Bitcoin Price Analysis – block size and fee debate fade

Bitcoin has been extremely volatility over the past week, rebounding from a large pullback, and heading straight back down again. The leading cryptocurrency continues to command more than twice the market cap of the next nearest coin, Ethereum.

All eyes remain on China, which continues to make announcements in a piecemeal fashion. All domestic Chinese exchanges will likely close there doors by the end of the year at latest.

According to a statement released today by OKEX, formerly known as OKcoin, “China is NOT banning bitcoin and digital assets itself. Regulators in China essentially suspended the operation of centralized matching services provider exchanges which facilitates buy and sell by way of an automatic auction process.”

I do not suspect that Bitcoin trading will be banned indefinitely from China, nor do I expect China to ban Bitcoin mining anytime soon. Chinese miners Antpool, BTC.top, ViaBTC, BTCC, F2Pool, and BW account for ~68% of all Bitcoin’s hash rate.

Even if every chinese miner goes offline, the Bitcoin network would adjust difficulty and self correct the enormous loss of hash rate. Immediate effects would be felt on the network but no long term issues would remain.

China may also release its own version of tether with strict controls. Domestic Chinese exchanges will likely re-open once they comply with “governance, investor protection, set forth a proper code of conduct and increase its transparency of policy on client money” according to OKEX.

Meanwhile, the rest of the world continues to develop products to grow the Bitcoin ecosystem. Today a document from LedgerX to the US Commodity Futures Trading Commission (CFTC) circulated regarding a new swap product as early as the beginning of October. On July 24th, the CFTC announced approval for LedgerX to move forward as a derivatives clearinghouse.

BTCe has also come back online after being taken down by the US government in a series of seizures related to coins sold from the Mt. Gox hack. BTCe rebranded as WEX and ~80% of customer cryptocurrency funds have remained intact.

Funds are able to be withdrawn without KYC/AML requirements, and the remaining outstanding balance (~20%) has been issued as a debt token similar to Bitfinex post-hack. The tokens are currently trading at USD$0.50 and WEX has planned to buy all of the tokens back within 1-2 years.

Bitcoin transactions remain unaffected. The number of transactions per day have peaked since the beginning of the year and essentially stagnated.

The number of transactions is limited by the number of transactions that will fit in each block. Block size has eased since the release of Segwit.

While SegWit aims to alleviate the block size problem, adoption of SegWit addresses has not been immediate and will take time. Currently, SegWit transactions account for around 3.5% of total transactions.

The mempool, or number of transactions waiting for confirmation, has dramatically decreased since the implementation of SegWit, further alleviating the block size restrictions.

A full mempool would actually likely help create awareness about the use of SegWit transactions. If there is not an immediate incentive or impetus for change, few people will veer from status quo.

SegWit transactions should theoretically always be cheaper that non-SegWit transactions because they use less space in a block per transaction. This should be incentive enough to switch but it’s likely many people are unaware of what to do or how to make the switch to the new addresses. Many exchanges and wallets have yet to implement SegWit addresses as well.

Exchange traded volume has been led by Us Dollar (USD) markets over the past 24 hours, with most of that volume coming from Bitfinex.

The Chinese Yuan (CNY), once the market leader in volume, is a shadow of its former self, thanks to the exchange domestic Chinese exchange regulations.

As Chinese trading volume diminishes, so should the influence the Chinese government has on Bitcoin price.

Global over-the-counter volume reached a new all-time highs this week, thanks to record trading in Columbia, India, Malaysia, New Zealand, Singapore, Switzerland, Thailand, United Arab Emirates, and Venezuela.

China also had a sharp spike in volume, as expected, considering most of their exchanges are now closed or closing.

Technical Analysis

The Bitcoin market continues to recover from the shock of a large pullback. The long standing bull trend remains strongly intact. Ichimoku Cloud, Pitchforks, and EMAs all support this notion.

The daily cloud remains bullish on most metrics, as it has since late 2015. Price remains above Cloud and the Cloud itself has not been bearish aside from the post-Bitfinex hack.

The TK lines are nearing a bearish cross but this has happened several times since 2015. A bullish re-cross would be a strong long entry signal for those who have not already bought the dip. The final signal, the lagging span, will likely take another month to resolve.

Price has remained in the confines of the extended Pitchfork (PF). Until May 2017, price remained in the lower half, below the median line, of this PF. A similar pattern could now occur above the median line of the PF. I would expect multiple support tests along the upper half of the median line before falling through to the bottom half.

Price also remains handedly above the 200EMA, as it has since breaking the 200EMA in late 2015. A candle close below the 200EMA and a bearish 50/200EMA cross would signal the likely beginning of a downtrend.

There is a possibility of a bearish Head and Shoulders reversal pattern here, albeit unlikely considering the volume profile is not descending in nature. The target would also be well below the strong resistance turned support of the previous all time high zone.

Lastly, there is some concern that this is the ultimate top before an extended bearish period.

Using the Wyckoff Method, we can compare the bottom of the current trend starting in 2015 (Top), to the current inverted price structure (Bottom), using an inverted chart (0-$BLX on TradingView). A direct comparison between the two also helps remove the bullish bias.

Accumulation and Distribution periods are marked with multiple tests of support and resistance, most of which has not occurred yet with the current price structure. The 2015 Accumulation period did not end until resistance around USD$300 was broken. If this were a Distribution, price structure would show multiple failed attempts at a new ATH and the support of USD$3000 would need to break.

Conclusion

With SegWit now fully implemented, the block size and fee debate is in the rearview. Although China will temporarily shutter its doors to exchange traded Bitcoin, OTC volume has exploded in much of the world. Everyday, more and more regulated products and increased exposure are coming to cryptocurrencies.

Technicals, although remaining bullish, are essentially in wait and see mode, but it is definitely much too early to declare an end to the bull trend at this point in time.