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Bitcoin Price Analysis – Fundamentals remain strongly bullish

Bitcoin Price Analysis – Fundamentals remain strongly bullish

Technicals remain strongly bullish despite a large price deviation from both the 200-day EMA and daily Kijun on the Cloud.

Bitcoin (BTC) is a decentralized digital currency that was created by Satoshi Nakamoto and released in 2009. The BTC market cap currently stands at US$224 billion, with US$10.7 billion traded in the past 24 hours.

BTC money flows over the past day show substantial movements to and from; Tether (USDT) at US$4.13 billion, Ethereum (ETH) at US$1.26 billion, the U.S. Dollar (USD) at US$1.14 billion, and Litecoin (LTC) at US$874 million.

Bitcoin Price Anlysis 10 July 2019 (1)
Source: coinlib

The rolling 90-day Pearson correlation between BTC and the top 10 cryptocurrencies continues to support bull market conditions. Generally, BTC and the rest of the high market cap coins are highly correlated during a bear market and less correlated during a bull market. Since February 2019, the correlations between major coins and BTC have fallen significantly.

Since the beginning of the year, Monero (XMR) and Ethereum (ETH) have had the longest periods of high correlation, whereas Binance Coin (BNB) and Tron (TRX) have had the longest periods of low correlation. BNB is currently the least correlated to BTC by a significant margin (not shown).

Bitcoin Price Anlysis 10 July 2019 (2)
Source: coinmetrics

Throughout most of BTC’s existence, relative changes in price have been closely related to three-month cycles. These quarterly cycles often see a dramatic expansion or contraction in price, with very few quarters ending with less than a 10% price change. Historically, Q2 and Q4 of any given year have seen the most positive periods while Q1 and Q3 have seen the most negative periods.

In total, there have been 22 positive quarters and 12 negative quarters. BTC’s massive Q2 2019, at +160%, is the seventh-best quarterly gain. The highest positive period was Q2 2011 at +1941% and the highest negative period was Q3 of that year at -68%.

The average gain among all positive periods, excluding Q2 2011, is 128%. The average loss among all negative periods is 28%. The longest period of consecutive gains occurred between Q4 2016 and Q1 2018, totaling 484%. The longest period of consecutive losses occurred between Q3 2014 and Q2 2015, totaling 80%. Since 2013, all quarters with a greater than 100% gain have been followed by a negative quarter, suggesting Q3 may close around 10% down.

Bitcoin Price Anlysis 10 July 2019 (3)

Turning to mining fundamentals, the BTC network is secured by 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, and MicroBT Whatsminer M215.

Two SHA-256 ASIC miners are set to be released later this year, the; StrongU STU-U8, and MicroBT Whatsminer M21. Manufacturers have been known to run new miners on the network prior to shipping.

Network factors that influence mining profitability include; price, block times, difficulty, block reward, and transaction fees. Electricity costs are also a significant factor when determining profitability for various ASICs. During the flood season from April to October every year in the Chinese province of Sichuan, electricity drops to a cost of US$0.04 cents/KWh due to the abundance of hydroelectric power. At this electricity price, all ASICs are currently profitable except the Bitmain Antminer S3.

Bitcoin Price Anlysis 10 July 2019 (4)
Source: asicminervalue

Both the network hash rate and difficulty have continued to reach new record highs over the past few weeks, which may reflect relatively cheap electricity currently available in China as well as new ASICs being manufactured. As electricity costs decrease and BTC price increases, more and more older ASICs again become profitable to mine. The previous hash rate record occurred in November 2018, and preceded a 50% drop in price over the following month.

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 40% of all blocks mined. Overt ASICBoost, which has no detrimental effects on the network, makes mining more profitable by lowering energy use.

Average block times are currently eight minutes with an estimated 14% increase in difficulty projected for the next adjustment in 12 days. Network difficulty adjusts up to +/-25% after 2,016 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.

Bitcoin Price Anlysis 10 July 2019 (5)
Source: bitinfocharts

BTC inflation currently stands at 3.68%, and is set to decrease in a disinflationary stepwise fashion over time. The next block reward halving is currently 314 days from now, in May 2020, when annual inflation will decrease to 1.80%. As hash rate continues to get added to the network, the estimated time until the next halving will reduce.

Bitcoin Price Anlysis 10 July 2019 (6)
Source: bashco.github.io/Bitcoin_Monetary_Inflation

On the network side, both the on-chain transactions per day (line, chart below) and average transaction value in USD (fill, chart below) have risen significantly since April 2018 and February 2019, respectively. Over the past few weeks, transactions per day have declined slightly after reaching a high of over 450,000 in early May. The current record was set on December 14th, 2017 where nearly 500,000 transactions were sent across the network.

Bitcoin Price Anlysis 10 July 2019 (7)
Source: coinmetrics

Compared to the previous period of record breaking transactions per day and price, in late 2017, there are currently very few unconfirmed transactions. There are also very few transactions being sent with a zero fee (blue fill, chart below) compared to several periods in 2017.

Additionally, SegWit allows individual transactions to occupy less block space than a traditional transaction. Segwit, or BIP141, was activated on August 23rd, 2017 via a user activated soft fork. 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 of roughly 2.2MB. The number of transactions using SegWit and the volume of total SegWit transactions stands at 32% and 30%, respectively. If Binance or VeriBlock enabled SegWit transactions, these SegWit usage values would be substantially higher. VeriBlock currently accounts for 10% of all on-chain transactions.

Bitcoin Price Anlysis 10 July 2019 (8)
Source: jochen-hoenicke.de

The average BTC block size (fill, chart below) has increased substantially since April 2018 and established a new high on June 14th. Despite a growing block size and increased on-chain use the average transaction fee (line, chart below) is currently US$2.19, compared to a high of US$62 in late December 2017.

Both the lack of zero fee transactions and increased scalability have kept fees substantially lower than when there were similar block sizes in late 2017. Additionally, transaction batching and the increasing off-chain capabilities of Lightning Network have decreased on-chain transaction bloat. Transaction batching is most effective for entities with a high amount of on-chain transactions outputs, like miners or exchanges. Bitmex does not currently batch transactions but they are in the process of enabling the federated sidechain called Liquid, by Blockstream.

Bitcoin Price Anlysis 10 July 2019 (9)
Source: coinmetrics

The 30-day Kalichkin network value to on-chain transactions ratio (NVT) has continued to increase since January, and is currently at 61 (line, chart below). The three previous highs in NVT, February 2011, October 2014, and October 2018, were all followed by bearish price moves.

Based on this metric, the probability for a local top in price will increase if another local high on NVT is reached. While Kalichkin’s NVT does not account for inflation or the use of off-chain transactions, which would decrease the overall NVT ratio, the metric remains in the upper-third of the historic range.

Monthly active addresses (MAA) have increased substantially over the past six-months. MAA has grown to 853,000 from a yearly low of 580,000. Daily active addresses (DAA) surpassed one million on June 14th, 26th, and 28th. This was the first time DAA had exceeded one million since February 2018. On December 14th, 2017, DAA exceeded 1.28 million. A large uptick or sustained increase 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 over time.

Bitcoin Price Anlysis 10 July 2019 (10)
Source: coinmetrics

The market cap divided by the realized cap (MVRV) is another crypto-native fundamental metric used to asses overbought or oversold conditions. Realized cap approximates the value paid for all coins in existence by summing the market value of coins at the time they last moved on the blockchain. The metric was created through a combination of efforts by Murad Mahmudov, David Puell, Nic Carter, and Antoine Le Calvez.

Historically, periods of an MVRV less than one have represented oversold conditions, whereas periods of an MVRV greater than 3.5 have represented overbought conditions. All three MVRV levels above four, after January 2014, have represented all-time highs in price. Currently, MVRV is under the median of both extremes, suggesting the potential for additional upside.

Bitcoin Price Anlysis 10 July 2019 (11)
Source: coinmetrics

Analyzing the age of UTXOs, or unspent coins, can also provide some insights into price movements. Spikes in newly moved coins tend to correlate highly with local tops or bottoms in price, and can represent euphoria or capitulation. Coins which have not moved recently are represented in cooler colors wheres as coins on the move are represented by warmer colors.

Coins that have not moved in more than five years now account for 21.55% of the circulating supply, or 3.837 million BTC. The 6-12 month age band, or coins not moved since January 2019 – July 2018, holds the next highest distribution at 13.25% of the circulating supply. The lower age distributions, less than one-month old, have been rising recently, suggesting the potential for a local top at the current price level is growing, although this also may represent exchanges re-arranging cold storage wallets.

Bitcoin Price Anlysis 10 July 2019 (12)
Source: https://plot.ly/~unchained/37.embed

Turning to developer activity, over 170 developers have contributed over 1,700 commits in the past year, mostly on the bitcoin repo. The BTC project on GitHub has two active repos, “bitcoin” (top chart, shown below) and Bitcoin Improvement Protocols, “BIPs” (bottom chart, 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 developer activity and interest.

Bitcoin Core version 0.18.0 was released in mid-May, providing various bug fixes and performance improvements. 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.

Bitcoin Price Anlysis 10 July 2019 (13)
Source: github

Bitcoin Price Anlysis 10 July 2019 (14)
Source: github

BTC exchange traded volume over the past 24 hours has been dominated by Tether (USDT) trading, with the United States Dollar (USD) markets representing 11.55% of total volume. Stable coin volumes currently represent over 75% of all reported volume over the past 24 hours.

A price deviation between the USDT and USD exchanges (right panel, chart below), specifically between Bitfinex and Coinbase, has been extremely volatile over the past few months. This has likely been related to both a short halt in withdrawals, as well as the LEO Token (LEO) IEO.

The price deviation, which started to increase in mid-October, was due in large part to a decrease in the USDT market rate (left panel, chart below). The BTC price premium has since become negligible as USDT has held a market rate near US$1.00.

Bitcoin Price Anlysis 10 July 2019 (15)

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 less than 5.11% of total 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. Fidelity Digital Assets, the financial behemoth manages over US$2.45 trillion in assets, announced the launch of a custody service to a select group of eligible clients with cryptocurrency trading set to launch later this year. Bakkt, a subsidiary of the Intercontinental Exchange which raised US$182.5 million from 12 partners and investors in 2018, is also set to launch a physically delivered BTC futures product some time this year. TD Ameritrade-Backed ErisX recently received the necessary licenses from the U.S. Commodity Futures Trading Commission (CFTC) to launch crypto futures products. The exchange launched pairs for BTC, ETH, LTC, and BCH spot markets in May after raising nearly US$50 million. Bitmex has also announced plans to launch a BTC zero coupon bond where users can earn yield on their holdings by loaning BTC to other companies in the space.

Further, fresh applications for the Bitwise and VanEck-SolidX BTC ETFs were submitted to the U.S. Securities and Exchange Commission (SEC) in February. All previous BTC ETF proposals have been rejected by the U.S. regulator, while several other BTC ETNs are available worldwide, and are seeing increasing volumes. Last month, the SEC delayed decisions on both ETF applications. The deadline for the final SEC decision on the pending U.S. ETFs is set for early December 2019.

Bitcoin Price Anlysis 10 July 2019 (16)

Global over the counter (OTC) volume, from LocalBitcoins.com, finished 2018 on a high but has declined as BTC price has increased. Global notional volume has held near or above US$50 million since the beginning of the year, but rose to US$67 million over the past week. In late May, LocalBitcoins discontinued servicing Iran, likely as a result of US sanctions and on June 1st, the service disabled paying for BTC with in-person cash trades.

The biggest increases in BTC and notional volume over the past few months have come from South American countries where inflation or hyperinflation have devalued local currencies. Other increases in volume can also be attributed to geopolitical turmoil. Notional volume has also recently spiked in Egypt, Europe, Hong Kong, Hungary, India, Japan, Kazakhstan, Kenya, Malaysia, Mexico, Nigeria, Pakistan, Phillipines, Saudi Arabia, Ukraine, and the UAE.

Bitcoin Price Anlysis 10 July 2019 (17)

Google Trends data for the term "bitcoin" has increased dramatically over the past few weeks, marking a new yearly high. 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.

Bitcoin Price Anlysis 10 July 2019 (18)

Technical Analysis

As price continues to move higher, a roadmap for trading decisions can be established using Exponential Moving Averages, Volume Profile of the Visible Range, Pivot Points, oscillators, Ichimoku Cloud, and chart patterns. 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 Exponential Moving Average (EMA) 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 50-day EMA is currently at US$9,800 and 200-day EMA is currently at US$7,000, both should now act as support.

Volume Profile of the Visible Range (VPVR) also shows large volume nodes at US$6,500 and US$8,500, which should both also act as support (horizontal bars, chart below). VPVR shows very little resistance above the current price level. Additionally, yearly Pivot Points, at US$8,080 and US$13,000, should act as support and resistance, respectively. If price breaches the nearest resistance Pivot Point, the next resistance above sits at US$22,141.

The Bitfinex long/short ratio is currently net long, with shorts dropping dramatically over the past week. There are also currently no active bearish divergences to suggest waning bullish momentum, but a bearish divergence is likely to form if price makes a higher high.

Bitcoin Price Anlysis 10 July 2019 (19)

A high timeframe Pitchfork (PF) with anchor points in January, July, and August 2015 shows price reaching the upper resistance limit towards US$14,000. Throughout any given trend price also returns to the median line (yellow), currently at US$8,700. The previous price break above maximum PF resistance led to a run toward the current record high at nearly US$20,000. Sustained price action above US$14,000 would suggest a severe hastening of the current trend typical of a parabolic advance and lead to a retest of the record high by August this year.

Bitcoin Price Anlysis 10 July 2019 (20)

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 beginning to lean bullish for the first time since 2018; price is above the Cloud, the Cloud is bearish, the TK cross is bullish, and the Lagging Span is above price and above Cloud. The previous break above the weekly Cloud in 2016 led to a 39% correction followed by an over 3,000% increase over the next 500 days. A 30+% correction from the current price level would essentially bring price to the Kijun at US$8,500.

Bitcoin Price Anlysis 10 July 2019 (21)

On the daily chart, Cloud metrics remain 100% bullish; price is above the 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 above the US$10,000 level. If price breaks above the previous range high, a target of 16,500 is possible based on the 1.618 fib extension of the range high to range low.

Bitcoin Price Anlysis 10 July 2019 (22)

On the four hour chart, Cloud metrics also recently flipped bullish in the setting of a bullish consolidation pattern, the inverted head and shoulders. Hallmarks of this pattern include a descending volume profile with series of lows with an extreme low in between two higher lows. The pattern carries a 1.618 fib and measured move of US$13,500 and US$13,880, respectively. Additionally, several other metrics, including RSI, OBV, and MACD, continue to support evidence for a move higher with no signs of waning bullish momentum.

Bitcoin Price Anlysis 10 July 2019 (23)

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.

Last month, the CME saw the highest notional volume ever in a single day for the BTC futures product, exceeding US$1.5 billion. Historically, price volatility tends to increase dramatically nearest any active contract expiration. Volatility increased substantially near the close of the June 28th contract. The next key zone for increased volatility will likely come near the expiration of the April 29th to July 26th contract.

Bitcoin Price Anlysis 10 July 2019 (24)

Conclusion

Network mining fundamentals have shown impressive growth in the past few weeks with both hash rate and difficulty reaching new highs. As long as the markets remain bullish, and mining profitability remains positive, miners will likely continue to add hash rate, especially as older ASICs return to profitability. Additionally, the seasonality of cheap electricity in regions of China supplied by hydroelectric power have likely fueled a mining boom.

Although transactions per day and daily active addresses have decreased slightly from local highs a few days ago, sustained on-chain activity remains, along with minimal transaction fees. Both NVT and MVRV, which are inversely related to on-chain activity, have decreased over the past few days, suggesting the possibility of additional upside in the current trend.

Technicals remain strongly bullish despite a large price deviation from both the 200-day EMA and daily Kijun on the Cloud. A 1.618 fib extension of the current range points to the possibility of US$16,500 if price makes a new local high. Additional upside resistance sits at US$22,000, the yearly R2 pivot with little to no resistance on VPVR. If shorts continue to open as price moves higher, short capitulation may continue to provide additional bullish fuel. Based on the current parabolic nature of price action, a retest of the record high by August is possible, and if price is able to breach US$14,000.


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