Bitcoin Price Analysis – Exchanges and trading desks continue to grow

Bitcoin (BTC) has held a shrinking price range between US$8,800 and US$9,700 since April 23rd. The market cap now stands at US$164.36 billion, with US$3.32 billion traded in the past 24 hours.

Crypto exchanges, regulation, and new trading platforms all made headlines this week. In a recent blog post, Binance CEO Changpeng Zhao revealed that the exchange made $200 million in the last quarter. This comes on the heels of a $400 million acquisition of Poloniex by Goldman Sachs-backed Circle earlier this year.

On April 17th, the New York Attorney General (AG) sent an inquiry letter “requesting disclosures on their operations, use of bots, conflicts of interest, outages, and other key issues” to several major crypto exchanges including; Coinbase/GDAX, Gemini, bitFlyer, Bitfinex, Bitstamp, Kraken, Bittrex, Circle/Poloniex, Binance, and Huobi.

The next day, Jesse Powell, CEO of Kraken, responded by saying the letter was abusive and “insulting”. Kraken further explained on their blog why they would not be responding to the inquiry and that they are not “opposed to working with government.” They concluded that “despite not having totally consistent, clear, global regulation, businesses and consumers have managed to figure it out and get along.” After leaving New York in 2015, due to the burdensome regulations of the BitLicense, Kraken has also not allowed any New York residents to trade on its platform.

On May 1st, Coinbase formally responded to the inquiry, praising the AG for the request, stating, “we applaud the OAG for taking action to bring further transparency to the virtual currency markets. The document revealed that customers have traded more than $150 billion in assets on Coinbase/GDAX and detailed ways the platform aims to “protect customers and ensure fairness and integrity.”

Coinbase also filed a Form D this week with the U.S. Securities and Exchange Commission, which is an exemption to offer stock to finance businesses without doing an IPO. In a letter to investors earlier this year, Coinbase revealed making $1 billion in revenue in 2017 and recently valued itself at US$8 billion.

Goldman Sachs recently hired a crypto trader and announced plans for a bitcoin trading desk. The move will require regulatory approval before any buying or selling of BTC can occur. Goldman Sachs is the fifth largest bank in the United States with US$917 billion in assets.

On the network side, transactions per day remain down sharply from the record high, above 400k in December, and are currently near 200k per day. Transactions have not only declined due to a lack of usage but also transaction batching, where one transaction is sent to many addresses at once instead of each transaction being sent individually.

Transaction fees, which increased dramatically throughout 2017, have also declined significantly. This fee reduction is multifactorial. A decrease in transactions per day means fewer transactions needing to be cleared, but SegWit adoption is also been a significant contributing factor.

SegWit transactions offer a more effective use of the network by squeezing more transactions inside each block, increasing network capacity. These transactions continue to steadily increase over time thanks to most of the major exchanges adopting them, including Bitfinex, BitMex, and GDAX as well as most of the major software and hardware wallets. SegWit transactions now account for 32% of all transactions sent, occupying 25% of total block space.

The SegWit soft fork enabled the possibility of further second layer network upgrades like the Lightning Network. Since going live on March 15, the Lightning Network (LN) has continued to gain traction as new channels come online and apps are created.

The software solution enables trusted, bidirectional, off-chain, hub and spoke payment channels and also promises the possibility of instant payments, microtransactions, and increased scalability. The channels work much like a tab at a restaurant, which remains open until the client settles the bill. This format allows for numerous transactions to occur without a network fee until the channel is closed.

The network value to estimated on-chain daily transaction ratio (NVT) has begun to turn downward recently. A falling NVT suggests increasing network use. Although NVT is difficult to compare between coins, which use different transactions types, it can be used to assess the network’s relative utility over time. DOGE is the only coin that has had an NVT consistently lower than BTC (not shown).

BTC NVT Ratio Since 2013

Exchange traded volume this week has been led by the Tether (USDT) and USD markets for the third consecutive week, mostly on Binance, OKEX, and Bitfinex. The KRW premium has returned and is currently at 1.4%. CNY volume remains a lifeless husk of its former self. The RUB pair holds a 7% discount.

Globally reported over the counter (OTC) volume from LocalBitcoins.com remains sharply down from December and January but has begun to increase again. Peru and Venezuela posted record highs in volume for their respective currencies over the past week. Venezuelan BTC interest continues to be fueled by hyperinflation, whereas Peru’s inflation recently reached a multi-year low. Venezuelans fleeing to other countries may be a contributing factor in rising South American OTC volume.

Technical Analysis

Bitcoin continues to move higher after substantial pullbacks throughout Q1 2018. The status of this trend can be determined using Moving Averages, Ichimoku Cloud, Pitchforks, and Chart Patterns. Further background information on the technical analysis discussed below can be found here.

On the daily chart, price has held above the 200 Exponential Moving Average (EMA), but the 50/200EMA still holds a bearish cross. A bullish 50/200EMA would signify a complete bull trend retest. There is currently some RSI bearish divergence as price makes a higher local high on less momentum. Open long/short interest on Bitfinex is essentially even with longs rising (top panel, chart below).

Turning to the Ichimoku Cloud on the weekly chart, there are four 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.

The Cloud metrics on the weekly time frame are; price above Cloud, bullish Cloud, bullish TK cross, and Lagging Span above price and Cloud. Together, these signals suggest the trend is bullish, and will remain bullish until a bearish TK cross or price dips below the Cloud.

The Cloud metrics on the daily time frame are; price inside Cloud, bearish Cloud, bearish TK cross, and Lagging Span above price but below Cloud. A long entry based on traditional Cloud rules does not occur until the Cloud is breached by price, currently at US$12,900. However, a long reversal trade opportunity known as the Edge to Edge trade can be taken advantage of with current Cloud structure.

If price breaches Cloud resistance a typical target is the opposite edge of the Cloud, or US$11,582-$12,900. This is known as an Edge-to-Edge trade. A long entry for this trade has triggered with a daily candle close within Cloud resistance. These trades also have a higher probability of success if they are accompanied by a bullish TK cross, which is not currently the case. The stop loss for these trades are typically either the Kijun or Cloud support, depending on Cloud structure at the time of entry.

The Cloud metrics on daily time frame are; price above Cloud, bullish Cloud, bullish TK cross, and Lagging Span above price and Cloud. When price is trending, as is the case currently, long entries can be taken at any many points; after a Kumo breakout, at the Kijun, or after a TK cross and recross. A bullish TK recross has occurred, indicating a long re-entry after consolidation.

On the daily chart, there is a large, active, double bottom bullish reversal pattern known as the Adam (V) and Eve (U). The shape of the pattern typically has two distinct valleys that differ in shape and together hold a descending volume profile. The traditional long entry occurs after pattern completion on the breach of horizontal resistance with high volume at ~US$11,480, which also represents yearly pivot resistance (not shown). The pattern yields a 1.618 fib and measured move between US$14,400 and US$17,000.

A long-standing Pitchfork on the daily chart, with anchor points in January, May, and July, shows price reaching a similar distance below the mean (red line) as was reached above the mean in December. Buying in the current zone comes with the risk of a bearish invalidation of the Pitchfork, which occurs with a significant break below the lowest diagonal support. The upside potential is a return to the median line, followed by a test of the upper limit. If price maintains the trend, a price of ~US$30,000 by July 1st is possible based on the mean of the trend.

Lastly, price has held a distinct alternating top/bottom price pattern between quarters since 2015. The current quarter is slated for bullish price action, as was the case almost immediately after the quarter began. A top for this quarter will likely occur around July 1st.

Conclusion

Crypto exchanges and trading desks continue to grow, both in number and in revenue. Expect announcements to continue from old and new world finance as the profit margins get too big to ignore. Few, if any of the available exchanges are able to handle the demand of continued user growth in their current state. While this is generally a ‘good problem,’ users of these exchanges find outages and slow response times frustrating.

Technicals show strong bullish consolidation, with a high probability target of US$11,500. Price is likely to reach that level or thereabouts, then consolidate and move higher. A price target of ~US$30,000 by July 1st continues to be a possibility.

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