Bitcoin Price Analysis – Strengthening on-chain use

Bitcoin (BTC) is a decentralized digital currency that was released by Satoshi Nakamoto in 2009. The BTC market cap currently stands at US$192 billion, with US$6.24 billion traded in the past 24 hours. The current spot price is down 46% from the all-time high established in December 2017.

On-chain metrics have increased slightly this week, with the amount of BTC moved on the blockchain and the velocity of money for the week both up nearly 13%.

The BTC network is secured by the SHA-256 consensus algorithm. Both the network hash rate and network difficulty have continued to post new record highs week over week since late-June. This consistent increase is likely due to both ASICs being manufactured as well as relatively cheap electricity currently available in China.

Source: BitInfoCharts

Three SHA-256 ASIC miners were released in August; the MicroBT Whatsminer M20S, the MicroBT Whatsminer M21, and the Bitmain Antminer S9k (13.5Th). Fifteen new ASICs have been released since January this year (shown below). The most profitable miners are currently; the MicroBT Whatsminer M20S, the ASICminer 8 Nano Pro, and the Bitmain Antminer S17 Pro (53Th).

Source: asicminervalue

During the flood season from April to October every year in the Chinese province of Sichuan, electricity can drop as low as US$0.04 cents/KWh due to the abundance of hydroelectric power. Excluding the Bitmain Antminer S3 and S5, all ASICs are currently profitable at this electricity price point.

Overt ASICBoost usage, which has no detrimental effects on the network and also makes mining more profitable by lowering energy use, currently accounts for 46% of all blocks mined. Other network factors that influence mining profitability include; price, block times, difficulty, block reward, and transaction fees.

Average block times are currently under nine minutes and thirty seconds, with an estimated 5% increase in difficulty projected for the next adjustment in 10 days. Network difficulty adjusts up to +/-25% every 2,016 blocks. As hash rate decreases before a difficulty adjustment, block times increase. As hash rate increases before a difficulty adjustment, block times decrease. The double-digit difficulty increase on August 4th was the third of such magnitude since January.

At block 593,100, BTC inflation currently stands at 3.66%, and is set to decrease in a stepwise fashion over time. The next block reward halving is estimated to be 256 days from now, in May 2020, when annual inflation will decrease to 1.80%. As hash rate continues to get added to the network, the estimated time until the next halving will reduce.

Source: bashco.github.io/Bitcoin_Monetary_Inflation

On the network side, both the on-chain transactions per day (line, chart below) and average transaction value in USD (fill, chart below) have risen significantly since April 2018 and February 2019, respectively. The current record for transactions for a single day was set in December 2017, at 500,000. The current record for average transaction values in USD was set on July 24th, at US$51,000. Over the past few weeks, both metrics have declined slightly, with transactions per day currently at nearly 331,000 and average transaction values at nearly US$7,500.

Source: CoinMetrics

Compared to the previous period of record breaking transactions per day and price, in late 2017, there are currently very few unconfirmed transactions. There are also very few transactions being sent with a zero fee (blue fill, chart below).

Additionally, SegWit allows individual transactions to occupy less block space than a traditional transaction. Segwit, or BIP141, was activated on August 23rd, 2017 via a user activated soft fork._ _Although both non-SegWit and SegWit transactions can be sent over the network, SegWit users pay less in accumulated fees to achieve the same number of transactions. SegWit also allows for an effective blocksize limit of roughly 2.2MB.

The number of transactions using SegWit and the volume of total SegWit transactions stands at 32% and 30%, respectively. If Binance or VeriBlock (VBK) enabled SegWit transactions, these SegWit usage values would be substantially higher. VeriBlock alone currently accounts for 12% of all on-chain transactions.

Source: jochen-hoenicke.de

The average BTC block size (fill, chart below) increased substantially from April 2018 to June 29th, due to both an increase in on-chain activity as well as VBK, which secures other blockchains through the “Proof of Proof” (PoP) consensus mechanism. Since June 29th, average block size has dropped from nearly 2 MB to 1.52 MB.

The average transaction fee (line, chart below) is currently US$0.88, despite a growing block size and increased on-chain use since the record high of US$62 in late December 2017. Both the lack of zero fee transactions and increased scalability have kept fees substantially lower than late in 2017.

Additionally, transaction batching and the increasing off-chain capabilities of Lightning Network have decreased on-chain transaction bloat. Transaction batching is most effective for entities with a high amount of on-chain transactions outputs, like miners or exchanges.

Source: CoinMetrics

The 30-day Kalichkin network value to on-chain transactions ratio (NVT) increased significantly from January to mid-July, but has now decreased to 71 (line, chart below). While Kalichkin’s NVT does not account for inflation or the use of off-chain transactions, which would decrease the overall NVT ratio, the metric remains in the upper-third of the historic range.

The three previous highs in NVT, February 2011, October 2014, and October 2018, were all followed by bearish price moves. Based on this metric, the probability for a local top in price will increase if another local NVT high is reached.

Monthly active addresses (MAAs) also increased substantially, from January to mid-July (fill, chart below). MAAs have grown to more than 705,000, from a yearly low of 550,000. Daily active addresses (DAAs) surpassed one million on June 14th, 26th, and 28th. This was the first time DAAs have exceeded one million since February 2018. On December 14th, 2017, DAAs exceeded 1.28 million.

A large uptick or sustained increase in DAAs should be seen as a bullish indicator for price as it suggests an increase in on-chain BTC demand. As off-chain transaction facilities increase, daily active addresses may stagnate or decline over time.

Source: CoinMetrics

The market cap divided by the realized cap (MVRV) is another crypto-native fundamental metric used to asses overbought or oversold conditions. Realized cap approximates the value paid for all coins in existence by summing the market value of coins at the time they last moved on the blockchain. The metric was created through a combination of efforts by Murad Mahmudov, David Puell, Nic Carter, and Antoine Le Calvez.

Historically, periods of an MVRV less than one have represented oversold conditions, whereas periods of an MVRV greater than 3.5 have represented overbought conditions. Of the MVRV levels above four since January 2013, all three have coincided with record highs in price. Currently, MVRV is 1.75 and falling, suggesting the possibility of a bullish bias.

Source: CoinMetrics

Analyzing the age of UTXOs, or unspent coins, can also provide some insights into price movements. Spikes in newly moved coins tend to correlate highly with local tops or bottoms in price, and can represent euphoria or capitulation. Coins which have not moved recently are represented in cooler colors wheres as coins on the move are represented by warmer colors.

Coins that have not moved in more than five years account for 21.58% of the circulating supply, or 3.86 million BTC. The 6-12 month age band, or coins not moved since March 2019 – September 2018, holds the next highest distribution at 13.27% of the circulating supply. The 1-3 month band has risen 5% since April 2019. Historically, local tops in price have occurred when the one to three month band, currently 12%, has represented more than 15% of all circulating UTXOs.

Source: https://plot.ly/~unchained/37.embed

Turning to developer activity, over 170 developers have contributed over 1,700 commits in the past year, mostly on the main repo. The BTC project on GitHub has two active repos, “bitcoin” (top chart, shown below) and Bitcoin Improvement Protocols, “BIPs” (bottom chart, shown below).

Most coins use the developer community of GitHub where files are saved in folders called "repositories," or "repos," and changes to these files are recorded with "commits," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher developer activity and interest.

Bitcoin Core version 0.18.1 was released on August 9th, and provided various bug fixes and performance improvements. Future potential protocol improvements in the pipeline include Schnorr signatures, Taproot, and Graftroot. Schnorr signatures and signature aggregation also bring the potential for storage and bandwidth reduction by at least 25%. Taproot and Graftroot improve upon Merkelized Abstract Syntax Trees (MAST) which offers three benefits; smaller transactions, more privacy, and larger smart contracts.

Last month, Pieter Wuille of Blockstream also unveiled plans for miniscript, a simplified way to write Bitcoin code. The current version, Script, is complex and difficult to use for those not intensely familiar with the language. According to Wuille, miniscript allows a user to write “[some] Bitcoin scripts in a structured, composable way that allows various kinds of static analysis, generic signing, and compilation of policies.” Miniscript remains in the early stages of development and is currently being tested internally at Blockstream.

Source: GitHub

Source: GitHub

BTC exchange traded volume over the past 24 hours has been dominated by Tether (USDT) trading, with the United States Dollar (USD) markets representing 10% of total volume. Tether is a stable coin pegged to the USD, and stablecoins currently represent over 80% of all reported volume over the past 24 hours.

A price deviation between the USDT and USD exchanges (right panel, chart below), specifically between Bitfinex and Coinbase, has been extremely volatile over the past few months. This has likely been related to both a short halt in withdrawals, the LEO Token (LEO) IEO, and the New York Attorney General’s report and associated active court case.

The price deviation, which started to increase in mid-October, was due in large part to a decrease in the USDT market rate (left panel, chart below). The BTC price premium has since become negligible as USDT has held a market rate near US$1.00.

Several potentially game-changing BTC services are slated for launch this year, indicating an increase in market access and custody for both retail traders and institutional entities.

According to data gathered by Alistair Milne, Coinbase recently broke the 30 million user mark, indicating a significant uptick in retail accounts on that platform as well. Last month, Coinbase Custody acquired the institutional business of Xapo, with Coinbase now reporting over US$7 billion in assets under custody.

Fidelity, Bakkt, and TD Ameritrade all have plans to launch institutional trading products for BTC which solves the biggest problem for institutional players: custody. Bakkt confirmed a September 23rd launch date for physical-settled BTC futures.

Bitmex, which is currently under investigation by the U.S Commodity Futures Trading Commission (CFTC), has also announced plans to launch a BTC zero coupon bond where users can earn a yield on their holdings by loaning BTC to other companies in the space. A Bitmex announcement last month also added further restrictions regarding access to the platform from users located in Hong Kong, Seychelles, and Bermuda due to regulatory concerns.

Fresh applications for the Bitwise and VanEck-SolidX BTC ETFs were submitted to the U.S Securities and Exchange Commission (SEC) in February. This week, VanEck-SolidX announced a limited version of a BTC ETF available for qualified institutional buyers later this week.

All previous BTC ETF proposals have been rejected by the U.S regulator. So far this year, the SEC has delayed decisions on all active BTC ETF applications. The next SEC decision deadline is set for October. However, there are already several BTC ETNs available, from various jurisdictions across the globe, which are seeing increasing volumes.

Global over the counter (OTC) volume, from LocalBitcoins.com, finished 2018 on a high but has declined as BTC spot prices have increased. Global notional volume has held near or above US$50 million since the beginning of the year, but rose to US$67 million in early July. In late May, LocalBitcoins discontinued servicing Iran, likely as a result of U.S sanctions and on June 1st, the service disabled paying for BTC with in-person cash trades.

The biggest increases in BTC and notional volume over the past few months have come from South American countries where inflation or hyperinflation have devalued local currencies. Notional volume in Venezuela reached a record high again over the past two weeks. Notional volume has also recently spiked in Japan, Kazakhstan, Kenya, Mexico, Nigeria, Poland, South Africa, South Korea, and Vietnam.

Google Trends data for the term "bitcoin" has increased dramatically since May, marking a new yearly high. The increase in search traffic has likely been related to both the sharp increase in price as well as mentions by several prominent U.S government officials, including the President of the United States. Throughout the course of 2018, “bitcoin” related searches declined dramatically. Despite the declining interest, the search “what is bitcoin” was the most popular “what is” Google search of 2018.

A slow rise in searches for "bitcoin" preceded the bull run in Q4 2017, likely signaling a large swath of new market participants at that time. A 2015 study found a strong correlation between google trends data and BTC price whereas a 2017 study concluded that when U.S. Google "bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

As BTC enters the global macroeconomic conversation more and more, thanks in no small part to zero or negative interest rate policies, correlations among legacy risk-on and risk-off instruments can become increasingly important. Despite BTC being touted by many as a hedge against another global financial meltdown, this hypothesis has largely been untested.

Since 2017, the rolling 90-day correlation (bottom panel, chart below) between Bitcoin and U.S. equities has mainly exhibited a strong positive correlation. The strongest negative correlation occurred in July 2018 when BTC price entered an extended period of price consolidation. The strongest correlation over the past few years occurred in Q3 2019. Extended periods of correlation with U.S. equities suggest investors continue to view BTC as a risk-on instrument.

Comparing BTC to the classic risk-off instrument, Gold, shows no consistent correlation (bottom panel, chart below) over the past three years. This again may suggest that BTC is not viewed as a safe haven or risk-off instrument. Since Q3 however, this correlation has quickly become strongly positive. As education and custody for crypto markets has increased in recent years, BTC and Gold may both start to be viewed as hedging instruments.

The rolling 90-day correlation (bottom panel, chart below) between Bitcoin and USD/CNH remained strongly positive throughout 2016 and strongly negative throughout 2017. More recently, as USD/CNH broke the US$7.00 price, marking an 11-year high, the correlation again became strongly positive. Although to some this may suggest capital flight towards BTC as yuan devaluation increases, this hypothesis is difficult to confirm.

Comparing BTC to the CBOE Volatility Index (VIX), or the expectation of volatility implied by S&P 500 index options, shows mainly a strong negative correlation since 2017 (bottom panel, chart below). The VIX is also broadly known as the “fear index” and this inverse correlation may again suggest investors view BTC as a risk-on instrument. Additionally, spikes for the VIX above 20 since 2017 have been excellent buy signals for BTC, suggesting high volatility in legacy markets bodes well for BTC.

Finally, comparing BTC to the U.S. 10-year treasury note interest rate reveals no consistent correlation until earlier this year (bottom panel, chart below). As the interest rate has dropped, entering a multi-year low, BTC prices have continued to increase. This may again signal investors fleeing low-yield risk-off instruments for better yielding risk-on instruments.

Further, BTC price volatility has declined significantly since mid-August, suggesting an extended period of consolidation. A roadmap for upcoming trading decisions can be established using Exponential Moving Averages, Volume Profile of the Visible Range, Pivot Points, oscillators, Pitchforks, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the spot price relative to the 50-day Exponential Moving Average (EMA) and 200-day EMA can be used as a litmus test for the trend. Price surpassed the 50-day EMA in mid-February and surpassed the 200-day EMA on April 2nd. The EMAs crossed bullishly in late April, representing an end to the almost year-long bear trend. The 50-day EMA is currently at US$10,300 and 200-day EMA is currently at US$8,500, both should now act as support.

Volume Profile of the Visible Range (VPVR) also shows large volume nodes at US$6,500 and US$8,200, which should both also act as support (horizontal bars, chart below). VPVR shows very little resistance above the current price level. Additionally, yearly Pivot Points, at US$8,150 and US$13,000, should act as support and resistance, respectively. If price breaches the nearest resistance Pivot Point, the next historic resistance zone is US$22,000.

The Bitfinex long/short ratio (top panel, chart below) is currently net long, with both longs and shorts having increased slightly over the past week. There are no active bullish or bearish divergences with neither likely to form based on the current price action.

A high timeframe Pitch Fork (PF) with anchor points in January, July, and August 2015 shows price recently reaching the upper resistance limit towards US$14,000 and returning to the median line (yellow). Throughout any given trend price returns to the median line several times.

The previous price break above PF resistance led to a run toward the current record high at nearly US$20,000. Sustained price action above US$15,000 would suggest a severe hastening of the current trend, which would be typical of a parabolic advance. The lower bound of the PF stands at US$6,100 and represents the last support before significant bearish momentum. If the trend continues for the next year at the same or similar rate, a price target of US$20,000 by July 2020 is possible.

Turning to the Ichimoku Cloud, there are four key 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.

On the daily chart, Cloud metrics are bullish; price is in the Cloud, the Cloud is bullish, the TK cross is bearish, and Lagging span is above the Cloud and in price. After a Kumo breakout, bearish or bullish, the probability of a new trend forming rises substantially. Additionally, a bullish TK re-cross above the Cloud is the most bullish trend indicator in the Cloud system. Such crosses occurred three times throughout 2017 (yellow arrows), all leading to strong bullish continuation.

Lastly, the opening and expiration dates of the Chicago Mercantile Exchange (CME) BTC cash-settled futures contracts, launched in December 2017, have had a significant impact on price. The CME facilitates trades for the largest portion of derivatives contracts in the world.

In July, the CME saw the highest notional volume ever in a single day for the BTC futures product, exceeding US$1.5 billion. Historically, price volatility tends to increase dramatically near any active contract expiration. The next key zone for increased volatility will likely come near the expiration of the April 1st to August September 27th contract.

Conclusion

Network mining fundamentals continue to push all-time highs thanks ever-increasing ASIC efficiency and seasonally cheap electricity. As long as the markets remain bullish, and mining profitability remains positive, miners will likely continue to add hash rate, especially as older ASICs retain profitability.

Transactions per day and daily active addresses have decreased from local highs over the past few weeks but have begun to increase again recently. Both NVT and MVRV, which are inversely related to on-chain activity, have fallen recently, confirming strengthening on-chain use.

Technicals suggest a lull in volatility with extended price consolidation on dwindling volume. Even so, trend metrics on the daily have now reset and are suggestive of continued bullish price action over the next few weeks. The current resistance level to watch is the previous local high and yearly pivot at US$13,000.

Pending key events that may impact price include; CME futures contract expiry on September 27th, resolution of both the Bitfinex and Bitmex regulatory probes, the launch of three different institutional trading products, and pending BTC U.S. ETFs.