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Bitcoin Price Analysis – The dip is coming

Bitcoin Price Analysis – The dip is coming

A confluence of resistance and weakening bullish momentum suggests the high probability of a price decline to around the US$4,700 level.

Bitcoin (BTC) is a decentralized digital currency created by Satoshi Nakamoto and released in 2009. The spot price is currently up 335% from the high set in December 2013, but down 74% from the current all time high set in December 2017. Since the beginning of the month, BTC has jumped almost 30% after a period of low volatility throughout March. Most of the other top 10 coins and assets also saw sharp increases this month. The BTC market cap currently stands at US$92 billion, with US$4.12 billion traded in the past 24 hours.

Bitcoin Price Analysis 10 April 2019 (1)

On-chain transactions per day have continued to rise since April 2018, and are now sitting near the record high set in mid-December 2018 (line, chart below). The average BTC transaction value in USD (fill, chart below) has declined as transactions per day have risen. However, transaction values recently began rising again and recently hit a four month high of over US$11,500. Transaction values peaked on the BTC network in mid-December 2017 at nearly US$100,000.

Bitcoin Price Analysis 10 April 2019 (2)
Source: coinmetrics.com

The rise in on-chain transactions per day can predominantly be attributed to VeriBlock (VBK), which secures other blockchains through the “Proof of Proof” (PoP) consensus mechanism. The VBK team includes Maxwell Sanchez, co-inventor of PoP and developer of Curecoin, the latter of which secures idle computing resources for biomedical research. VBK investors and advisors include Jeff Garzik, a previous BTC Core dev and head developer of the failed SegWit2x initiative, and Bill Shihara, co-founder and CEO at Bittrex. On April 2nd, VBK had an Initial Exchange Offering on Bittrex, reaching the US$7 million funding hard cap in just 10 seconds

PoP secures networks by embedding the current state of blockchains into the BTC blockchain, using the BTC OP_RETURN transaction code. By continually embedding blockchain states into BTC, other blockchains become less vulnerable to 51% attacks. Over the past few months, several coins, including Vertcoin (VTC) and Ethereum Classic (ETC) have been hit by this PoW vulnerability due to declining or consolidating hash rate on their respective networks.

Due to the quickly rising number of on-chain transactions, VBK has been thrust into the Bitcoin community spotlight. Some have aired concerns over transaction spamming, while others have described the platform as an outright attack on the Bitcoin network. There have also been suggestions that a blockchain is not needed for PoP, but a service like OpenTimestamps would suffice. Moreover, questions remain as to whether PoP can restore consensus once a 51% attack occurs. Yet another, more insidious purpose of VBK, as suggested by Ambroid, is Bitcoin laundering, whereby VBK miners spend Bitcoin and receive "clean" VBK coins. This process would bypass typical KYC/AML laws almost entirely.

VBK transactions rose dramatically through the testnet period from October 2018 to March 2019. During the testnet period, VBK accounted for as much as 40% of on-chain BTC transactions. The VBK mainnet launched on March 25th, and currently accounts for 10% of on-chain BTC transactions. However, VBK transactions have accounted for at least half of all pending transactions in the mempool from March 25th to April 7th. The majority of these transactions are sent with a one satoshi transaction fee (blue fill, chart below).

Bitcoin Price Analysis 10 April 2019 (3)
Source: https://jochen-hoenicke.de/queue

Bitcoin days destroyed (BDD) for the month of March clocked in at near four year lows, likely signifying a period of accumulation rather than the distribution of older coins. BDD can be used to measure coin velocity over time. For example, if an address holds 10 BTC received 10 days ago, and the BTC is moved to another address, 100 BTC days have been destroyed. This metric accrues over time and resets any time the coins are moved.

BDD spiked dramatically in December 2018 and surpassed the previous record set in August 2017. BDD has since declined rapidly but remained significantly elevated in January 2019, based on historical data.

The months with the highest BDD have historically correlated with extreme highs or lows in price as long term holders begin to sell coins on an exchange. A spike in BDD in July 2017 was likely related to the Bitcoin Cash hard fork. However, 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 or over the counter (OTC) brokers.

Bitcoin Price Analysis 10 April 2019 (4)
Source: oxt.me

The 30-day Kalichkin network value to on-chain transactions ratio (NVT) has continued to rise since January, and is currently slightly above 28 (line, chart below). Kalichkin’s NVT does not account for inflation or the use of off-chain transactions, which would decrease the overall NVT ratio. However, NVT remains in the upper-third of the historic range, which paints a bearish picture. While inflection points in NVT can correlate with extreme highs or lows in price, a rising NVT should also be seen as bearish due to decreasing on-chain network utility.

Daily active addresses (DAA) had been ranging between 550,000 to 675,000 over the past few months (fill, chart below). DAA recently surpassed 700,000, hitting a new yearly high. On December 30th, 2017, DAA exceeded one million. A large uptick in DAA 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.

Further, there continues to be grassroots interest in BTC, as suggested by 1.72 million members and over 5,000 meetups worldwide on meetup.com. The BTC subreddit also has over 1.02 million subscribers and is ranked 171st overall on reddit.com. There are also over 350 BTC-related job postings on LinkedIn in the United States, which has decreased slightly over the past few weeks. Most notably, the much-hyped Bakkt exchange continues to have eight job listings relating to engineering, development, and sales.

Bitcoin Price Analysis 10 April 2019 (5)
Source: coinmetrics.com

Turning to mining fundamentals, the network hash rate has increased significantly since late December last year, indicating a substantial increase in mining activity. Network difficulty adjusts up to +/-25% after 2016 blocks have confirmed. As hash rate decreases before a difficulty adjustment, block times increase. As hash rate increases before a difficulty adjustment, block times decrease.

The increase followed a 35% decrease in difficulty through four difficulty adjustments from October to December last year. Difficulty increased by 10% on December 31st and nearly 5% on January 13th, both increases reflecting the added hashing power. Since then, the network has undergone six difficulty adjustments accounting for an 8.52% increase in difficulty. Average block times are currently averaging just below 10 minutes with an estimated 0.23% decrease in difficulty projected for the next adjustment in 11 days.

The BTC network is secured with the SHA-256 consensus algorithm. The most profitable SHA-256 ASIC miners currently available are the; ASICminer 8 Nano Pro, Ebang Ebit E11++, ASICminer 8 Nano 44Th, and Innosilicon T3 43T. Network factors that influence mining profitability include; price, block times, difficulty, block reward, and transaction fees. The next block reward halving is currently set for May 2020.

The ASIC manufacturing behemoth Bitmain will be releasing four new ASICS this month, all of which will sit at the top of the profitability list. The recent increase in BTC network hashrate is likely directly related to these new Bitmain ASICs being manufactured and turned online. Most ASIC manufacturers are known to deploy new ASICS before shipping them to customers.

Bitcoin Price Analysis 10 April 2019 (6)
Source: bitinfocharts.com

The total percentage of overt version-rolling ASICBoost on the network has ranged between 35% and 40% over the past few months, and currently accounts for approximately 38% of all blocks mined. SlushPool mined the first ASICBoost block on March 24th, 2018 and a Braiins OS mining system verified ASICboost capability on Antminer S9s in October 2018. Bitmain responded by releasing firmware to enable overt ASICboost on the Antminer S9. Overt ASICBoost spiked dramatically after mid-October 2018.

Unlike covert ASICBoost, overt ASICBoost has no detrimental effects on the network, while making mining more profitable by requiring less energy usage. Covert ASICBoost encourages small or empty blocks because the mechanism involves transaction reordering. Overt ASICBoost is also SegWit compatible whereas covert ASICboost is not.

Bitcoin Price Analysis 10 April 2019 (7)
Source: asicboost.dance

The average BTC block size (fill, chart below) has remained far below the block limit of ~2.2MB since March of 2018. Despite an increase in average block size since June, related to VeriBlock transactions, the average transaction fee (line, chart below) has not increased substantially and is currently US$0.69. Fees have essentially declined since June 2018, and are currently at pre-March 2017 levels.

A low and non volatile transaction fee market can be partially attributed to the general decline in network use as a whole since December 2017. Additionally, an increase in transaction batching, SegWit use, and off-chain channels like the Lightning Network and Liquid side chains have also contributed to removing network strain and keeping fees low. The Liquid side chain currently has little traffic overall, but has seen a substantial increase in transactions per day over the past few weeks.

Bitcoin Price Analysis 10 April 2019 (8)
Source: coinmetrics.io

Transaction Batching involves sending one transaction with many outputs instead of sending each transaction individually. Batching is most effective when used by high transaction volume market participants, such as crypto exchanges and miners, which benefit substantially from the reduced fees. As batching increases, the transactions per day metric underreports the total individual transactions per day.

Transactions with only one output have declined steadily since March 2016 (red, chart below). About 90% of all transactions are currently sent with at least two outputs. Transactions with three to four outputs have risen substantially since January 2018 (yellow, chart below).

Bitcoin Price Analysis 10 April 2019 (9)
Source: https://p2sh.info/dashboard/db/batching

The overall number of transactions using SegWit recently reached a record high of 47.8%. This metric has risen and fallen directly with the end of VBK testing and the VBK mainnet launch, suggesting that VBK does not currently use SegWit transactions. The number of SegWit transactions, as a percentage of total volume, recently accounted for 90% of BTC on-chain volume but has returned to just over 50%.

SegWit, or BIP141, was activated on August 23rd, 2017 via a user activated soft fork and allows individual transactions to occupy less block space than a traditional transaction. 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 above 2MB. As fees on non-SegWit transactions have declined significantly, users may feel less inclined to use SegWit addresses.

Bitcoin Price Analysis 10 April 2019 (10)
Source: https://p2sh.info/dashboard/db/segwit-usage

SegWit also enabled the possibility of further second layer network utilities like the Lightning Network (LN), which facilitates trusted, bidirectional, off-chain, hub and spoke payment channels. The LN also paves the way for the possibility of instant payments, micro and nano-transactions, and increased network scalability.

Since going live on March 15, 2018, the LN has continued to rapidly gain traction. There are now almost 44,000 available channels, with a total channel value of 1093 BTC, or US$5.65 million. 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 with one on-chain network fee, after the channel is closed. Transactions sizes are currently capped at ~0.04BTC while the network is still being developed and built.

In early January 2019, a community member named Hodlonaut started an experiment to send payments through the LN, which has become known as the LN Trust Chain. A random stranger was initially sent 100,000 satoshis and the transaction has now been relayed to over 250 unique users in 39 countries. The experiment has acted as a catalyst for increased public awareness of the LN.

Three services built on the LN have also quickly gained popularity. Lightning Spin, a gambling roulette game, accrued over 10,000 invoices in a 10-month span and was sold to another party in late March, becoming the first LN app to trade hands. Tippin.Me, a tipping service similar to the previous on-chain version ChangeTip, allows users to send microtransactions on the LN with a few clicks. The service became so popular so quickly that it initially encountered server trouble trying to keep up with demand. Ln.pizza also went live earlier this year, a service which allows U.S. users to instantly purchase Domino’s pizza through the LN, with a 5% discount.

Bitcoin Price Analysis 10 April 2019 (11)
Source: https://p2sh.info/dashboard/db/lightning-network

Turning to developer activity, Bitcoin Core released version 0.17.1 on December 25th with various bug fixes and performance improvements. Version 0.18.0 is set for release later this month. The BTC project on GitHub has two active repos “bitcoin” and “BIPs” or Bitcoin Improvement Protocols. Over 170 developers have contributed over 3,200 commits to over the past year, mostly on the bitcoin repo (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 dev activity and interest.

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.

Bitcoin Price Analysis 10 April 2019 (12)
Source: https://github.com/bitcoin/bitcoin/graphs/contributors

BTC exchange traded volume over the past 24 hours has been dominated by Tether (USDT) trading, with the United States Dollar (USD) markets representing just 10% of total volume. Stable coin volumes, which have grown to account for over 50% of volume in recent weeks, currently represent 81.43% of all reported BTC volume over the past 24 hours.

In Asia, volume on the Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) pairs have remained subdued throughout the past few years, and currently account for 2.55% of global volume. The BTC/CNY pair currently holds a 2.8% premium over the BTC/USD pair. The so-called Kimchi premium on the BTC/KRW pair, which existed during the previous bull market and vanished during the bear marker, has begun to grow again and is currently 0.55%. These Asian fiat markets may increase substantially if regulatory scrutiny in the region is clarified or if domestic mainland Chinese exchanges open again.

Several potentially game-changing BTC services are also in the works and slated for launch this year. On March 7th, Fidelity Digital Assets announced the launch of a custody service to a select group of eligible clients. The financial behemoth manages over US$2.45 trillion in assets. Bakkt, which raised US$182.5 million from 12 partners and investors in 2018, is also set to launch a physically delivered BTC future some time this year. Bakkt is a subsidiary of the Intercontinental Exchange, which also runs the New York Stock Exchange. Starbucks also received a significant equity stake in the Bakkt BTC futures platform.

A fresh application for the VanEck-SolidX BTC ETF was also submitted in February to the U.S. Securities and Exchange Commission (SEC), after the proposal was pulled in January during the government shutdown. All previous BTC ETF proposals have been rejected by the U.S. regulator, while several other BTC ETNs are available worldwide and seeing increasing volumes. The deadline for the final SEC decision on the pending U.S. ETFs is set for early December 2019.

Bitcoin Price Analysis 10 April 2019 (13)

A price deviation between the USDT and USD exchanges (right panel, chart below), specifically between Bitfinex and Coinbase, closed completely in recent days. 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). Recently, the BTC price premium was around US$100, or 2.5%, but is currently US$0, while the USDT market rate has increased to above US$1.00. The premium on Bitfinex is currently negligible.

These price differentials are also likely related to a 3% withdraw fee implemented by Bitfinex late last year, which was enacted to curb repetitive smaller fiat withdrawals. In early March 2019, Bitfinex announced a reduction in the minimum withdrawal limit to US$20, which may help increase arbitrage and decrease existing premiums. An extended period of a US$1.00 market rate for USDT would suggest a return to normal market conditions.

Bitcoin Price Analysis 10 April 2019 (14)

Global over the counter (OTC) volume, from LocalBitcoins.com, finished 2018 on a high and has remained at those levels this year. The biggest increases in BTC and notional volume over the past few months have come from South American countries where inflation or hyperinflation has devalued local currencies. Notional volume has also recently spiked in Indonesia, Iran, Kazakhstan, South Africa, South Korea and the United States.

Bitcoin Price Analysis 10 April 2019 (15)

Google Trends for the term "bitcoin" increase recently for the first time since November last year. 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.

Bitcoin Price Analysis 10 April 2019 (16)

Technical Analysis

BTC price volatility increased dramatically over the past week, bringing strong bullish momentum for the first time in several months. As price flirts with a full-blown bullish reversal, roadmaps for key decision points on high timeframes can be found using exponential moving averages (EMAs), volume, Ichimoku Cloud, and chart patterns. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the spot price relative to the 50 and 200 day EMAs can be used as a litmus test for the trend. Price surpassed the 50 EMA in mid-February and surpassed the 200 EMA on April 2nd. However, since May 15th, 2018, these key averages have been bearishly crossed, with the 200 EMA above the 50 EMA. The 200 EMA is currently at US$4,743, which should now act as support. A bullish cross of the 50 EMA and 200 EMA is possible in the coming weeks, and should signify the beginning of a new bullish trend.

There are currently no volume or RSI divergences on this timeframe, however, RSI is currently at the highest value since December 2017. Price is also approaching a zone of historic volume congestion at US$5,650 (horizontal bars). Long/short open interest on Bitfinex (top panel, chart below) is currently 58% long with a substantial short position closing on April 8th.

Bitcoin Price Analysis 10 April 2019 (17)

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 100% bullish for the first time since December 2017; price is above Cloud, the Cloud is bullish, the TK cross is bullish, and Lagging span is above both the Cloud and price. This is the first bullish Kumo twist since November 2016 and the first bullish Kumo breakout since late-July 2017. Both metrics are highly indicative of a trend change.

After a Kumo breakout, bearish or bullish, the probability of a new trend forming rises substantially. During this period, price returns to the Kijun many times to confirm support before trend continuation, this is known as a Kijun Bounce. Currently, the Kijun sits just below the US$4,500 level.

Price had been held below the Cloud since mid-January 2018. If the current local low holds without making a new lower low, then a move towards the flat Kumo at US$4,850 becomes more and more likely. These trades are known as Edge to Edge trades and typically require a bullish TK cross before entering a long position. All Edge to Edge trades have a stop loss at the bottom of Cloud support, currently at US$3,785. This trade setup carries a risk/reward ratio of six, indicating a highly favorable long setup.

Additionally, a bullish chart pattern, the ascending triangle, completed in early April. The hallmarks of this pattern include a series of higher lows towards a horizontal resistance level. The pattern also often has a declining volume profile during formation, and a substantial increase in volume once the horizontal resistance is broken. The 1.618 fib extension and measured move of the pattern pointed to a target range for the pattern between US$4,742-US$5,200.

Bitcoin Price Analysis 10 April 2019 (18)

On the four hour chart, price has formed a bearish reversal pattern, the rising wedge. The hallmarks of this pattern include higher highs and higher lows within a shrinking range. This typically occurs with a declining volume profile and a bearish divergence, signifying declining bullish momentum. Retracement targets for this pattern include 50% of the range-high to range-low, currently at US$4,700, as shown by the Kijun. The Cloud has also painted a TK divergence known as a C-Clamp, indicating overbought conditions. Overall, although the probability of bearish reversal is high with this pattern, bullish continuation is also not impossible.

Bitcoin Price Analysis 10 April 2019 (19)

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. A report released by the CME in late March showed record high short interest.

At the beginning of April, the CME saw the highest volume ever in a single day for the BTC futures product. Additionally, volatility increased dramatically after the most recent quarterly contract rollover earlier this week. The next key zone for increased volatility will likely come near the expiration of the January 28th to April 26th contract.

Bitcoin Price Analysis 10 April 2019 (20)

Conclusion

Almost all network fundamentals have either continued to show signs of increasing growth, or have recently broken through multi-month range highs. Specifically, transactions per day and daily active addresses have shown substantial increases in recent weeks. Hashrate has also shown large increases, likely directly related to the unreleased ASICs manufactured by Bitmain being brought online by Bitmain before shipping to the general public. Average daily block size has also continued to grow due to VeriBlock, with minimal impact on the transaction fee market. Off-chain, the Lightning Network continues to grow rapidly as well, thanks to the highly publicized transaction relay and other adoption initiatives becoming both high-profile and widely successful.

Technicals on higher time frames show the beginnings of bullish trend formation for the first time in over a year. Price is above both the daily 200 EMA and daily Cloud, a litmus test for a bullish trend. Confirmation of bullish trend continuation will likely occur after a bullish daily 50/200 EMA cross and Kijun bounce between US$4,500-US$4,700. In the near term, price has surpassed projected targets based on the multi-month ascending triangle, as well as quickly approaching a high volume congestion zone with a bearish reversal pattern and bearish divergence on lower time frames. Collectively, this confluence of resistance and weakening bullish momentum suggests the high probability of a price decline to around the US$4,700 level.


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