Bitcoin Price Analysis – A nascent bear market

Bitcoin (BTC) is a decentralized digital currency that was released by Satoshi Nakamoto in 2009. The market cap currently stands at US$146.26 billion, with US$4 billion traded in the past 24 hours. The current spot price is down 58% from the all-time high established in December 2017.

On-chain metrics have decreased over the past this week, with the amount of BTC moved on the blockchain and the velocity of money both down nearly 40%. Miner revenue and the number of Bitcoin created have both decreased as well, both reflecting a plateau or decrease in hash rate and on-chain fees.

The BTC network is secured by the SHA-256 consensus algorithm. Both the network hash rate and network difficulty have continued to post record highs week over week since late-June. This consistent increase is likely due to both ASICs being manufactured as well as relatively cheap electricity currently available in China and elsewhere in the world. As BTC spt prices have begun to decline, hash rate increases have slowed slightly.

Source: BitInfoCharts

Twenty-one new ASICs have been released thus far this year, with two more slated for release in November. The most profitable miners are currently the; ASICminer 8 Nano Pro, Bitfury Tardis, and MicroBT Whatsminer M20S.

During the flood season from April to October every year in the Chinese province of Sichuan, electricity can drop as low as US$0.04 cents/KWh due to the abundance of hydroelectric power. Excluding the Bitmain Antminer S3, S5, and S7, all ASICs are currently profitable at this electricity price point. If electricity prices suddenly rise in geographic areas with large mining farms, hash rate may continue to drop in line the BTC, as more and more ASICs become unprofitable.

Source: asicminervalue

Overt ASICBoost usage continues to make record highs, and currently accounts for 53% of all blocks mined. This competitive mining advantage will continue to squeeze out miners who do not leverage the software efficiency increase. Overt ASICBoost has no detrimental effects on the network and makes mining more profitable by lowering energy use. Other network factors that influence mining profitability include; price, block times, difficulty, block reward, and transaction fees.

Source: asicboost.dance

Average block times are currently under nine minutes and thirty seconds, with an estimated 4% increase in difficulty projected for the next adjustment the next two days. Network difficulty adjusts up to +/-25% every 2,016 blocks. As hash rate decreases before a difficulty adjustment, block times increase. As hash rate increases before a difficulty adjustment, block times decrease. The double-digit difficulty increase on September 13th was the fourth of such magnitude since January.

BTC inflation stands at 3.65%, and is set to decrease in a stepwise fashion over time. The next block reward halving is estimated to be 218 days from now, in May 2020, when annual inflation will decrease to 1.80%. As miners add hash rate to the network, and maintain a block time less than 10 minutes, the estimated time until the next halving will continue to decrease.

Source: bashco.github.io/Bitcoin_Monetary_Inflation

On the network side, both the on-chain transactions per day (line, chart below) and average transaction value in USD (fill, chart below) have risen significantly since April 2018 and February 2019, respectively. The current record for transactions in a single day was set in December 2017, at 500,000. The current record for average transaction values in USD was set on July 24th, at US$51,000.

Since July, both metrics have declined slightly, with transactions per day currently near 321,000 and average transaction values at nearly US$5,580. Unconfirmed transactions have been held below 10,000 since August, and currently stand around 2,000 (now shown).

Source: CoinMetrics

Segwit, or BIP141, activated on August 23rd, 2017 via a user activated soft fork. The change allows individual transactions to occupy less block space than a non-SegWit transaction, and an effective blocksize limit of roughly 2.2MB.. 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.

The number of transactions using SegWit has breached 60% for the first time since the upgrade was implemented and currently accounts for 52% of network traffic. This significant increase was largely due to Veriblock (VBK) implementing SegWit. VBK currently accounts for 14% of all on-chain transactions.

Source: p2sh.info

The average block size (fill, chart below) increased substantially from April 2018 to June 29th, due to both an increase in on-chain activity as well as VBK, which secures other blockchains through the “Proof of Proof” (PoP) consensus mechanism. Since June 29th, the average block size has dropped from nearly 2 MB to 1.47 MB.

The average transaction fee (line, chart below) is currently US$0.76, despite a growing block size and increased on-chain use since the record high fee of US$62 in late December 2017. Both the lack of zero fee unconfirmed transactions and increased scalability have kept fees substantially lower than late 2017.

Additionally, transaction batching and the increasing off-chain capabilities of Lightning Network have decreased on-chain transaction bloat. Transaction batching is most effective for entities with a high amount of on-chain transactions outputs, such as miners and exchanges.

Source: CoinMetrics

The 30-day Kalichkin network value to on-chain transactions ratio (NVT) increased significantly from January to mid-July, but has now decreased to 65 (line, chart below). While Kalichkin’s NVT does not account for inflation or the use of off-chain transactions, which would decrease the overall NVT ratio, the metric remains in the upper-third of the historic range.

The three previous highs in NVT, in February 2011, October 2014, and October 2018, were all followed by bearish price moves. Based on this metric, the probability for a local top in price will increase if another local NVT high is reached. In December 2018, NVT bottomed out at 46 before a price reversal.

Monthly active addresses (MAAs) also increased substantially, from January to mid-July (fill, chart below). MAAs grew to 850,000, from a yearly low of 550,000, and are currently 711,000. Daily active addresses (DAAs) surpassed one million on June 14th, 26th, and 28th. This was the first time DAAs have exceeded one million since February 2018. On December 14th, 2017, DAAs exceeded 1.28 million.

The Bitcoin network has far more active addresses than any other blockchain. A large uptick or sustained increase in DAAs 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 over time.

Source: CoinMetrics

The market cap divided by the realized cap (MVRV) is another crypto-native fundamental metric used to asses overbought or oversold conditions. Realized cap approximates the value paid for all coins in existence by summing the market value of coins at the time they last moved on the blockchain.

Historically, periods of an MVRV less than one have represented oversold conditions, whereas periods of an MVRV greater than 3.5 have represented overbought conditions. Of the MVRV levels above four since January 2013, all three have coincided with record highs in price. Currently, MVRV is 1.44 and falling, suggesting the possibility of a bullish bias.

Source: CoinMetrics

Analyzing the age of UTXOs, or unspent coins, can also provide some insights into price movements. Spikes in newly moved coins tend to correlate with local tops or bottoms in price, and can represent euphoria or capitulation. Coins which have not moved recently are represented in cooler colors wheres as coins on the move are represented by warmer colors.

Coins that have not moved in more than five years (dark blue) account for 21.59% of the circulating supply, or 3.87 million BTC. The 6-12 month age band (yellow), or coins not moved since March 2019 – October 2018, holds the next highest distribution at 13.75%. The 1-3 month band (orange) rose 5% since April 2019 but has begun falling again. Historically, local tops in price have occurred when the one to three month band, currently 13%, has represented more than 15% of all circulating UTXOs.

Source: https://plot.ly/~unchained/37.embed

Turning to developer activity, over 170 developers have contributed over 1,722 commits in the past year, mostly on the main repo. The BTC project on GitHub has two active repos, “bitcoin” (top chart, shown below) and Bitcoin Improvement Protocols, “BIPs” (bottom chart, shown below).

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 developer activity and interest.

Bitcoin Core version 0.18.1 was released on August 9th, and provided various bug fixes and performance improvements. Future potential protocol improvements in the pipeline include Schnorr signatures, Taproot, and Graftroot. Schnorr signatures and signature aggregation also bring the potential for storage and bandwidth reduction by at least 25%. Taproot and Graftroot improve upon Merkelized Abstract Syntax Trees (MAST) which offers three benefits; smaller transactions, more privacy, and larger smart contracts.

Earlier this year, Pieter Wuille of Blockstream also unveiled plans for miniscript, a simplified way to write Bitcoin code. The current version, Script, is complex and difficult to use for those not intensely familiar with the language. According to Wuille, miniscript allows a user to write “[some] Bitcoin scripts in a structured, composable way that allows various kinds of static analysis, generic signing, and compilation of policies.” Miniscript is in the early stages of development and is currently being tested internally at Blockstream.

Source: GitHub

Source: GitHub

BTC exchange traded volume over the past 24 hours has been dominated by Tether (USDT) trading, with the United States Dollar (USD) markets representing 7% of total volume. Tether is a stable coin with a soft peg to the USD. Stablecoins in general currently represent well over 80% of all reported volume over the past 24 hours.

Last month, VanEck-SolidX once again withdrew their BTC ETF proposal from formal SEC review. All previous ETF proposals thus far have been rejected by the U.S regulator. So far this year, the SEC has delayed decisions on all active BTC ETF applications. However, there are already several BTC ETNs available, from various jurisdictions across the globe, which are seeing increasing volumes.

In place of a traditional ETF, VanEck-SolidX introduced a limited version of a BTC ETF, made available to qualified institutional buyers. The 144a product currently has US$525,700 under management. The Bakkt physically-settled BTC futures exchange also launched on September 23rd, but thus far has had underwhelming volume. The Chicago Mercantile Exchange (CME) has also announced a BTC options product, currently slated for release in Q1 2020.

Global over the counter (OTC) volume, from LocalBitcoins.com, finished 2018 on a high but has declined since July as BTC spot prices have increased. Global notional volume has held near or above US$50 million since the beginning of the year. In late May, LocalBitcoins discontinued servicing Iran, likely as a result of U.S sanctions and on June 1st, the service disabled paying for BTC with in-person cash trades.

Eastern Europe (orange) holds the highest percentage of total notional volume, followed by Latin America. The Middle East (yellow) and the Australia/New Zealand regions (grey) hold the lowest notional volume, both under US$1 million over the past week. Notional volumes for Venezuela and Columbia stand at US$5.3 million and US$2.8 million, respectively. Venezuela’s central bank also recently announced plans to hold BTC within it’s reserve system.

Source: UsefulTulips

Worldwide Google Trends data for the term "bitcoin" increased dramatically from March to June this year, marking a new yearly high. Since June, search interest has continued to drop. The previous increase in search traffic has likely been related to both the sharp increase in price in Q2 as well as mentions from several prominent U.S government officials, including the President of the United States. Throughout the course of 2018, “bitcoin” related searches declined dramatically. Despite the declining interest, the search “what is bitcoin” was the most popular “what is” Google search of 2018.

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. However, a 2015 study found a strong correlation between google trends data and BTC price whereas a 2017 study concluded that when U.S. Google "bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

BTC price volatility has declined significantly since mid-August, suggesting an extended period of consolidation. A roadmap for upcoming trading decisions can be established using Bollinger Bands, Exponential Moving Averages, Volume Profile of the Visible Range, Pivot Points, oscillators, Pitchforks, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the weekly chart, price is currently sitting just above the bottom Bollinger Band (BBand). BBands measure volatility and attempt to predict the direction of price action as consolidation is occurring. Throughout the past three months, price consolidated heavily and broke down through the 20-period Simple Moving Average (red line). The only other bearish BBand squeeze and breakout of this caliber, since 2012, occurred in November 2018 and resulted in a 50% down move. The current outlook on the BBands remains bearish until price is above the 20-SMA.

On the daily chart, the spot price relative to the 50-day Exponential Moving Average (EMA) and 200-day EMA can be used as a litmus test for the trend. Since mid-September, price has remained below the 50-day EMA, and dropped below the 200-day EMA on September 24th. If the current lows do not hold, a bearish 50-day EMA and 200-day EMA Death Cross is likely to occur. The 50-day EMA is currently at US$9,300 and 200-day EMA is currently at US$8,725, both should now act as resistance.

Volume Profile of the Visible Range (VPVR) also shows large volume nodes at US$6,500 and US$8,200, which should both also act as support (horizontal bars, chart below). VPVR shows very little resistance above the current price level. Additionally, yearly Pivot Points, at US$8,150 and US$13,000, should act as support and resistance, respectively. If price breaches the nearest resistance Pivot Point, the next historic resistance zone is US$22,000.

The Bitfinex long/short ratio (top panel, chart below) is currently 73% long, with both longs and shorts down slightly since the price drop. There is a subtle bullish RSI divergence which may suggest weakening bearish momentum in the near term.

A high timeframe Pitch Fork (PF) with anchor points in January, July, and August 2015 shows price reaching the upper resistance limit of US$14,000 in late June and returning to the median line (yellow). Throughout any given trend price returns to the median line several times.

The previous price break above PF resistance led to a run toward the current record high at nearly US$20,000. Sustained price action above US$18,000 would suggest a severe hastening of the current trend, which would be typical of a parabolic advance. The lower bound of the PF stands at US$6,400 and represents the last support before significant bearish momentum.This PF projects a price target of US$20,000 by July 2020.

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, Cloud metrics are bearish; price is below the Cloud, the Cloud is bearish, the TK cross is bearish, and the Lagging Span is below Cloud and below the current spot price. The trend will remain bearish so long as price remains below the Cloud. Price is currently 20% below the Kijun, suggesting additional consolidation is needed before further downside. Short sellers will likely add to positions heavily near the Kijun, currently at US$9,888.

On lower time frames, price sits within a tight range-bound horizontal zone, similar to the period of consolidation from May to June. If the range-lows break, the 1.618 fib and measured move the the triangular consolidation period from July to October suggest a target of US$5,850 to US$4,600. This target zone also matches a previous consolidation period from April to May. If the range-highs are breached, price will likely find resistance at the bottom of the triangle, near US$9,500

Lastly, the opening and expiration dates of the Chicago Mercantile Exchange (CME) BTC cash-settled futures contracts, launched in December 2017, have had a significant impact on price. The CME facilitates trades for the largest portion of derivatives contracts in the world.

In July, the CME saw the highest notional volume ever in a single day for the BTC futures product, exceeding US$1.5 billion. Historically, price volatility tends to increase dramatically near any active contract expiration, as was again the case leading into September 27th. The next key zone for increased volatility will likely come near the expiration of the July 29th to October 25th contract. The July 1st to December 27th contract has yielded an excellent short trade thus far, similar to the bi-annual contract last year.

Conclusion

Network mining fundamentals continue to push all-time highs thanks to more and more ASICs being deployed on the network. As long as the markets remain bullish, and mining profitability remains positive, miners will likely continue to add hash rate, especially as older ASICs retain profitability. If BTC price continues to drop, hash rate is more likely to stagnate or decline.

Transactions per day and daily active addresses have decreased from local highs in June, but have increased slightly over the past few weeks. Both NVT and MVRV, which are inversely related to on-chain activity, have continued to fall over the past month, confirming strengthening on-chain use. NVT and MVRV may both continue to fall further, with BTC price, suggesting a bullish divergence between price and on-chain usage.

Technicals suggest a nascent bear market with price now below both the 200-day moving average and daily Cloud. Any price action below US$10,000 will likely be sold off heavily in the near-term. If the current local lows of US$7,700 are breached, price targets of US$6,000 and US$6,500 are extremely likely based on a confluence of projected targets of consolidation patterns and key zones of support.