Bitcoin Price Analysis – Price increasing at a breakneck speed

Bitcoin (BTC) is currently undergoing parabolic growth in the setting of unprecedented institutional and retail demand. The market cap is currently US$287.6 billion on US$22 billion worldwide volume over the past 24 hours. The market cap is approaching that of a major bank, such as JP Morgan and Bank of America.

The entire Bitcoin ecosystem, including the network and all exchanges, has been under heavy load over the past week, stress testing the network’s ability to scale.

The network’s mempool, or the number of unconfirmed transactions, has increased to levels not seen since mid-November and is currently over 200,000. The all time high for backlogged transactions was over 225,000 in May 2017.

As more and more transactions are piling up a higher fee must be used in order to send a transaction with higher priority. As the number of pending transactions subsides, miners work from the top down, accepting transactions that paid the highest fee first. Transactions are never lost but may take longer than expected when an appropriate fee is not paid. The current best fee, as estimated by btc.com, is a median of ~$10.

Unlike November, block times have remained unaffected and currently stand at ~9.5 minutes. The block size is now averaging just under 1.2MB. With more exchanges and wallets enabling SegWit addresses every week, block sizes will continue to increase and more transactions will be confirmed per day. SegWit transactions are now ~11% of the total.

The Bitcoin network achieved a new all time high of 443,000 transactions yesterday, in part due to SegWit integration.

Hashrate and difficulty, up 18% on the last adjustment alone, have continued to increase since the drop in hashrate on November 12th. Miners continue to pile onto the network, with some estimates that Bitcoin mining will use all electricity by 2020 if the trend continues at the current rate.

Exchanges have also been unable to keep up with user growth over the past week. Despite preparing for several years, most of the current high volume exchanges, including Bitfinex, Coinbase/GDAX, Kraken, Poloniex, Bittrex,  have been unable to scale with user growth.

Bitfinex reported ongoing DDoS attacks on top of a heavy user load. An estimate using publicly available data by a trader known as Lowstrife shows Bitfinex consistently raking in record revenue on current volume.

Coinbase continues to report difficulty onboarding customers and today had a period of post-only orders on GDAX, allowing the exchange infrastructure to catch up with orders. In a recent interview with Bloomberg, Coinbase CEO Brian Armstrong acknowledged the problem but reassured customers they were doing their best to meet demand.

Together, a transaction backlog and fragile exchange infrastructure creates a compounding demand shock effect during price discovery. This on/off phenomenon prevents an immediate blow off top in price, but rather extends the rally even further. As it stands, most early adopters have a holding/hoarding mentality and have no intention to sell, with a recent survey showing many not selling until $200,000. The deflationary or disinflationary monetary policy of Bitcoin has an effect as well, with the next block reward halving set for June 2020.

The Lightning Network (LN), a protocol for trusted bidirectional, off-chain hub and spoke payment channels, is now live on the mainnet. LN has been shown to enable microtransactions confirmed in milliseconds and may be the answer for companies like Steam, a popular game aggregator, who dropped Bitcoin as a payment option citing high fees and volatility.

Despite SegWit and LN being somewhat controversial, both protocol changes have been successfully implemented on several other cryptocurrencies without duress. The argument against LN and side chains involves the claim that Blockstream, a company involved in Bitcoin development, is directly limiting a block size increase in order to profit from selling side chains to businesses.

A recent study showed that this fear is likely unfounded due to Blockstream’s minimal influence over the Core protocol in its entirety. Bitcoin is free and open source software which will remain that way for the indefinite future. Any user or group of users is always welcome to fork the protocol if they believe that the current Bitcoin is not their ideal version.

Indeed, six more forks are scheduled for release in the near future. Whether or not they will be listed on exchanges or find support from wallets remains to be seen, but these dividends do give all users impetus to buy and hold Bitcoin throughout December. Not only does this encourage new buyers, but they also discourage further cryptocurrency purchases as those holdings would reduce the amount of a trader’s eligible BTC holdings.

In the meantime, the Chicago Board of Exchange is set to launch its futures product this Sunday, Dec 10th, with the Chicago Mercantile Exchange launching its own on the 18th. As the cryptocurrency influence in Chicago is quickly growing, Brave New Coin has partnered with BarCharts to provide market data and analysis.

A wide array of speculation in regards to how these futures products will affect Bitcoin price has been swirling throughout the mainstream financial press. Most on Wall Street believe that Bitcoin will be the next ‘big short.’ Users within the crypto space disagree. Read two of these opinions here and here.

Over the last 24 hours, volume has been led by US Dollar (USD) and Japanese Yen (JPY) trading pairs on Bitfinex and BitFlyer respectively. Prices have varied wildly from currency to currency today. GDAX traders were paying a premium in USD of almost $3,000.

As it stands, due to strict and limiting banking laws, most of the exchanges are now siloed from one another with almost no ability for anyone to easily arbitrage the spread. The friction within the Bitcoin network itself, due to the aforementioned transaction backlog, adds to arbitrage risk. By the time the coins have moved to another exchange the price may have varied wildly.

Technical Analysis

The outcome of bubbles or parabolic moves are notorious for being difficult or even impossible to predict. The bull run beginning around October 2013 led to an 800% increase before being extinguished by the closing of Mt. Gox. A similar move on this run would lead to a Bitcoin price of US$40,000.

A pitchfork can also help determine targets when entering price discovery. This indicator projects a diagonal trend using three anchor points. The median line (red) represents the mean of the trend while the top and bottom zones represent overbought or oversold territory, respectively.

The current maximum zone of resistance (red) yields a target of US$24,000-$30,000. After this target is reached, Bitcoin often pulls back the entire length of the Pitchfork very quickly (yellow), back to around US$14,000. This would represent a 50% pullback sometime in January.

On the hourly chart, Ichimoku Cloud is showing a Kijun support around $14,400 (yellow). This is a mean reversion point and long entry zone. The entry for this long trade occurred at US$11,150 based the on TK recross above Cloud. The fractal stop for this trade is currently US$14,740, just above the Kijun.

Lastly, the OKEX quarterly futures rollover date begins in nine days and continues throughout the remainder of the month. The rollover dates have been significant since 2015, with an alternating top/bottom price pattern between contract expirations. Based on this pattern, the top for the quarter will likely occur around December 17th.

Conclusion

Both the on-ramps/exchanges and the network itself has been unable to keep pace with demand. While this is a good problem to have, it makes price discovery difficult and elongated in duration. The fair value for Bitcoin can only occur when the available demand pool is able to meet the available supply pool, which is not currently the case.

Technicals suggest price increasing at a breakneck speed, potentially above US$25,000, with a maximum of US$30,000-$40,000 before a significant pullback. Based on previous market cycles an interim top is highly likely within the next 45 days.