Bitcoin Price Analysis – Crucial week ahead

Bitcoin (BTC) has been wide-ranging over the past week after a strong pullback. The market cap now stands at US$235 billion on US$6.46 billion in volume over the past 24 hours. Volume has slowed broadly amongst the cryptocurrency markets, which is most likely due the holiday season.

BTC transactions per day have declined since the peak around 490,000. This trend has been matched through Ethereum (ETH), Bitcoin Cash (BCH), and Litecoin (LTC). ETH continues to process the highest number of transactions per day, almost double that of BTC. However, the average value of a BTC transaction is over 10x greater than ETH (not shown below).

There are currently 175,00 unconfirmed transactions in the bitcoin mempool, down from over 250,000 just a few days ago. Transactions usually see an uptick during downwards price movements, as was the case from the 17th to the 22nd of December. This only compounded the problem of the existing backlog. “Spam” transactions also continue to plague the network. One such “spam attack” was caught live and recorded.

SegWit, which reduces the size of each transaction and therefore makes the transaction cheaper, continues to have around 10% adoption. Key bottlenecks in the ecosystem like the major exchanges continue to develop, or ignore, SegWit integration. Coinbase/GDAX has promised SegWit addresses sometime in 2018.

Currently, SegWit uses the P2SH address format which is compatible with older clients. A BIP, first introduced on the 20th of March, is gaining traction to move SegWit towards native addresses. BIP 173, created by Peter Wuille and Greg Maxwell of Blockstream, introduces the Bech32 address format which is more efficient and secure, and not case sensitive.

In the meantime, difficulty continues to climb. This indicates that additional hashing power is being added to the BTC network. Block times before each difficulty adjustment have benefited from this, holding below 10 minutes on average over the past week. According to BTC.com, the next difficulty adjustment will be a 5% increase and is set to occur in three days. This suggests that miners continue to believe BTC is amongst the most profitable coins to mine, as hash rate has not moved elsewhere.

Exchange traded volume has been led by the US Dollar (USD) and Japanese Yen (JPY) pairs. The Tether (USDT) pair, which is pegged to $1, has seen an increase in volume recently as traders seek safe haven from declining BTC prices.

Korean Won (KRW) trading volume and price are down sharply amidst reports that regulatory bodies are looking to reign in anonymous trading accounts. The KRW markets have been trading at almost $4000 above USD markets, which suggests difficult or impossible arbitrage opportunities.

The minister of the Office for Government Policy Coordination, Hong Nam-ki, said on Thursday that the Korean government is banning the use of anonymous virtual accounts in cryptocurrency transactions as part of efforts to curb speculation. These accounts are widely used in the Korean financial industry.

Only real-name bank accounts and matching accounts at virtual currency exchanges will be used for deposits and withdrawals in the future. Reuters reported that this as an outright ban on trading yesterday, which caused a direct and immediate sell off. The New York Times later picked up the story as well.

Technical Analysis

When determining the progress of a trend, the Ichimoku Cloud, Moving Averages, and Pitchforks are excellent resources for entry and exit signals.

On the weekly chart, the Ichimoku Cloud signals continue to scream bullish momentum. The Cloud uses a moving-average-type system with dynamic support and resistance to make projections of key zones, as well as capturing 80% of any given trend. As long as the price remains above the Cloud, sentiment remains bullish. Price in the Cloud indicates a neutral trend, and below the Cloud indicates a bearish trend.

When the Tenkan (blue) is over the Kijun (red) sentiment is bullish, as shown below. When the Kijun is over the Tenkan sentiment is bearish. When the Lagging Span (dark green) is above the Cloud the current price sentiment is bullish, as shown below. When the Lagging Span is below the Cloud the current price sentiment is bearish.

The best entry signals when using this indicator occur when the trend is obvious, but 1 or 2 of the signals have yet to become confluent on a higher timeframe trend.

The recent pullback to US$11,000 found support at the Tenkan. The next support down is the Kijun at US$11,000. Price has bounced at or near the Kijun six times in the current trend. The Cloud continues to show a thin upward slope, the mark of a healthy trend. A thick Cloud, which last occurred late in 2015, signifies a rangebound price with a high likelihood of reversal.

Additionally, the price is light years away from either the 50 or 200 Exponential Moving Averages (EMA), both of which are at a 45 degree angle. These moving averages are commonly used to determine the status of the trend. When a faster moving average is above a slower moving average, the trend is bullish, and vice versa.

Hastening of the trend is best depicted with the use of a parabola, as popularized by ParabolicTrav recently on twitter. The slope of the trend on a logarithmic chart has gotten steeper and steeper over the past year. Typically, these patterns end after four touches of support with a massive reversal which breaks the curved support. BTC is currently flirting with this zone.

The Pitchfork, which uses three anchor points to predict a price channel with diagonal potential reversal zones, shows price vacillating within the heart of the trend (green). A break to the lower diagonal support will signify a strong buy signal based on the year long trend, most of which has been held below the median line (red).

On the daily chart, the Ichimoku Cloud also continues to show bullish signals with several Kijun bounces. A candle close below the Kijun would signal a significant pullback, likely below the US$11,000 support. These Kijun breaks have led to an average of a 17.75% drop on the four occasions they have occurred this year, which would bring the price to around US$10,400.

On this same timeframe, since the bullish cross of the 50/200EMA on the daily chart in September 2015 the price has largely remained above the 50EMA. A break of the 50EMA would likely reach for the 200EMA (yellow), currently US$7,300. While unlikely at the moment based on current price structure, it’s important to prepare a roadmap for all possibilities.

On the four hour chart, the 50/200EMAs have crossed and recrossed four times this year, all resulting in a push higher after reaching the 850EMA, currently at US$8,500. If the 200 and 50 EMA cross on this timeframe, I’d expect the same to occur in this instance.

The Cloud signals are mixed in this timeframe. The Cloud is bearish, the price is below Cloud, the TK cross is bullish, and the lagging span is below price and Cloud. A long entry signal of moderate position size would be appropriate if the price rises above the Cloud, a Kumo breakout. If the price is above Cloud with a bullish Cloud as well the likelihood of bullish continuation is significantly greater.

Conclusion

Bitcoin has hit several new all time highs over the course of 2017. The asset was at one point up over 1800%. Despite news events which pummeled the price, BTC has proven that it remains more antifragile now than it has ever been. Mainstream adoption will continue to rise into 2018 with Bitcoin-backed ETFs shortly on the horizon.

Technicals in the near term suggest a crucial week ahead in a historically bearish month for Bitcoin. The likely support for any dip remains between US$8,500-$10,500. Otherwise, new highs to beyond US$30,000 are reasonable based on the current trend.