Bitcoin Price Analysis – Return to the Mean

Bitcoin (BTC) has recovered 88% from the ~US$6000 low posted on February 6th. The market cap now stands at US$186.7 billion, with US$4.3 billion traded on exchange over the past 24 hours.

Regulation continues to underpin industry discussions. A South Korean official who guided Seoul’s regulatory clampdown on cryptocurrencies was found dead on Sunday, according to a government spokesman.

Jung Ki-joon, 52, was head of economic policy at the Office for Government Policy Coordination. He helped efforts to create new legislation aimed at suppressing cryptocurrency speculation and illicit activity.

A rumored ban on South Korea trading caused a sharp drop in price early this year when Justice Minister Park Sang-ki shared that the government was preparing a law to close all the nation’s exchanges. Finance minister Kim Dong-yeon later called for more consolation from the government in a response, “The issue of banning exchanges that the justice minister talked about yesterday is a proposal by the Justice Ministry and it needs more coordination among ministries.” South Korea’s Presidential office has clarified that an outright ban is only one of the steps being considered and not a measure that has been finalized.

In the U.S., a second hearing regarding cryptocurrency regulation with CFTC chair J. Christopher Giancarlo occurred in Washington, D.C. on February 15th. Giancarlo is focusing on six elements: (1) staff competency; (2) consumer education; (3) interagency cooperation; (4) exercise of authority; (5) strong enforcement; and, (6) heightened review of virtual currency product self-certifications.

“A key issue before market regulators is whether our historic approach to the regulation of currency transactions is appropriate for the cryptocurrency markets,” Giancarlo said. ”Check-cashing and money-transmission services that operate in the U.S. are primarily state-regulated. Many of the internet-based cryptocurrency trading platforms have registered as payment services and are not subject to direct oversight by the SEC or the CFTC. We would support policy efforts to revisit these frameworks and ensure they are effective and efficient for the digital era.”

With increasing government scrutiny, concerns regarding privacy on the BTC blockchain continue to gain momentum. Although pseudonymous, the blockchain acts as a permanent immutable record, with an open ledger that anyone can review.  Other assets offer privacy-focused transactions, and several BTC-related projects have been released with similar solutions.

In 2013, bitcoin developer Greg Maxwell proposed CoinJoin which essentially acts as a mixer by consuming one or more inputs and creating one or more outputs with specified values. Maxwell also later discussed confidential transactions, where the transfer amounts are only visible to participants in the transaction.

A decentralized mixer, CoinShuffle, was introduced in 2015. CoinShuffle sends rounds of transactions, requiring a transaction fee to be paid for each round. In 2017, Adam Fiscor introduced ZeroLink, which breaks all links between separate sets of coins with rounds of mixing. Fiscor also developed TumbleBit and HiddenWallet.

Bulletproofs and Mimblewimble have since emerged as privacy solutions, offering complete fungibility between transactions. Further research and development include Schnorr signatures and signature aggregation, alongside Merkelized Abstract Syntax Trees (MAST).

On the network side, BTC hash rate and difficulty continue to increase month over month. This trend should continue unabated, with several new mining hardware products being shipped by Q2 this year. The current rate of block discovery reflects the continued addition of hash rate. Miners currently find a block every ~9 minutes, on average.

Segregated Witness (SegWit) transaction adoption continues to slowly increase over time after the initial transfer of funds from early adopters. SegWit provides a scaling solution that decreases the size of a transaction, which allows for more transactions to be squeezed into each block.

By increasing the number of transactions that Bitcoin can process there are fewer unconfirmed transactions, and a decrease in fee pressure. SegWit transactions currently account for ~14% of Bitcoin transactions. Coinbase announced plans to implement SegWit addresses over the next few weeks which will increase SegWit usage on the network significantly.

Unconfirmed transactions are down significantly. Transactions per day are currently less than half their peak, 490,000 on December 14th. Inputs per transaction continue to rise thanks to batching, where one transaction is sent to many people at once instead of each transaction being sent individually. Essentially, the network is now functioning smarter, not harder.

The BTC network value to transactions ratio (NVT) is currently among the lowest 25% of all cryptoassets. Of the top assets ranked by market cap, only Ethereum and Litecoin currently carry lower NVTs. Because NVT only accounts for on-chain transactions, a metric analyzing the number of active wallets, as proposed by Dmitry Kalichkin of Cryptolab Capital, may better illuminate the network use. Second layer off-chain transactions like the Lightning Network will continue to compound this issue.

The Lightning Network (LN) is a protocol that implements trusted, bidirectional, off-chain, hub and spoke payment channels. LN is designed to enable microtransactions that are confirmed in milliseconds. There are 1976 nodes with 5644 channels currently operating on the testnet. The second-layer protocol remains in very early stages on the mainnet, although it is growing in popularity, and should be used with caution.

Exchange traded volume has been led by Tether (USDT) and the U.S. Dollar (USD) markets. The majority of this trading occurs on Bitfinex, OKEX, and Binance. The South Korean premium has returned in Korean Won (KRW) markets. BTC is currently 6% more expensive when traded for KRW, in comparison to the Bitcoin Liquid Index (BLX) spot price.

Technical Analysis

The ongoing trend in Bitcoin has been bullish since the asset completed a consolidation phase in 2015. The following analysis of this trend uses Ichimoku Cloud, Relative Strength Index, Moving Averages, and Pitchforks. Chart patterns and Candlesticks are used to help determine inter-trend reversals. Further background information on the technical analysis discussed above can be found here.

The Ichimoku Cloud uses a series of moving average-like values to determine various metrics. Cloud metrics on the weekly chart (below) are all currently bullish.

Over the prior two weeks, price closed below the Kijun (red line below) for the first time since 2015, which indicated a potential death knell of the longstanding trend. The Kijun represents the mean of any given trend. The slope of the Kijun denotes the speed of the trend. Long entries at or near the Kijun have been profitable every time they have occurred in the current trend.

A bullish reversal candle then followed, the dragonfly (green arrow below). This combination indicates that the overarching trend is holding, and larger upswings are probable.

Included in the weekly chart is the Relative Strength Index (RSI). The RSI (yellow line below) is used to determine the status of a trend. RSI denotes whether an asset is overbought, >70, or oversold, <30, on a scale of 0-100. The RSI has consistently held above the median, 50, since 2015, even during the most current retest. The current RSI indicates a complete reset of momentum, with a great deal of upside potential.

Moving on to lower time frames, which are used to define entry and exit points in the overarching trend, the Cloud metrics on the daily chart are all bearish. This presents an ideal opportunity for traders looking for a long entry.

Price is currently below the Cloud. The Tenkan (blue below) and Kijun (Red below) are currently crossed bearishly. The Cloud is also currently bearish (red zone below). Traders will typically buy when all three metrics have flipped; price above Cloud, a bullish Tenkan and Kijun cross, and a bullish Cloud.

Furthermore, price is currently sitting at Kijun resistance and is likely headed for the Kumo Twist on March 6th, where the Cloud will flipped from green to red. Based on probability, this represents a period in time when there is no overhead resistance.

The RSI tells a different story on the daily than the weekly. Because of the strength of the overarching trend, any point in time where the RSI has been below 50 has been a solid buying opportunity. Bitcoin has never made a lower low when the RSI has dropped below 30 on the daily timeframe. This is also the first time price has closed below the 200EMA since the beginning of the trend.

Some of the Cloud metrics on the six-hour chart have already flipped bullish. The six-hour timeframe is a favorite amongst institutional investors. The TK cross typically flips before the Kumo breakout, followed by the Kumo twist. Overall, this represents the first cleanly bullish entry since breaking below the Cloud in December.

This reversal concurs with a head and shoulders chart pattern, which recently completed. The pattern provides a measured move of ~US$12,000. Prior to the head and shoulders, a triangle pattern completed providing a horizontal support and resistance at the current price.

A Pitchfork on the daily chart (with anchor points in February, May, and July) shows price reaching the 1.618 level on the recent drop. The 1.618 level is borrowed from Fibonacci extensions. Price has since returned to the mean of the trend, as is expected when buying extreme lows or selling extreme highs.

Lastly, Fibonacci Retracements drawn from the all time high in December to the recent low yields a 1.618 extension of ~US$29,000. Bitcoin has routinely met or exceeded this extension upon breaking the previous high.

Conclusion

Improving network metrics suggest scalability continues to drive protocol development. Batching transactions, SegWit adoption, and Lightning Network development all continue to evolve. The fees seen in late December seem unlikely to recur anytime soon. Private and confidential transactions are also quickly emerging as a priority.

Technical analysis shows that BTC may have survived it’s most violent reversion to the mean since 2015, which would be confirmed by a new all time high. Low timeframe indicators have been suggesting strong buying opportunities.