Bitcoin Price Analysis – OTC volume spikes

Bitcoin (BTC) continues to trend downward on light trading volume. The market cap now stands at US$119.72 billion, with US$1.82 billion traded in the past 24 hours.

Transactions per day are down sharply from the record high, above 400k in December, and are currently near 170,000 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.

This change in network use is in response to the transaction and fee bottleneck experienced late last year. Going forward, it will be difficult to interpret whether or not the on-chain transaction volume is declining from lack of users or more efficient network use.

SegWit transactions also 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.

The SegWit soft fork also 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.

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.

Despite the decreased transaction volume, Bitcoin continues to hum along as a medium of exchange. The network has facilitated over US$6 trillion in transaction value since inception, and currently sees an average of US$10 billion sent per day with an average transaction value of US$46,000.

Hash rate and difficulty continue to push record highs thanks to fresh shipments of ASICs from multiple mining companies, including Bitmain and Halong. However, drastic increases in ASIC usage can have a detrimental effect in the long term as it increases the likelihood of smaller independent miners being squeezed out of the market. The highest percentage of mining will continue to concentrate in large mining farms, where economies of scale and cheap electricity are available.

Exchange traded volume this week has been led by the Tether (USDT) and USD markets, mostly on Binance, OKEX, Bitfinex, and GDAX. A small 0.4% Korean premium remains in the Korean Won (KRW) market. KRW volume has declined following the CoinCheck hack in January and increased regulatory scrutiny.

Globally reported over the counter (OTC) volume from LocalBitcoins.com remains sharply down from December and January. Despite this, Canada and Europe, posted record highs in volume for their respective currencies over the past week.

Others have reported unusually high volumes of private OTC trading both on the bid and ask side. These sales typically have a large minimum ticket size and occur on closed platforms. The New York Times recently reported on the booming OTC crypto market worldwide. Large institutional investors including Rothschild, Rockefeller, and Soros are rumored to have entered or to be entering the crypto market. Institutions will likely use private OTC purchases to minimize market volatility.

Technical Analysis

The trend is showing bearish characteristics with some potential bullish retracement targets and trigger points. Indicators such as the Candlestick and Chart Patterns, Ichimoku Cloud, Moving Averages, and Pitchfork help determine entry and exit points, as well as the state of the current trend. Further background information on the technical analysis discussed below can be found here.

A simple diagonal support trendline has held for at least four of the previous extreme lows. A resistance curve and diagonal gives a window within the next month for bitcoin to make a decision as far as bearish continuation or bullish reversal. Whether this price structure represents a symmetrical triangle or downward channel is difficult to determine.

A long-standing Pitchfork on the daily chart, with anchor points in February, May, and July, shows price far below the 1.618 level. The 1.618 level is borrowed from Fibonacci extensions and was also roughly seen as resistance at US$15,700 and US$17,000. An extension of 2.5 can be added to encapsulate the entire rise through 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.

The Ichimoku Cloud on the weekly chart uses 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 current metrics on this time frame are; Price above Cloud, bullish Cloud, bullish TK cross, and bullish Lagging Span.

Price has remained below the Kijun, which has historically provided long-term support. A definitive Kijun bounce would have indicated bullish continuation, whereas a breach leaves the status of the trend indeterminant. At the moment, Price remains in no man’s land according to key Cloud levels. The Kijun and Flat Kumo at the US$10,000 level will act as both a strong magnet and resistance.

The Relative Strength Index (RSI) has also held below 50 for several weeks, for the first time since 2015. Bullish continuation would have been a higher probability if the RSI held near 50. A definite break and hold below the 50 level suggests an inevitable reach below the 30 level, and provides evidence for a sustained bear trend. Price would likely react by reaching for Cloud support and yearly pivot support (not shown), US$2500 -$3000.

On the daily chart, the Ichimoku Cloud metrics are bearish; price below Cloud, bearish Cloud, bearish TK cross, and Lagging Span below Cloud and price. The optimal short entry would follow a retest of the Kijun, currently US$9,100. Price currently shows a bullish divergence (white lines) indicating waning bearish momentum.

A long entry based on traditional Cloud rules does not occur until the Cloud is breached by Price, currently at US$12,900. However, there are several other long reversal trade opportunities which can be taken advantage of with current Cloud structure.

The first long reversal trade opportunity is a mean reversion to the Kijun. This long entry is warranted when a C-Clamp forms between the Tenkan and Kijun lines indicating Price being oversold (in this case) without making lower lows. A stop loss for this long trade would trigger if Price does make a lower low. The longer the C-Clamp holds, the higher the probability of a successful reversal. The previous C-Clamp in February brought Price back to the Kijun and no further.

A second long reversal trade opportunity occurs when Price breaches Cloud resistance, the target being the opposite edge of the Cloud, or US$12,900. This is known as an Edge-to-Edge trade. A long entry for this trade would trigger 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. The stop loss for these trades are typically either the Kijun or Cloud support, depending on Cloud structure at the time of entry.

To round out the potential for a bullish reversal, the Cloud has remained flat since early March. A long flat Kumo is indicative of a market creating an extreme low without making lower lows. Flat Kumo levels represent 50% of these ranges and typically act as magnets for Price. The flat Kumo remains intact until a new low is created or Cloud resistance ‘burns off’ over time, creating an opportunity for a bullish Kumo twist.

On the four hour chart, Cloud metrics are also entirely bearish, which has essentially been the case since early March. Signs of a bullish reversal will be seen here with a Kumo breakout to US$8,000 which may or may not occur in the setting of a bullish Cloud and/or bullish TK cross.

The 50/200 daily EMA has crossed for the first time since late 2015. This bearish cross is known as a death cross and typically precedes further bearish Price action. The previous death cross in 2014 did not recross for 430 days, due to a bear trend and eventual accumulation period bringing Price below US$200 twice. A bullish recross of the 50/200 daily EMA would be a strong long re-entry signal but may not occur for some time.

Lastly, the 50/200 EMA on the four-hour chart is also bearish. Any early signs of bullish momentum will occur with a bullish 50/200 EMA cross, similar to the four hour Cloud.

Conclusion

Fundamentals show continued development of the Bitcoin network with further scalability improvements thanks to a successful launch of the Lightning Network. New institutional investors with deep pockets, known and unknown, are rumored to have recently entered the Bitcoin arena. Currently, OTC volume is so large that this liquidity has potentially not had a direct impact on exchange volume or market Prices.

Technicals are almost entirely bearish across the board. Although a roadmap for bullish targets does exist on the daily Cloud, a grinding bearish continuation remains the most likely outcome currently. Longstanding but rather arbitrary diagonal support has held this level previously. A break of this level would suggest a swift drop lower with heavy momentum.