Bitcoin Price Analysis – SegWit2x shelved, community relieved

Bitcoin now holds a market cap of US$120 billion despite a heavy initial rejection of US$8,000. Bitcoin has now released 79.46% of its total supply through block rewards and will continue to do so on a deflationary schedule. The next block reward halving is set for June 12th, 2020. Miners will then receive 6.25 BTC per block, roughly every ten minutes.

The highly contentious hard fork, SegWit2x, was recently called off due to lack of community consensus. The proposed change was considered by some to be an upgrade to Bitcoin, was the second part of the New York Agreement (NYA) scaling plan, and would have increased the base block size to 2MB.

Although the plan originally enjoyed about 95% of Bitcoin’s hashrate backing it, support had been waning with an increasing pace and many influential signers backed out of the NYA on Wednesday morning. Many of those withdrawing support – which included the lead developer Jeff Garzik – cited the lack of support in the community as the reason for suspending the upgrade.

2017 has been a busy year for Bitcoin

The companies pushing for SegWit2x included the Digital Currency Group, Coinbase, Blockchain, Bitpay, Shapeshift, Xapo, and BitGo. The individuals largely responsible for this include; Barry Silbert, Vinny Lingham, Mike Belshe, Wences Casares, Jeff Garzik, Peter Smith, Stephen Pair, Bobby Lee, and Erik Voorhees.

Aside from BitGo, who recently reported over 50% SegWit usage among their customers, other companies have yet to adopt SegWit addresses where possible. This is perhaps because Segwit and future scaling solutions like the Lightning Network seek to disrupt their business model entirely.

Jihan Wu and Roger Ver were also involved in the NYA, but exited the agreement early through their own fork, Bitcoin Cash, a direct response to the User Activated Soft Fork (UASF) which enabled SegWit.

Going forward, any fork attempt needs to build community consensus before forcing changes upon users, petitions against the fork around the world make that loud and clear. The UASF which lead to Segwit is an example of a successful community-driven change.

Despite wild swings in hashrate after the last difficulty adjustment, a -4% difficulty adjustment is scheduled for <12 hours. If miners choose to continue to game these difficulty adjustments, expect a large spike in hashrate immediately preceding the adjustment with a large reduction immediately after. This locks in an inflated difficulty with downstream effects including block times <10 minutes, increase in unconfirmed transactions, and increased network fees.

A secondary attack will include spamming transactions with 0 fees on the network to further fill the blocks and increase fees. This process will enhance the narrative that bigger blocks are needed to compensate.

While this manipulation can be seen as nefarious action, it is perfectly within the rules of the protocol to do so. Should these problems persist, changes will need to be made to prevent this from happening. Decentralization comes with positive and negative consequences. Attacks on the network will continue with opposing sides hoping for capitulation after death by a thousand cuts.

Over the last 24 hours, global trading volume has exceeded US$2.8billion, being led by the Japanese Yen (JPY) and the US Dollar (USD) on CoinCheck and Bitfinex respectively. USD Tether (USDT) volume has steadily crept up over the past few weeks, likely signaling traders moving in and out of the safe haven coin, pegged to $1, before and after the SegWit2x fork.

As of November 9th, Bitfinex will no longer be available to US Customers. Expect the volume share of GDAX to increase proportionally to the volume lost on Bitfinex. Coinbase, the USD on-ramp, continues to add several hundred thousands of users a week (data compiled by Alistair Milne).

Technical Analysis

Any news event, like the canceling of SegWit2x, will have an immediate and violent impact on price. This news saw previous sellers that were fearful of the protocol changes buying back in, as well as pre-fork buyers who thought they were getting a post-fork airdrop/dividend selling. Anything near US$7,000 has been bought ferociously.

The same type of price action occurred during the ETF denial announcement on March 10, 2017 by the US Securities and Exchange Commision. This usually disrupts any short term indicators substantially in the hours and sometimes days following. Similar events also occur in legacy markets during news events like non-farm payroll. Although this may be new to many crypto only traders, it is nothing too out of the ordinary.

The large bearish reversal patterns – Rising Wedge and Bearish Three Drives – continue to fill, with the march towards US$10,000. Both of these formations can easily be invalidated, but should not be ignored. Should either pattern resolve as expected, a pullback to 50% of the patterns range is expected.

There is also a large Spinning Top candle, on the three day chart, which is typically indicative of a reversal, even more so if it had closed red. When seen at the top or bottom of the range, it is usually suggestive of buyers or sellers coming to equilibrium. A similar candle preceded the downtrend in the beginning of September.

On the daily chart, Ichimoku Cloud continues to show bullish metrics all around. There is a large TK disequilibrium building, suggestive of a pullback to the Kijun, US$5,450. A pullback with similar rationale occurred in the middle of September. The longer price remains in this zone without a higher high, the larger the probability retracement will occur. The first sign of trouble for the bulls will be a candle close below the Tenkan (blue).

Overall, the trend is in full-steam ahead mode with signs of overbought conditions. A subtle but definite bearish divergence has formed with higher highs in price on lower momentum. The same divergence occurred in August to precede the September correction. A pullback and recharge here would be very suggestive of further all time highs via consolidation and markup.

One of the Pitchforks for this trend also suggests price is in the upper zone of the range. The Pitchfork uses three anchor points to predict a price channel with diagonal potential reversal zones. The median line is thought of the mean of the trend. Despite being the upper boundary of the channel, there is plenty of upside possible before a likely correction to the median line.

An alternative Pitchfork, capturing less data and using more price channels, shows price in the bottom quartile with upside well beyond US$10,000. Subjectivity certainly plays a role when deciding which is best, but either Pitchfork will be invalidated with a price close outside of the extreme-most diagonals.

Lastly, the best bet for re-entry should occur off of the Cloud signals on the hourly chart, most of which have temporarily flipped bearish. Signals to watch include price above Cloud, a bullish Cloud, a bullish TK cross, and Lagging Span above Cloud and price. These can all change quickly due to the low timeframe nature of the chart, and lower timeframe signals paired with a ranging price zone are a recipe for noisy and false signals with the Cloud system.

Conclusion

The controversial SegWit2x fork has come to a close, at least temporarily. Many in the community immediately took a deep sigh of relief on the news. Although new user signups don’t directly correlate with new money being injected into the space, it’s one of the best metrics we have at estimating on-ramping through organic growth. Daily news headlines about the Bitcoin price fuel this fear-of-missing-out cycle over and over.

Despite the seemingly bearish technical indicators, the bitcoin mega bull train shows virtually no signs of slowing. Price action will become very interesting from US$8,000-US$10,000 if there is no correction to >US$5,000 first.