Bitcoin Price Analysis – Dropping Hashrate

Bitcoin (BTC) volatility has continued to increase since mid-November after sitting near historic lows for several months. The current spot price is down 79% from the all time high set in December. The market cap currently stands at US$72.66 billion, with US$2.46 billion traded in the past 24 hours.

Looking to legacy markets, most of the world market indices dropped significantly in the beginning of Q4, including U.S. (DJI, NDX) & Japanese stock markets (NI225), as well as emerging markets (MSCI) and oil (USOIL). This "risk-off" environment suggests that investors are moving funds to safe haven assets.

There has always been speculation that BTC could be considered a safe-haven asset, but this does not currently appear to be the case. BTC price reacted more bullishly to the "risk-on" environment of legacy markets throughout 2017. All of the major world indices have risen significantly over the past few weeks, except for oil (white line, bottom pane)

Stablecoins, including Tether (USDT), continue to dominate much of the current crypto landscape as several USDT competitors jostle for dominance. USDT, which debuted in October 2014, maintians the highest circulating supply of all stablecoins at ~US$1.85 billion. Among competitors, TUSD, USDC, and PAX all hold similar amounts between US$165-195 million. DAI and GUSD account for US$61 million and US$45 million respectively.

USDT and the stablecoins partner exchange Bitfinex have seen a slurry of news and banking related events over the past few months, including market panic suggesting that the dollar peg was not being honored. On October 24th, Tether burned US$500 million USDT from the treasury, removing the excess from circulation (chart below). On November 1st, Tether announced a banking partnership with Deltec Bank & Trust Limited, located in the Bahamas. The notice included a banking statement revealing Tether was in possession of US$1.8 billion.

On November 11th, Bitfinex announced a 3.0% fee on any account requesting two fiat withdrawals in any thirty day period and/or requesting more than US$1 million in fiat withdrawals in any thirty day period. Bitfinex may exempt some customers from this charge, although the details of which customers were not given, nor the conditions which would enable exclusion. On November 27th, Tether introduced similar minimum account requirements and fees, as well as a 3% fee for any fiat withdrawal over US$10 million.

According to Bitfinex, the exchange processed over 700 withdrawals representing more than US$1 billion in October 2018 alone. Overall, this indicates USDT is freely being redeemed for USD and that there are adequate banking reserves.

The market rate for USDT (left pane, chart below) has almost reached parity with the Dollar once again, after declining on the news of the new Bitfinex fees. The historic USDT market rate has never been exactly US$1.00. The market rate of USDT has fluctuated during times of excessive volatility, while the 1:1 peg has always been honored by Tether.

The BTC premium (right pane, chart below) between Bitfinex, where USDT is a major currency, and Coinbase nearly reached US$1,000 on October 15th, but has begun to decline. The premium is currently just under US$100 or ~2.5% and is returning to the historic range seen during normal market conditions. As confidence in the exchange and free-flowing USDT return the premium should continue to decline as traders arbitrage the difference.

Turning toward the Bitcoin network, the number of BTC transactions per day (line, chart below) has steadily increased since April, having declined slightly over the past week after reaching an eight month high. Transactions per day have declined throughout the year for most cryptocurrencies and assets. BTC is the only coin which has had steadily increasing transactions per day since April.

The average transaction value in USD (fill, chart below), on the other hand, has continued to decline since January 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 November, reaching the highest levels since January this year. 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 OTC brokers.

Source: oxt.me

The 30-day Kalichkin network value to on-chain transactions ratio (NVT) has begun to fall after being near record highs for the past few months (line, chart below). 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. 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 continued to increase since April, but remain significantly lower than the highs in January (fill, chart below). A large uptick in DAA should be seen as a bullish indicator for price as it suggests an increase in BTC demand. Also, there continues to be large grassroots interest in BTC, as suggested by 1,708,806 members and 5,575 meetups worldwide on meetup.com.

Source: coinmetrics.com

Network hash rate and difficulty have dropped substantially over the past month as more and more miners shut off their rigs due to unprofitability. Network difficulty adjusts up to +/-25% after 2016 blocks and is set for a -15% adjustment within the next day. This is the largest decrease in difficulty since October 2011. As hash rate drops before a difficulty adjustment, block times increase, with the average block time currently above 12 minutes.

Source: bitinfocharts.com

Approximately 25% of all blocks mined over the past week were mined with overt version-rolling ASICBoost, a trend 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 miners more profitable as the energy used by ASICs with this mining advantage is lower than those who do not.

Source: asicboost.dance

The average BTC block size has remained far below the block size 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$0.60. Fees have essentially remained flat since July.

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.

Source: bitinfocharts.com

Despite increasing block times, pending transactions, which currently stand below 10,000, have not increased substantially over the few weeks. A spike to almost 40,000 occurred 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 days. Throughout most of the year, pending transactions have remained far below the period of 200,000-250,000 unconfirmed transactions in December.

Source: https://jochen-hoenicke.de/queue

Transaction Batching, or sending one transaction with many outputs instead of sending each transaction individually, has contributed to increased network efficiency. Batching is most effective when used by high transaction volume market participants, such as crypto exchanges and miners, which would benefit more from the reduced fees. Almost 90% of all transactions are sent with at least more than one output, with a majority of transactions having two outputs. In May, 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, which has increased steadily over the course of the year, currently accounts for ~37.82% 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 addresses 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.

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, microtransactions, and increased scalability.

Since going live on March 15, 2018, the LN has continued to gain traction. There are now more than 16,422 available channels, with a channel value of 458 BTC, or US$1.9 million at current prices. 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 without a network fee, until the channel is closed.

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

Turning to developer activity, over 170 developers have contributed a cumulative 3,269 commits to the BTC project on GitHub over the past year, mostly on the 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, OEX, 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 5% of global volume. These Asian fiat pairs may increase substantially as regulatory scrutiny in the region is reduced and clarified.

Global over the counter (OTC) BTC volume, from LocalBitcoins.com, has remained essentially flat over the course of the year, but jumped 20% over the past week. The biggest increases in BTC and notional value globally have come from South American countries where inflation or hyperinflation has devalued local currencies.

Google Trends for the term "bitcoin" remain down sharply over the course of the year but have begun to increase again, especially over the past week. 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 May 2017 study concluded that when the U.S. Google "bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

BTC has dropped over 40% since mid-November. The recent, sustained break below the psychological US$6000 mark indicates the continuation of this bear trend A roadmap for the trend can be determined using Bollinger Bands, moving averages, Wyckoff Method, chart patterns, Pitchforks (PFs), and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the weekly chart, the Bollinger Bands (BBands) have expanded in line with the weekly candle close outside of the BBands. This is the classic setup for a strong bear trend following consolidation. Just as price pushed the upper bands throughout 2017 during the bull trend, price will also return to the 20SMA (red) periodically. As volatility decreases again, the BBands will contract for the next move.

On the daily chart, the 50/200EMAs have been bearishly crossed since May 15th, where price held below the 50EMA before the most recent significant drop. There are no active bearish RSI divergences on the daily timeframe. However, RSI did reach the lowest level on the daily chart since August 2015 when price made a low of US$162 on Bitfinex.

Long/short open interest on Bitfinex is currently net short, as has largely been the case since August. A spike in price above US$5,000 would likely be exaggerated by leveraged short positions unwinding. 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.

Price also sat within a multi-month Falling Wedge, making successive lower highs and lower lows. This pattern can precede bullish reversal, and typically resolves when 75% full, experiencing a more explosive move when 80% complete. Using Bulkowski’s measure rule, a bearish target of US$3,980 was projected. This zone also represents a previous range with high volume.

Alternatively, price also broke below the multi-month Descending Triangle on the daily chart, which held a bearish continuation bias. Using Bulkowski’s measure rule, a bearish target of ~US$3,264 is projected, which also matches the low in November 2017. The 1.618 fib extension from the triangle width paints a bearish target of US$2,777. The yearly pivot at US$3,000 should also be considered as strong support.

Price has also broken the bullish pitch fork (PF) beginning in 2015 and has candle wick anchor points in January, May, and August of that year. This suggests invalidation of the multi-year bull trend. A price above US$5,500 would suggest a possibility of returning to the previous bull trend, just as price returned to the PF in early 2018.

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 below 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, than a move towards the Kijun at US$5,200 becomes more and more likely.

On the four hour chart, the Cloud metrics are also mostly bearish; price is below the Cloud, Cloud is bearish, the TK cross is bullish, and Lagging Span is above 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 can trigger. This is known as an edge to edge (e2) trade with a target of ~US$5,000. If the e2e fails, a 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 next three-month futures contract is set to open on December 3rd. The CME facilitates trading in the largest portion of derivatives contracts in the world. The BTC futures contracts opened in December on low volume, but over the past two weeks, volumes have increased substantially, hitting record highs for the product.

Conclusion

The decline in legacy markets appears to have abated, for now, while BTC has not seen a significant recovery. The Tether and Bitfinex situation continues to improve with increased transparency, as well as new competitors entering the marketplace. The significant decline in price has meant that many miners are no longer profitable, and are thus turning off their mining hardware, dropping the network hashrate substantially. Despite the large increase in block times and increasing transactions per day, there have been no detrimental effects to transaction fees or pending transactions. Overall, the network continues to scale and shows no signs of pressure from increasing transaction volume and block size.

Technicals will remain bearish for the immediate future with no major trend shift likely until next year. Trend-based indicators have drifted from bearish-neutral to strongly bearish. Although a relief rally is possible towards US$5,000, a strong reversal does not appear likely. Price structure, such as repeated formation of bearish continuation patterns, and divergences in momentum oscillators will help discern the strength of the bear trend.