Bitcoin Price Analysis – A sustained and significant rise in transactions

Bitcoin (BTC) is a decentralized digital currency which went live in 2009, and has remained at the top of the BraveNewCoin market cap table since its creation. Over the past month, BTC has underperformed several other top 10 coins including Ethereum (ETH), EOS (EOS), Litecoin (LTC), and Binance Coin (BNB), but has outperformed Ripple (XRP), Steller (XLM), and Tron (TRX). The current BTC spot price is currently down 81% from the all time high set in December 2017. The market cap currently stands at US$66.4 billion, with US$4.76 billion traded in the past 24 hours.

Source: coin360.com

BTC is the only coin, with transactions fees, that has experienced steadily increasing transactions per day since April 2018 (line, chart below). Transactions per day currently match levels last seen in May 2017. BTC also has more transactions per day than most other top 10 cryptocurrencies combined. Transactions per day declined throughout 2018 for most other cryptocurrencies and assets and have generally not increased this year.

The average BTC transaction value in USD (fill, chart below), on the other hand, has declined to US$8,400, after peaking at nearly US$100,000 in mid-December 2017. A rise in transactions per day with a decline in the average value of those transactions clearly shows more transactions with smaller value amounts are being sent through the network.

The continued growth in transactions per day has been helped by VeriBlock, which secures other blockchains through the "Proof of Proof" (PoP) consensus mechanism. The Veriblock team includes Jeff Garzik, a previous BTC Core dev and head developer of the failed SegWit2x initiative. VeriBlock transactions have continued to rise dramatically since the project’s launch in October 2018. According to some estimates, VeriBlock accounts for 30%-45% of all transactions currently on the network.

PoP secures networks by embedding the current state of their blockchains into the BTC blockchain using the OP_RETURN transaction code. By continually embedding blockchain states into BTC, other blockchains become less vulnerable to 51% attacks. Over the past few months, several coins, including Vertcoin (VTC) and Ethereum Classic (ETC) have been hit by this PoW vulnerability due to declining or consolidating hash rate on their respective networks.

Source: coinmetrics.com

Bitcoin days destroyed (BDD) spiked in December 2018, hitting an all time high, and surpassing the previous record set in August 2017. BDD has since declined rapidly but was elevated in January 2019, based on historical data. BDD can be used to measure coin velocity over time. For example, if someone has 10 BTC 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 extreme highs or lows in price. A spike in BDD in July 2017 was likely related to the Bitcoin Cash hard fork. 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) began to rise in January (line, chart below) after declining to less than 20. Kalichkin’s NVT does not account for inflation or the use of off-chain transactions, which would decrease the overall NVT ratio. However, NVT remains in the upper-third of the historic range, which paints a bearish picture. While inflection points in NVT can correlate with extreme highs or lows in price, a rising NVT should be seen as bearish due to decreasing network utility.

Daily active addresses (DAA) have remained essentially flat over the past few months (fill, chart below). On December 30th, 2017, DAA exceeded one million. 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 1.7 million members and 5,264 meetups worldwide on meetup.com. The BTC subreddit also has over 1 million subscribers and is ranked 158th overall on reddit.com. There are also 366 BTC-related job postings on LinkedIn, which has decreased over the past two weeks.

Source: coinmetrics.com

The network hash rate has increased significantly since December 21st, indicating a substantial increase in mining activity. The increase followed a 35% decrease in difficulty across four difficulty adjustments late last year. Difficulty then increased by 10% on December 31st and nearly 5% on January 13th, both increases reflecting the added hashing power. The three most recent difficulty adjustments have accounted for a 5.25% increase in difficulty.

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 sitting at 10 minutes with no change in difficulty projected for the next adjust in 14 days.

The BTC network is secured with the SHA-256 consensus algorithm. The most profitable SHA-256 ASIC miners currently, at an electricity cost of US$0.06/KWh, are; the ASICminer 8 Nano Pro release in May 2018, the MicroBT Whatsminer M10S released in September 2018, and the Ebang Ebit E11++ and ASICminer 8 Nano 44Th, both released in October 2018. Bitmain ASIC miners, which once reigned supreme in terms of ASIC profitability, are nearly absent from the top 10 list. Network factors that influence mining profitability include; price, block times, difficulty, block reward, and transaction fees. The block reward halving is currently set for late May 2020.

Source: bitinfocharts.com

Use of overt version-rolling ASICBoost has continued to increase over the past few months, and currently accounts for approximately 38.5% of all BTC blocks mined. This percentage spiked dramatically after mid-October 2018 when Bitmain released firmware to activate overt ASICboost on the Antminer S9.

Unlike covert ASICBoost, overt ASICBoost has no detrimental network effects while making mining more profitable by requiring less energy usage. Overt ASICBoost is also SegWit compatible whereas covert ASICboost is not. Additionally, covert ASICBoost encourages small or empty blocks because the mechanism involves transaction reordering.

Source: asicboost.dance

Despite disruptions in hash rate and increasing block times throughout December 2018, pending transactions have continued to decline and have been relatively low since mid-November. During the Bitcoin Cash hard fork, pending transactions spiked to almost 40,000 as some miners and mining pools moved hash rate from BTC to Bitcoin Cash.

Any spike in pending transactions has been short lived, having been cleared almost completely within a few hours or days. Recent months have seen pending transactions remain below 10,000 on most days. Throughout 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

The average BTC block size (fill, chart below) has remained far below the block limit of ~2.2MB since March of 2018. Despite an increase in average block size since June, related to VeriBlock transactions, average transactions fees (line, chart below) have not increased substantially and currently average US$0.31. Fees have essentially continued to decline since June 2018, currently at pre-February 2017 levels.

A low and non volatile transaction fee market can be partially attributed to the general decline in network use as a whole since December 2017. 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: coinmetrics.io

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. As batching increases, the transactions per day metric underreports the total individual transactions per day.

Transactions with only one output have declined steadily since March 2016 (red, chart below). Over 90% of all transactions are currently sent with at least more than one output, with a majority of those transactions having two outputs. Transactions with three to four outputs have also risen substantially since January 2018 (yellow, chart below).

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

The number of SegWit transactions, as a percentage of total volume, recently accounted for 90% of BTC on-chain volume but has returned to 50% of total volume. The overall number of SegWit transactions has decreased over the past few months (not shown), and is currently at 35%, which is most likely related to VeriBlock transactions. SegWit, or BIP141, was activated on August 23rd, 2017 via a 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.

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 rapidly gain traction. There are now almost 35,000 available channels, with a total channel value of 731 BTC. The channels work much like a tab at a restaurant, which remain open until the client settles the bill. This format allows for numerous transactions to occur with one on-chain network fee when the channel is closed.

On January 19th, a community member named Hodlonaut started an experiment to send payments through the LN, an experiment which become known as the LN Trust Chain. A random stranger was initially sent 100,000 satoshis and the transaction has now been relayed to over 150 unique users in 39 countries. Jack Dorsey, CEO of both Twitter and Square, received the relay on February 4th and discussed the importance of Bitcoin and LN on Twitter. Dorsey was an investor in Lightning Labs and was the driving force behind enabling Bitcoin purchases on the Square Cash.App. Dorsey also hinted at one day including LN transactions on Twitter natively. The relay transaction was also sent through the Blockstream satellite in Earth’s orbit.

A new tipping service on Twitter using the LN has also been growing in popularity. Tippin.Me, similar to the previous on-chain version ChangeTip, allows users to send microtransactions on LN with a few clicks. Over the past week, the service reported server trouble keeping up with demand. Another service, ln.pizza, went live earlier this month which allows U.S. users to instantly purchase Domino’s pizza at 5% off through using the LN.

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. Over 170 developers have contributed over 3,200 commits to the BTC project on GitHub over the past year, mostly on the main repo (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 dev activity and interest.

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.

Source: https://github.com/bitcoin/bitcoin/graphs/contributors

BTC exchange traded volume over the past 24 hours has been dominated by Tether (USDT), with the United States Dollar (USD) markets representing about 25 percent of USDT volume. Stable coin volumes represent ~73% of all BTC volume over the past 24 hours. Exchanges with the most volume over the past 24 hours include CoinBene, OKEx, OEX, and Binance.

In Asia, volume on the Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) pairs have remained subdued throughout the past few years, and currently account for ~4.2% of global volume. These Asian fiat markets may increase substantially as regulatory scrutiny in the region is clarified or if domestic mainland Chinese exchanges open again.

A BTC price premium (right panel, chart below) between Bitfinex and Coinbase started to increase in mid October, mainly due to a decrease in the USDT market rate (left panel, chart below). Recently, the BTC price premium has remained below US$100, or ~2.5%, while the USDT market rate has been more volatile but remains near US$1.00. These price differentials may be related to a 3% withdraw fee implemented by Bitfinex late last year which was enacted to curb repetitive smaller fiat withdrawals. An extended period of a US$1.00 market rate for USDT would suggest a return to normal market conditions.

Global over the counter (OTC) volume, from LocalBitcoins.com, finished 2018 higher than any period throughout the year and has remained at those levels since January 2019. The biggest increases in BTC and notional value over the past few months have come from South American countries where inflation or hyperinflation has devalued local currencies. Notional volume has also recently spiked in Indonesia, South Korea, and the United States.

Google Trends for the term "bitcoin" remained down sharply over the course of 2018 and into 2019, with a slight uptick towards the end of 2018. 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. 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 action has shown some signs of life over the past week, with a move slightly higher on significant volume. However, technical analysis becomes limited on lower time frames when markets are trendless, unpredictable or irrational. Roadmaps for key decision points on high timeframes can be found using exponential moving averages (EMAs), 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 and 200 EMAs are a litmus test for the trend, and have been bearishly crossed since May 15th. Price had been mostly lower than the 50EMA since that cross, until this week when price broke North and has returned to test the 50EMA as support. A break above the 50EMA should signify bullish momentum with a likely push towards the 200EMA at US$5,000. There are currently no volume or RSI divergences. Long/short open interest on Bitfinex (top panel, chart below) is currently net long.

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 weekly chart, the Cloud metrics are bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and Lagging Span is below price and below Cloud. A long entry based on traditional Cloud strategy would not be warranted until price breaches the Cloud.

Comparing current price action to 2014, 2015, and 2016, a similar Cloud fractal has formed. This pattern previously took 300 days to turn bullish again after multiple support and resistance tests. If repeated, similar price action would break US$6,200 around September 2019. In the near term, the Tenkan at US$5,000 will likely act as resistance. Over the course of the next two years, the Cloud projects a target of US$10,000 based on the long flat Kumo at that price level. However, if the current lows do not hold, falling towards the previous all-time high at US$1,000 always remains a possibility.

On the daily chart, the Cloud metrics are bearish to neutral; price is in the Cloud, Cloud is bearish, the TK cross is neutral, and Lagging Span is above 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 2018. If the current local low holds without making a new lower low, then a move towards the flat Kumo at US$4,800 becomes more and more likely. These trades are known as Edge to Edge trades and typically require a bullish TK cross before a long entry. All Edge to Edge trades have a stop loss at the bottom of Cloud support, currently at US$3,600. This trade setup carries a risk/reward ratio of six, indicating a favorable long setup.

Additionally, a bullish reversal chart pattern, the Adam and Eve, has completed with a firm rejection at the horizontal resistance. The hallmarks of the pattern include a V and U-shaped price action which increased in volume once resistance is broken. Both the 1.618 fib extension and measured move of the pattern both point to the US$5,000 range as a price target.

Lastly, the opening and expiration dates of the Chicago Mercantile Exchange (CME) BTC futures contracts can have a significant impact on price. The CME facilitates trading of the largest portion of derivatives contracts in the world. The CME BTC futures contracts first opened in December 2017 on low volume, but volumes for the product have increased significantly throughout 2018. Last week, the CME saw the highest volume ever in a single day for the BTC futures product.

The January 28th contract opening saw price fall lower, which has consistently been the case on the two month contracts since inception. The September 4th contract opened at almost exactly the local top for price. Shorts which opened at the start of the December 3rd contract will also likely close slightly in profit. The current three-month futures contract opened on December 31st, with shorts and longs open at the beginning of the contract currently around break even.

Conclusion

Fundamentals continue to show a sustained and significant rise in transactions per day over the past few months, which can mainly be attributed to VeriBlock, a mechanism for securing other blockchains using the BTC blockchain. VeriBlock does not use Segwit and some have called the mining strategy "transaction spam." Off-chain, the Lightning Network continues to grow rapidly as well, with the recent transaction relay and other adoption and awareness initiatives becoming both high-profile and widely successful. Hashrate and block times have stabilized with virtually no pending transactions while block size is growing, again due to Veriblock transactions, with no impact on the transaction fee market.

Technicals on higher time frames remain bearish to neutral, warranting a wait and see approach prior to a potential trend reversal. Trend indicators, including the weekly Tenkan, daily Cloud, and daily 200EMA suggest the US$5,000 as a reversal target should price gain bullish momentum. An Adam and Eve bullish reversal chart pattern also has a price target of ~US$5,000 adding to the bullish confluence. Despite the 10% pullback, price remains above the daily 50EMA and above the daily Kijun. New lower lows would likely bring price towards the previous consolidation zone from May through August 2017, from US$2,000-US$2,800.