Bitcoin Price Analysis – Fundamentals continue growing

Bitcoin (BTC) is a decentralized digital currency created by Satoshi Nakamoto and released in 2009. The spot price is currently up 84% from the low set in December 2018, but down 72% from the current all time high set in December 2017. The BTC market cap currently stands at US$102.39 billion, with US$4.31 billion traded in the past 24 hours. Historically, both April and Q2 have been the most bullish periods for price.

Tether (USDT) is back in the news after a New York Attorney General (AG) report released on April 25th revealing that US$850 million of Tether funds had been used to cover bad debts at Bitfinex. In exchange for the funds, Tether limited holds 60 million shares of iFinex, Bitfinex’s parent company, as collateral. Bitfinex and Tether CEO, JL van der Velde, released a statement a few hours after the AG report stating that Bitfinex is working with authorities to retrieve the seized funds.

One of Bitfinex’s payment processors, Crypto Capital, likely had these funds seized by law enforcement after Crypto Capital was allegedly found connected with shadow banking and a narcotics trafficking scheme. The AG also accused Bitfinex and Tether of “ongoing fraud” and proposed a full audit of the exchange.

The market responded to the news by fleeing both USDT and Bitfinex. Over the next few days, the USDT market rate broke US$0.95 and the known BTC cold wallet at Bitfinex saw outflows exceeding 30,000 BTC. The BTC premium on Bitfinex also rose to over 6% and currently stands at just over 5%. Despite all of this, there have been no user reports of delayed withdrawals of USD or BTC out of Bitfinex, as well as no reports of failed USDT redemptions through Tether.

On April 30th, Bitfinex and Tether’s legal counsel, Stuart Hoegner, responded in an affidavit stating that 74% of USDT is currently back by USD reserves. Additionally, Hoegener argued that a USDT terms of service change in March this year was adequate notification to USDT users that USDT reserves were no longer backed by 1:1 USD reserves. Hoegner also revealed that both Bitfinex and Tether retained independent legal counsel when making this decision.

Currently, there are US$2.811 billion in circulating USDT, over 20% of which resides on Binance. Although many users have de-risked from USDT over the past week, the market seems unphased by the matter. Additionally, US$400 million was migrated to ERC-20 USDT and US$100 million was migrated to Tron USDT, which also suggests continued faith in USDT from exchanges. These migrations aim to diversify the base protocol layers USDT can be sent through, as there can be advantages to fees and confirmation times when using these chains.

Source: https://wallet.tether.to/richlist

On the network side, on-chain transactions per day have continued to rise since April 2018, and are now sitting near the record high set in mid-December 2018 (line, chart below). The average BTC transaction value in USD (fill, chart below) has risen to over US$15,000 after a low of US$6,360 in February. Transaction values peaked on the BTC network in mid-December 2017 at nearly US$100,000.

Source: coinmetrics.com

The rise in on-chain transactions per day from October 2018 to March 2019 can predominantly be attributed to VeriBlock (VBK), which secures other blockchains through the “Proof of Proof” (PoP) consensus mechanism. VBK transactions currently account for only 15% of total BTC on-chain transactions but for as much as 40% of transactions a few months ago.

These VBK transactions also accounted for at least half of all pending transactions in the mempool from March 25th to April 7th. The majority of these transactions are sent with a one satoshi transaction fee (blue fill, chart below). Currently, the mempool is nearly empty with just over 16,000 transactions pending, suggesting the congestion has been cleared significantly over the past few weeks.

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

Bitcoin days destroyed (BDD) for the month of March clocked in at near four year lows, likely signifying a period of accumulation rather than the distribution of older coins. April saw a slightly higher BDD compared to March. BDD spiked dramatically in December 2018 and surpassed the previous record set in August 2017. BDD has since declined rapidly but remained significantly elevated in January 2019, based on historical data.

BDD can be used to measure coin velocity over time. For example, if an address holds 10 BTC received 10 days ago, and the BTC is moved to another address, 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 as long term holders begin to sell coins on an exchange. 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) has continued to rise since January, and is currently slightly above 30 (line, chart below). 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 also be seen as bearish due to decreasing on-chain network utility.

Daily active addresses (DAA) had been ranging between 550,000 to 675,000 over the past few months (fill, chart below) but recently surpassed 730,000, hitting a new yearly high. 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 1.72 million members and almost 5,000 meetups worldwide on meetup.com. The BTC subreddit also has over 1.03 million subscribers and is ranked 179th overall on reddit.com. There are also over 360 BTC-related job postings on LinkedIn in the United States, which has decreased slightly over the past few weeks. Most notably, the much-hyped Bakkt exchange continues to have eight job listings relating to engineering, development, and sales.

Source: coinmetrics.com

Turning to mining fundamentals, the network hash rate and difficulty have increased significantly since late December last year, indicating a substantial increase in mining activity. The recent increases have followed a 35% decrease in difficulty through four difficulty adjustments from October to December last year. Historically, the BTC network has only had three periods of monthly decline in network difficulty, all three of which have corresponded with the bottom of a bear market.

Network difficulty adjusts up to +/-25% after 2016 blocks have confirmed. As hash rate decreases before a difficulty adjustment, block times increase. As hash rate increases before a difficulty adjustment, block times decrease. Average block times are currently just under 11 minutes with an estimated 3.26% increase in difficulty projected for the next adjustment in 12 days.

The BTC network is secured with the SHA-256 consensus algorithm. The most profitable SHA-256 ASIC miners currently available are the; ASICminer 8 Nano Pro, Bitfury Tardis, Bitmain Antminer S17, Innosilicon T3+ 52T. Network factors that influence mining profitability include; price, block times, difficulty, block reward, and transaction fees. The next block reward halving is currently set for May 2020.

Source: bitinfocharts.com

The total percentage of overt version-rolling ASICBoost on the network has ranged between 35% and 40% over the past few months, and currently accounts for approximately 39% of all blocks mined. SlushPool mined the first ASICBoost block on March 24th, 2018 and a Braiins OS mining system verified ASICboost capability on Antminer S9s in October 2018. Bitmain responded by releasing firmware to enable overt ASICboost on the Antminer S9. Overt ASICBoost spiked dramatically after mid-October 2018.

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

Source: asicboost.dance

The average BTC block size (fill, chart below) has increased substantially since April 2018, sitting near the previous record high of just over 2MB. With the implementation SegWit, the BTC block size limit is now roughly 2.2MB. Despite an increase in average block size since June, related to VBK transactions, the average transaction fee (line, chart below) has not increased substantially and is currently just over US$1.00.

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. The Liquid side chain currently has little traffic overall, but has seen a substantial increase in transactions per day over the past few weeks.

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 substantially 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). About 90% of all transactions are currently sent with at least two outputs. Transactions with three to four outputs have risen substantially since January 2018 (yellow, chart below).

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

The overall number of transactions using SegWit reached a record high of 47.8% in late March 2019. This metric has risen and fallen directly with the end of VBK testing and the VBK mainnet launch, suggesting that VBK does not currently use SegWit transactions. The number of SegWit transactions, as a percentage of total volume, accounted for 90% of BTC on-chain volume in mid-January but has returned to just over 50%.

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 since December 2018, 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 44,000 available channels, with a total channel value of 1087 BTC, or US$6.3 million. 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, after the channel is closed. Transactions sizes are currently capped at ~0.04BTC while the network is still being developed and built.

In early January 2019, a community member named Hodlonaut started an experiment to send payments through the LN, which has 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 250 unique users in 39 countries. The experiment has acted as a catalyst for increased public awareness of the LN.

Three services built on the LN have also quickly gained popularity. Lightning Spin, a gambling roulette game, accrued over 10,000 invoices in a 10-month span and was sold to another party in late March, becoming the first LN app to trade hands. Tippin.Me, a tipping service similar to the previous on-chain version ChangeTip, allows users to send microtransactions on the LN with a few clicks. The service became so popular so quickly that it initially encountered server trouble trying to keep up with demand. Ln.pizza also went live earlier this year, a service which allows U.S. users to instantly purchase Domino’s pizza through the LN, with a 5% discount.

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

Turning to developer activity, Bitcoin Core released version 0.17.1 on December 25th and version 0.18.0 earlier this month with various bug fixes and performance improvements. The BTC project on GitHub has two active repos, “bitcoin” and “BIPs” or Bitcoin Improvement Protocols. Over 170 developers have contributed over 3,200 commits to over the past year, mostly on the bitcoin 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) trading, with the United States Dollar (USD) markets representing just 8% of total volume. Stable coin volumes, which have grown to account for over 50% of volume over the past few months, currently represent 85.23% of all reported BTC volume over the past 24 hours.

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 just over 2% of global volume. These Asian fiat markets may increase substantially if regulatory scrutiny in the region is clarified or if domestic mainland Chinese exchanges open again.

Several potentially game-changing BTC services are also in the works and slated for launch this year. On March 7th, Fidelity Digital Assets announced the launch of a custody service to a select group of eligible clients. The financial behemoth manages over US$2.45 trillion in assets. Bakkt, which raised US$182.5 million from 12 partners and investors in 2018, is also set to launch a physically delivered BTC future some time this year. Bakkt is a subsidiary of the Intercontinental Exchange, which also runs the New York Stock Exchange. Starbucks also received a significant equity stake in the Bakkt BTC futures platform.

A fresh application for the VanEck-SolidX BTC ETF was also submitted in February to the U.S. Securities and Exchange Commission (SEC), after the proposal was pulled in January during the government shutdown. All previous BTC ETF proposals have been rejected by the U.S. regulator, while several other BTC ETNs are available worldwide and seeing increasing volumes. The deadline for the final SEC decision on the pending U.S. ETFs is set for early December 2019.

Global over the counter (OTC) volume, from LocalBitcoins.com, finished 2018 on a high but has declined over the past few months. USD notional volume has remained essentially flat since January. The biggest increases in BTC and notional volume 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 Iran, Kazakhstan, Japan, Mexico, Poland, South Africa, South Korea and Thailand.

Google Trends for the term "bitcoin" increased recently for the first time since November last year. Throughout the course of 2018, “bitcoin” related searches declined dramatically. 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 has continued climbing since April with strong bullish momentum fueled by a market-wide USDT exodus. As price continues to increase into high timeframe resistance, roadmaps for key decision points on high timeframes can be found using exponential moving averages (EMAs), oscillators, volume, and Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the spot price relative to the 50-day and 200-day EMAs can be used as a litmus test for the trend. Price surpassed the 50-day EMA in mid-February and surpassed the 200-day EMA on April 2nd. The EMAs crossed bullishly in late April, representing an end to the almost year-long bear trend. The 200 EMA is currently at US$4,900, which should now act as support.

There is currently a bearish RSI and volume divergence, suggesting waning bullish momentum. Price is also approaching a zone of historic volume congestion at US$6,400 (horizontal bars). Long/short open interest on Bitfinex (top panel, chart below) is currently 62% short with almost all shorts currently underwater and paying high lending fees. A significant price movement upwards will result in an exaggerated move as the short positions will begin to unwind. This is known as a "short squeeze."

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, the Cloud is bearish, the TK cross is bearish, and the Lagging Span is below price and below the 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 begun to form. This pattern previously took 300 days to turn bullish after multiple support and resistance tests. If repeated, similar price action would break US$6,200 around September 2019. In the near term, the Kijun at US$6,570 will likely act as resistance. Over the course of the next two years, the Cloud projects a target of US$10,300 based on the long flat Kumo at that price level. However, if the current lows do not hold over the next year, falling towards the previous all-time high at US$1,000 always remains a possibility.

On the daily chart, Cloud metrics remain 100% bullish; price is above Cloud, the Cloud is bullish, the TK cross is bullish, and Lagging span is above both the Cloud and price. After a Kumo breakout, bearish or bullish, the probability of a new trend forming rises substantially. During this period, price returns to the Kijun many times to confirm support before trend continuation, this is known as a Kijun Bounce. Currently, the Kijun sits just below the US$4,850 level. A growing Tenkan-Kijun disequilibrium suggests overbought conditions.

Lastly, the opening and expiration dates of the Chicago Mercantile Exchange (CME) BTC cash-settled futures contracts, launched in December 2017, have had a significant impact on price. The CME facilitates trades for the largest portion of derivatives contracts in the world. A recent report released by the CME showed record high short interest.

In the beginning of April, the CME saw the highest volume ever in a single day for the BTC futures product. Additionally, volatility increased dramatically after the most recent quarterly contract rollover in late March. The next key zone for increased volatility will likely come near the expiration of the February 25th to May 31st contract.

Conclusion

Almost all network fundamentals have either continued to show signs of increasing growth, or have recently broken through multi-month range highs. Specifically, transactions per day and daily active addresses have shown substantial increases in recent weeks. Hashrate and difficulty has also shown large increases, likely directly related to a new round of ASICs being shipped to the public. Historically, monthly declines in hashrate and difficulty have also represented an end to the bear market. Average daily block size has also continued to grow due to VeriBlock, with minimal impact on the transaction fee market. Off-chain, the Lightning Network growth has slowed over the past few weeks after the highly publicized transaction relay and other adoption initiatives becoming both high-profile and widely successful.

Technicals on higher time frames continue to show a sustained bullish trend. Price is above both the daily 200 EMA and daily Cloud, a litmus test for a bullish trend. Confirmation of the bullish trend occurred with a bullish 50/200 EMA cross. Support, based on the 200-day EMA and daily Kijun, sits around US$4,900, suggesting bulls will be buying any dip below US$5,000. For near-term targets, a high volume congestion zone sits at US$6,400. There is also evidence for overbought conditions based on a growing Tenkan-Kijun disequilibrium and high timeframe bear divergence.