Bitcoin Price Analysis – On-chain metrics pull back as Hash rate and difficulty push for record highs

Bitcoin (BTC) is a decentralized digital currency that was released by Satoshi Nakamoto in 2009. The BTC market cap currently stands at US$180.94 billion, with US$5.95 billion traded in the past 24 hours. Over the past week, spot prices across all markets and on-chain metrics have reduced significantly.

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 Q2 2019 gain, 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 at least -10%.

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; MicroBT Whatsminer M20S and MicroBT Whatsminer M21. Manufacturers have been know to run new miners on the network prior to shipping. Thus far, 13 new ASICs have been released since January.

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. Excluding the Bitmain Antminer S3, all ASICs are currently profitable at this electricity price point.

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 10 minutes and 40 seconds with an estimated 0.30% decrease in difficulty projected for the next adjustment in 13 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. The double-digit difficulty increase on July 9th was the second of such magnitude since January.

Source: bitinfocharts

BTC inflation currently stands at 3.68%, and is set to decrease in a stepwise fashion over time. The next block reward halving is estimated to be 300 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.

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. On July 12th, average transaction values nearly reached US$25,000.

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 alone currently accounts for 10% of all on-chain transactions.

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. The average transaction fee (line, chart below) is currently US$1.92, despite a growing block size and increased on-chain use since the record high of US$62 in late December 2017. Both the lack of zero fee transactions and increased scalability have kept fees substantially lower than late in 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.

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). 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.

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.

Monthly active addresses (MAA) have also increased substantially over the past six-months. MAA has grown to over 800,000 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.

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. Of the MVRV levels above four since January 2014, all three have coincided with record highs in price. Currently, MVRV is at the median of both extremes, which yields no bias in either direction.

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 account for 21.5% of the circulating supply, or 3.83 million BTC. The 6-12 month age band, or coins not moved since February 2019 – July 2018, holds the next highest distribution at 13.8% 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.

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.

Source: github

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% 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, the LEO Token (LEO) IEO, and the New York Attorney General’s report and active court case.

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.

Several potentially game-changing BTC services are slated for launch this year, indicating an increase in market access and custody for both retail traders and institutional entities. According to data gathered by Alistair Milne, Coinbase recently broke the 30 million user mark, indicating a significant uptick in retail accounts on that platform.

Fidelity, Bakkt, and TD Ameritrade all have plans to launch institutional trading products for BTC which solves the biggest problem for institutional players; custody. Bitmex, who is currently under investigation by the US Commodity Futures Trading Commission (CFTC), 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 US Securities and Exchange Commission (SEC) in February. All previous BTC ETF proposals have been rejected by the US regulator. So far this year, the SEC has delayed decisions on both ETF applications. The next two deadlines for the SEC decisions on the pending US ETFs are August 19th and October 18th. However, there are several BTC ETNs available, from various jurisdictions across the globe, which are seeing increasing volumes.

Global over the counter (OTC) volume, from LocalBitcoins.com, finished 2018 on a high but has declined as BTC spot prices have increased. Global notional volume has held near or above US$50 million since the beginning of the year, but rose to US$67 million in early July. 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. Notional volume in Venezuela reached a record high over the past week. Notional volume has also recently spiked in Egypt, Europe, Hong Kong, Hungary, India, Japan, Kazakhstan, Kenya, Malaysia, Mexico, Nigeria, Pakistan, Philippines, Saudi Arabia, Ukraine, and the United Arab Emirates.

Google Trends data for the term "bitcoin" has increased dramatically since May, marking a new yearly high. The increase in search traffic has likely been related to both the sharp increase in price as well as mentions by several prominent US government officials, including the President of the United States. 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

As price begins to consolidate for a potential move to the downside, a roadmap for trading decisions can be established using Exponential Moving Averages, Volume Profile of the Visible Range, Pivot Points, oscillators, Pitchforks, the 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 Exponential Moving Average (EMA) and 200-day 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$10,000 and 200-day EMA is currently at US$7,500, both should now act as support.

Volume Profile of the Visible Range (VPVR) also shows large volume nodes at US$6,500 and US$8,150, 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$8,150 and US$13,000, should act as support and resistance, respectively. If price breaches the nearest resistance Pivot Point, the next historic resistance zone is US$22,000.

The Bitfinex long/short ratio is currently net long, with shorts dropping dramatically over the past two weeks. There are also currently no active bearish divergences to suggest waning bearish momentum, and a bullish divergence is unlikely to form if price makes a lower low.

A high timeframe Pitch Fork (PF) with anchor points in January, July, and August 2015 shows price recently reaching the upper resistance limit towards US$14,000 and returning to the median line (yellow). Throughout any given trend price returns to the median line several times. The previous price break above the PF resistance led to a run toward the current record high at nearly US$20,000. Sustained price action above US$15,262 would suggest a severe hastening of the current trend, which would be typical of a parabolic advance. The lower bound of the PF stands at US$5,500 and represents the last support before significant bearish momentum.

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 similar correction from the current price level would essentially bring price to the Kijun at US$8,500.

On the daily chart, Cloud metrics remain bullish; price is above the Cloud, the Cloud is bullish, the TK cross is bullish, and Lagging span is above the Cloud and in 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 is US$10,600 with price below this level, suggesting a failed Kijun Bounce. In the next few days, if price is unable to break above US$11,000, a bearish TK cross will form, signaling an exit for many long trades. Further, an Edge to Edge short trade with a target of US$8,850 will then trigger if price enters the Cloud. If this does not occur, a long trade will not trigger until a bullish TK cross above Cloud.

On the four hour chart, Cloud metrics are bearish (not shown) with price below the 200-period EMA. The 50-period and 200-period EMA have also crossed bearishly (yellow arrows) for the first time since mid-February. Together, these trend metrics suggest the beginning of a low timeframe bearish trend.

Conversely, price has also potentially formed a bullish reversal pattern known as the Falling Wedge. Hallmarks for this pattern include lower highs and lower lows on less and less volume. Reversal targets are measured from the maximal width of the wedge, projected upward from the break up point. This target would bring price at least to approximately the US$13,350 zone.

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 near 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.

Conclusion

Network mining fundamentals have shown impressive growth in the past few weeks with both hash rate and difficulty pushing new all-time 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. Transactions per day and daily active addresses have decreased slightly from local highs over the past few weeks. Both NVT and MVRV, which are inversely related to on-chain activity, have held flat over the past week, confirming weakening on-chain use.

Technicals have begun to lean increasingly bearish. Trend metrics show the beginning of a larger reversal downward with key support levels, including the 50-day EMA and daily Kijun, failing to hold price. A confluence of support including, a yearly Pivot, a high volume node, the daily Cloud, weekly Kijun, and median line of a multi-year Pitchfork, stands within the US$8,000-US$9,000 range. Pending key events to impact price include; CME futures contract expiry, resolution of both the Bitfinex and Bitmex regulatory probes, the launch of three different institutional trading products, and pending BTC US ETFs.