Bitcoin Price Analysis – SegWit picking up steam

Bitcoin (BTC) has risen 30% since April 12th, with most of those gains occurring in two days. The market cap now stands at US$151.23 billion, with US$2.44 billion traded in the past 24 hours.

The networks hash rate and difficulty continue to increase month over month. This trend should continue unabated, with several new mining hardware products being shipped this quarter. The current rate of block discovery reflects the continued addition of hash rate. Block times (not shown) have remained consistently below 10 minutes per block since January.

SegWit usage has continued to increase since the beginning of the year. SegWit transactions now account for 32% of all transactions sent, occupying 27% of total block space. Most of the major exchanges have adopted the change, including Bitfinex, BitMex, and GDAX, as well as most of the major software and hardware wallets.

SegWit has also enabled the Lightning Network (LN), which are nodes capable of trusted, bidirectional, off-chain, hub and spoke payment channels, paving the way for 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 and the transaction settles on the blockchain. The number of LN channels, as well as the value held within these channels, has continued to increase since the mainnet release on March 15th.

Compared to December and January (not shown), pending transaction fees have remained almost non-existent, likely due to increased SegWit usage and transaction batching, as well as decreased network usage generally. There are currently only ~2,350 unconfirmed transactions. Unconfirmed transactions peaked on December 22nd with 261,000 transactions in the mempool.

Exchange traded volume this week has been led by the Tether (USDT) and USD markets for the second consecutive week, mostly on Bitfinex, OKEX, and Binance. The KRW premium has reduced to 0.1% and CNY volume remains almost completely dormant.

Globally reported over the counter (OTC) volume from LocalBitcoins.com remains sharply down from December and January. The platform now requires KYC/AML, which may push users to avenues not requiring identification, such as decentralization OTC exchanges such as Bisq. Despite this, Canada, Peru, Tanzania, and Venezuela posted record highs in volume for their respective currencies over the past week.

Google Trends for the term “bitcoin” remain down sharply since the beginning of Q1 2018. A rise in searches for “bitcoin” preceded the bull run in Q4 2017, likely signaling a large swath of new market participants at that time.

Technical Analysis

Bitcoin potentially sits in the resumption of a bull trend with a complete reset of momentum. The status of this trend can be determined using Moving Averages, Pitchforks, Ichimoku Cloud, and Chart Patterns. Further background information on the technical analysis discussed below can be found here.

On the daily chart, price is again back above the 200 Exponential Moving Average (EMA), but the 50/200EMA holds a bearish cross. A bullish 50/200EMA would signify a complete bull trend retest. There is currently no bearish divergence. Open long/short interest on Bitfinex is essentially even after shorts recently reached a record high (top panel, chart below).

A long-standing Pitchfork on the daily chart, with anchor points in January, May, and July, shows price reaching a similar distance below the mean (red line) as was reached above the mean in 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 metrics on daily time frame are; price below Cloud, bearish Cloud, bearish TK cross, and bearish Lagging Span. Price has remained below the Kijun, which has recently been strong resistance (red arrows). A definitive Kijun bounce would indicate bearish continuation.

The Ichimoku Cloud 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.

A long entry based on traditional Cloud rules does not occur until the Cloud is breached by price, currently at US$12,900. However, a long reversal trade opportunity known as the Edge to Edge trade can be taken advantage of with current Cloud structure.

If 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, which is not currently the case. The stop loss for these trades are typically either the Kijun or Cloud support, depending on Cloud structure at the time of entry.

Also on the daily chart, there is a large active double bottom bullish reversal pattern known as the Adam (V) and Eve (U). The shape of the pattern typically has two distinct valleys that differ in shape and together hold a descending volume profile. The long entry occurs after pattern completion on the breach of horizontal resistance with high volume at US$11,480, which also represents yearly pivot resistance (not shown). The pattern yields a 1.618 fib and measured move between US$15,000 and US$17,000.

Conclusion

Fundamentals suggest that although mining profitability is near all time lows, miners continue to add ASICS to the network. In some cases, depending on electricity costs, miners will not have a return on their ASIC investment for many months, let alone turn a profit from mining. However, so long as miners are able to pay their costs, they can profit from any long term appreciation of Bitcoin price.

Network usage is heavily down from its peak in December and January, which for many is the sole metric used to determine market sentiment. The network was unable to handle the load of heavy users at the time, but now, with SegWit and Lightning Network available, as well as most high throughput chokepoints batching transactions, the network is more prepared to handle future demand.

Technicals, including EMAs, Pitchfork, Ichimoku Cloud, and a bullish Chart Pattern all indicate a potential bottoming after a 70% reduction from the all time high in December. Key resistance levels include US$9,050, US$11,600, and US$12,800.