Bitcoin Price Analysis – Still Bleeding

Bitcoin (BTC) has slid 40% since May, and 70% from the record high in December 2017. The market cap stands at US$105.65 billion, with US$2.97 billion traded in the past 24 hours.

A new announcement from Mt. Gox trustee emerged this week with a proposed rehabilitation program and repayment plan for users of the now defunct exchange. Under court order, bankruptcy proceedings which resulted in the selling of crypto holdings between December 2017 and February 2018 have ceased. Creditors will need to re-file their claims, and a repayment plan will be developed to return the lost funds to users in crypto. A deadline for the proposal is set for February 14, 2019.

In effect, because the coins will be returned, creditors may realize a capital gain on their value. The Mt. Gox wallets still hold over 137,000BTC and 137,000 Bitcoin Cash, or an additional 16,753BTC at current prices. Returning these funds to users will likely result in a demand shock, similar to previous government auctions, and cause bearish price action. The Bitcoin block reward halving will also result in a supply shock and is slated for May 2020.

On the network side, transactions per day have averaged 180,000 since March. This metric has declined significantly for all cryptocurrencies. The Visa payment network processes an average of 150 million transactions per day, or around 1,667 transactions per second on average. However, the Visa network experienced a continent-wide outage for over two days in May, due to hardware failure, while Bitcoin has had 99.99% uptime since inception in January 2009.

Transaction fees, which increased dramatically throughout 2017, have also dropped since late December and remain relatively low. This fee reduction is multifactorial. Although a decrease in transactions per day means fewer transactions need to be cleared, SegWit, which currently accounts for ~37% of transactions, has also been a significant contributing factor in the average fee decline.

SegWit transactions occupy less block space than equivalent non-SegWit transactions, allowing SegWit transactions to pay less total fees to achieve the same feerate as non-SegWit transactions. Daily SegWit usage has steadily increased since January. A spike in SegWit usage in November was likely due to the proposed SegWit2x hard fork which failed to activate.

On-chain transactions per day have not only declined due to a lack of network use but also transaction batching, where one transaction is sent to many addresses at once instead of each transaction being sent individually. The ratio of outputs per transactions has risen significantly since this time last year, suggesting the practice has become a mainstay. In August 2017, a random block sampling showed that batching would have saved 9% of the block space, totaling about US$140,000 in transaction fee savings per day.

The impact of on-chain data batching can also be quantified by visualizing the number of transactions with OP_RETURN outputs over time. Since October 2012 (block 201403), the use of op-return outputs per transaction has increased dramatically. In May 2017, a BitFury address was shown to save ~87% in block space, or 10BTC in fees, if transactions had been created with multiple OP_RETURN outputs.

OP_RETURN is code used to embed metadata in a transaction. Normally, only one OP_RETURN output is allowed per transaction. If someone wants to insert N pieces of data in the blockchain, they have to make N transactions, resulting in a separate fee for each transaction.

Transactions with multiple OP_RETURN outputs allow for a reduction of fees by reducing the number of required transactions. The bitcoin protocol makes these transactions possible, but they are not relayed by peers on the network, so they need to be sent to miners directly. Since the transactions are still valid, miners can mine transactions with any number of OP_RETURN outputs, so long as the block does not exceed the block size limit.

Using a 30-day Kalichkin network value to transactions (NVT) ratio, BTC remains in the upper-third of its historical NVT value. NVT has not been this high since January 2015 but has begun to turn downward recently, which suggests increasing on-chain network usage based on the dollar amount being transacted. Additionally, inflection points in NVT ratio can be correlated to extreme highs or lows in price.

Although NVT is difficult to compare between coins that use different transactions types, the ratio can be used to assess a network’s relative utility over time. XRP, LTC, and DOGE are currently the only coins with an NVT lower than BTC.

Hash rate and difficulty continue to post record highs as more and more ASICs are added to the network. Mining profitability has hit an all-time low, meaning that miners who account for a significant percentage of the hash rate are mining at a loss. The average cost in the U.S and Venezuela to mine 1BTC as of March 2018 was US$4,758 and US$531 respectively. More recently, the cost to mine 1BTC with an electricity cost of 5 cents per kilowatt-hour (c/kWh) was calculated as ~US$2370.

As difficulty rises, mining profitability will continue to decrease, given that transactions per day remain relatively low. While many factors influence mining profitability, such as price, block times, difficulty, block reward, and transaction fees, decreasing profitability has a risk of further centralizing miners, both by mining pool and geographically.

Bitcoin days destroyed (BDD), a measure of long term holding and coin dormancy, can be used to analyze early adopters cashing out or moving coins between wallets. For example, if someone has 10BTC that they received a 10 days ago and then they spend it, 100 bitcoin days have been destroyed.

The highest months in BDD since Bitcoin’s inception have strongly correlated with highs or lows in Bitcoin price. A spike in BDD in July 2017 was likely related to the Bitcoin Cash hard fork in August. On June 20th, a spike in BDD preceded a drop in Bitcoin price two days later, but this should not be seen as a 1:1 correlation. A rise in BDD can also represent custodial providers moving coins between wallets, which is typical of major exchanges.

Bitcoin exchange traded volume over the past 24 hours has been led by the Tether (USDT) and the United States Dollar (USD) markets for the seventh consecutive week, mostly on Binance, OKEX, and Bitfinex. In Asia, Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) volumes are down as a percentage of trading since last week.

Asia had two significant exchange events over the past week. South Korea’s biggest exchange, Bithumb, reported a hack resulting in a loss of more than US$30 million. The losses will be fully reimbursed by the exchange. In Japan, the Financial Services Agency ordered QUOINE, BTC Box, Bit Bank, Tech Bureau, Bit Point and bitFlyer to improve business practices, especially in regards to Anti Money Laundering (AML) regulation, after a series of inspections over the past few months. bitFlyer, Japan’s largest exchange, has temporarily stopped onboarding new users while they address the issue.

On the retail trading side, Square, Inc has acquired the New York Bitlicense, meaning their Cash App is now able to provide customers in the state with the option to buy and sell Bitcoin. Robinhood and Circle also offer similar services for U.S. residents.

Globally reported over the counter (OTC) volume from LocalBitcoins.com remains sharply down from December and January and continues to decrease. Venezuela continues to post record highs in Bolivar volume, fueled by hyperinflation. The platform recently implemented mandatory Know Your Customer and Anti Money Laundering (KYC/AML) requirements, which may provide increased legitimacy going forward. This will also push so-called dark money transactions onto other avenues.

Technical Analysis

Bitcoin continues to make fresh lows despite a continued relative decline in trading volume. The strength or weakness of this trend can be analyzed with candlestick patterns, the Wyckoff Method, Pitchforks, and Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

The most recent weekly candle closed with a small body and similarly sized wick on each end. Candles of this type are known as spinning tops, and often represent reversals because buyers and sellers have come to an equilibrium.  Since 2017, BTC has had several of these candles which resulted in reversal. A current green close on the weekly would confirm an interim reversal based on this candlestick type.

The daily price structure correlates to a typical Wyckoff Accumulation phase which can be used as a rough interpretation of a trading range. The price of BTC is potentially forming a “Spring” with this new local low, but may also represent another support test. The Wyckoff Method can be used to help determine where price sits within a cyclical pattern. An accumulation phase occurs before a new markup phase. BTC experienced one of these classic accumulation periods throughout 2015. A successful accumulation period would be highly indicative of a prolonged bull trend.

Price remains tightly bound in a bearish Pitchfork with anchor points in December, April, and May. A downside target of US~$4,800 median line (red line) is likely, so long as price remains bound to the Pitchfork. The trend is likely to continue until a candle closes above the highest resistance line, representing bullish invalidation.

Turning to the Ichimoku Cloud on the weekly chart, there are 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 Cloud metrics on the daily time frame are all bearish; price below Cloud, bearish Cloud, bearish TK cross, and Lagging Span below price and Cloud. A long entry based on traditional Cloud rules does not trigger until price breach’s the Cloud.  A bearish Kijun bounce should be expected and any bullish reversals will be met with resistance at the Kijun, currently ~US$7,850.

The spread of the TK lines are forming a C-Clamp, which has indicated reversals in price trajectory twice this year. There is also an active bullish RSI divergence, meaning, price has moved lower on less momentum, suggesting a potential reversal. Furthermore, the daily candle closed as a dragonfly, further hinting at potential reversal.

Since 2015, each quarter had represented an alternating pattern of bullish price action. This week marks the end of the second quarter of the year, which had experienced bullish price inflection initially. OKEX futures quarterly rollovers have been loosely associated with elevated periods of volatility.

The CME futures have now also joined the fray with 1 contract representing 5BTC and, despite being cash-settled, will also likely influence price. The May open interest for CME futures stood at 2,827 contracts with an average daily volume of 3,931 contracts. The December to June contract will settle on July 5th.

Conclusion

Fundamentals continue to show a maturing network with increasing use of batching and SegWit adoption, which add downward pressure on transaction fees. These changes will be essential for scaling when on-chain transactions begin to increase. NVT has begun to decrease, suggesting an increase in network utility.

Technicals continue to show a definitive bear trend with the probability of an eventual price touch below US$5,000. Intraday metrics suggest price is oversold and will likely bounce before going lower. The trading range since February is indicative of a potential price reversal on a broader scale.

Fundamentals continue to show a maturing network with increasing use of batching and SegWit adoption, which add downward pressure on transaction fees. These changes will be essential for scaling when on-chain transactions begin to increase.