.

Network difficulty adjusts up to +/-25% after 2016 blocks have confirmed. As hash rate drops before a difficulty adjustment, block times increase. As hash rate increases before a difficulty adjustment, block times decrease. Average block times are currently just above 10 minutes with the next estimated difficulty adjustment projected to be +8% in five days.

Source: bitinfocharts.com

Approximately 32% of all blocks mined over the past week were mined with overt version-rolling ASICBoost, a percentage that has continued to rise since mid-October when Bitmain released firmware to activate overt ASICboost on the Antminer S9. Overt ASICBoost has no detrimental network effects but does make mining more profitable for those that can use it, as the energy used by ASICs with this mining advantage is lower.

Source: asicboost.dance

Despite disruptions in hash rate and increasing block times throughout December, pending transactions have continued to decline. Pending transactions spiked to almost 40,000 in the setting of the Bitcoin Cash hard fork as some miners and mining pools moved hash rate from BTC to Bitcoin Cash. Any spike in pending transactions has been short lived and cleared almost completely within a few hours or days. Throughout most of 2018, pending transactions remained far below the 200,000-250,000 range seen during the December 2017 trading frenzy.

Source: [https://jochen-hoenicke.de/queue](https://jochen-hoenicke.de/queue)

The average BTC block size has remained far below the block limit of ~2.2MB since March of this year. Despite an increase in average block size since June, average transactions fees have not increased substantially and currently average US$0.247. Fees have essentially continued to decline since July and are currently at pre-December 2016 levels.

A low and non volatile transaction fee market can be attributed to the general decline in network use as a whole. Additionally, an increase in transaction batching, SegWit use, and off-chain channels like the Lightning Network and Liquid side chains have also contributed to removing network strain and keeping fees low. However, Liquid currently has almost no network traffic.

Source: bitinfocharts.com

Transaction Batching involves sending one transaction with many outputs instead of sending each transaction individually. Batching is most effective when used by high transaction volume market participants, such as crypto exchanges and miners, which benefit more from the reduced fees.

Transactions with only one output have declined steadily since March 2016. Almost 90% of all transactions are sent with at least more than one output, with a majority of those transactions having two outputs. In May 2018, a study found that ~12% of all transactions were batched, accounting for between 30–60% of all on-chain transactional value.

Source: https://p2sh.info/dashboard/db/batching

Segwit adoption increased steadily throughout most of 2018 and currently accounts for ~34% of all network transactions. SegWit, or BIP141, was activated on August 23rd, 2017 via user activated soft fork and allows individual transactions to occupy less block space than a traditional transaction.

Although both non-SegWit and SegWit transactions can be sent over the network, SegWit users pay less in accumulated fees to achieve the same number of transactions. SegWit also allows for an effective blocksize limit above 2MB. As fees on non-SegWit transactions have declined significantly, users may feel less inclined to use SegWit addresses, which may explain the decline in SegWit use towards the end of the year.

Source: https://p2sh.info/dashboard/db/segwit-usage

SegWit also enabled the possibility of further second layer network utilities like the Lightning Network (LN), which facilitates trusted, bidirectional, off-chain, hub and spoke payment channels. The LN also paves the way for the possibility of instant payments, micro and nano-transactions, and increased network scalability.

Since going live on March 15, 2018, the LN has continued to gain traction. There are now more than 23,000 available channels, with a channel value of 570 BTC, or US$2.28 million at current prices. The channels work much like a tab at a restaurant, which remains open until the client settles the bill. This format allows for numerous transactions to occur without an on-chain network fee, until the channel is closed.

Source: https://p2sh.info/dashboard/db/lightning-network

Turning to developer activity, Bitcoin Core released version 0.17.1 on December 25th with various bug fixes and performance improvements. On GitHub over 170 developers have contributed a cumulative 3,278 commits to the BTC project over the past year, mostly on the main repo.

Most coins use the developer community of GitHub where files are saved in folders called "repositories," or "repos," and 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.

BTC exchange traded volume over the past 24 hours has been dominated by Tether (USDT), with the United States Dollar (USD) markets representing less than a third of USDT volume. Exchanges with the most volume over the past 24 hours include CoinBene, OKEx, and Binance.

In Asia, volume on the Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) pairs have remained subdued throughout the entire year, and currently account for less than 4% of global volume. These Asian fiat markets may increase substantially as regulatory scrutiny in the region is reduced and clarified.

A BTC premium (chart below) between Bitfinex, where USDT is a major currency, and Coinbase nearly reached US$1,000 on October 15th, but has held below US$200 recently. The premium is currently just under US$108 or ~2.7% and is returning to the historic range seen during normal market conditions. As confidence in Bitfinex and free-flowing USDT return, the premium between the two exchanges should continue to decline as traders arbitrage the difference.

Global over the counter (OTC) volume, from LocalBitcoins.com, finished the year higher than any period in 2018. The biggest increases in BTC and notional value have come from South American countries where inflation or hyperinflation has devalued local currencies. According to The Guardian, Iranian students abroad, who have restricted banking capabilities, are using BTC to pay for higher education expenses.

Google Trends searches for the term "bitcoin" remained down sharply over the course of 2018 with a slight uptick towards the end of the year. A slow rise in searches for "bitcoin" 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 BTC price. A 2017 study concluded that when the U.S. Google "bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

As BTC begins to consolidate there is a potential trend reversal on the horizon. Targets for trend reversals can be estimated using moving averages, chart patterns, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the 50/200EMAs have been bearishly crossed since May 15th. Price has mostly been held below the 50EMA since that cross. A break above the 50EMA would be a strong bullish indicator. There are no active volume or RSI divergences on the daily timeframe. Long/short open interest on Bitfinex is currently net long for the first time since mid-November. BTC and USD funding rates on Bitfinex are both relatively low, suggesting that there are ample coins and Dollars available to borrow for leveraged trading.

Remaining on the daily timeframe, BTC broke below the multi-month Descending Triangle in mid-November, which held a bearish continuation bias. Using Bulkowski’s measure rule, a bearish target of ~US$3,264 was projected and reached. The Descending Triangle is further confirmed with a near exact match in the predicted and expected target. Based on the resolution of the pattern target, further price consolidation in more likely than lower lows.

On the four hour chart, an Inverted Head and Shoulders reversal chart pattern has developed, with a 1.618 fib extension and measured move of US$4,900 and US$5,100 respectively. The Inverted Head and Shoulders would be validated by either the shape of market structure, descending volume profile, a break through the neckline resistance with notable volume, and a throwback to the resistance which confirmed as support. The most conservative long entries will trigger above US$4,050 with stop losses below US$3,800.

Turning to the Ichimoku Cloud, there are four key metrics; 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.

On the daily chart, the Cloud metrics are bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and Lagging Span is in price and below Cloud. A long entry based on traditional Cloud strategy would not be warranted until price breaches the Cloud. Price has remained below the Cloud since mid-January. If the current local low holds without price making a lower low, then a move towards the Kijun at US$4,800 becomes more and more likely.

On the twelve hour chart, the Cloud metrics are neutral to bearish; price is in Cloud, Cloud is bearish, the TK cross is bullish, and Lagging Span is in price and below Cloud. Again, a traditional long entry will not trigger until price is above the Cloud with a bullish TK cross. However, as the TK cross turns bullish and price enters the Cloud, a long reversal trade has triggered. This is known as an edge to edge trade (E2E) with a target of ~US$4,900. If the E2E fails, a Kumo Breakout and bearish TK cross below the Cloud is highly suggestive of further bearish continuation.

Lastly, the opening and expiration dates of the Chicago Mercantile Exchange (CME) BTC futures contracts can have a significant impact on price. The September 4th contract opened at almost exactly the local top for price. The current three-month futures contract opened December 31st. The CME facilitates trading in the largest portion of derivatives contracts in the world. The BTC futures contracts opened in December 2017 on low volume, but volumes for the product have increased significantly throughout 2018.

Conclusion

Overall, fundamental metrics are mixed with transactions per day increasing, transaction values falling significantly, and NVT high but falling. However, the network continues to work as intended, and network scalability solutions continue to be utilized, creating a low fee market with very few pending transactions.

Technicals indicate the possibility of near term bullish price action. With the near completion of a bullish Inverted Head and Shoulders, and a breach of the 50EMA on the daily, targets towards US$5,000 are likely. Should price fail to breach the US$4,000 level, bearish continuation would be highly likely if price falls below the twelve hour Cloud with a bearish TK cross.