Bitcoin (BTC) is a decentralized digital currency, created by Satoshi Nakamoto, and released in 2009. Although the coin has remained at the top of the BraveNewCoin market cap table since then, the spot price is currently down 81% from the all time high set in December 2017. Over the past month, BTC has overperformed Ethereum (ETH), EOS (EOS), Ripple (XRP) and Tron (TRX) while underperforming Litecoin (LTC), Steller (XLM), and Binance Coin (BNB). The BTC market cap currently stands at US$69.21 billion, with US$4.03 billion traded in the past 24 hours.
Transactions per day declined significantly for most cryptocurrencies throughout 2018. Most of these coins continue to have very few transactions per day relative to 2017. Transactions per day on the BTC network have generally moved higher since April 2018, with a slight decline since the beginning of March (line, chart below). Additionally, the current number of BTC transactions per day is on par with the local high seen in May 2017.
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, as transactions per day have begun declining.
Transaction values peaked on the BTC network in mid-December 2017 at nearly US$100,000. A rise in transactions per day with a decline in the average value of those transactions likely signifies more transactions of smaller value being sent through the network.
The rise in on-chain transactions per day has been due in large part 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 which provides idle computing resources to biomedical research. 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. VBK is set for an Initial Exchange Offering on Bittrex sometime this year.
PoP secures networks by embedding the current state of non-BTC blockchains into the BTC blockchain using the 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.
VBK transactions have continued to rise dramatically since the testnet launch in October 2018. The testnet ended on March 4th, and correlates with the decline in transactions per day. During the testnet period, VBK accounted for as much as 40% of transactions on the BTC network. VBK’s mainnet launched on March 25th, and currently accounts for 26% of BTC transactions.
Bitcoin days destroyed (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. BDD for the month of March is currently sitting near four year lows, likely signifying a period of accumulation rather than distribution of older coins.
BDD can be used to measure coin velocity over time. For example, if an entity has 10 BTC they received 10 days ago, and then they spend or move the BTC to another address, 100 BTC days have been destroyed. This metric accrues over time and resets any time the coins are moved.
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.
The 30-day Kalichkin network value to on-chain transactions ratio (NVT) has continued to rise since January, and is currently at 27 (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) have ranged between 550,000 to 675,000 over the past few months with DAA currently near the top of that range (fill, chart below). 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 1.7 million members and 5,116 meetups worldwide on meetup.com. The BTC subreddit also has over 1 million subscribers and is ranked 166th overall on reddit.com. There are also 434 BTC-related job postings on LinkedIn in the United States, which has increased slightly over the past few weeks.
Turning to mining fundamentals, the network hash rate has increased significantly since December 21st, indicating a substantial increase in mining activity. The increase followed a 35% decrease in difficulty across four difficulty adjustments late 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 five difficulty adjustments accounting for an 8.3% increase in difficulty.
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. Average block times are currently averaging closer to 9.3 minutes with an estimated 6.23% increase 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, at an electricity cost of US$0.06/KWh, are; the ASICminer 8 Nano Pro released in May 2018, the MicroBT Whatsminer M10S released in September 2018, and the Ebang Ebit E11++ and ASICminer 8 Nano 44Th, both released in October 2018. Bitmain’s ASIC miners, which once reigned supreme in terms of ASIC profitability, barely make the top 10 list. 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 late May 2020.
The total percentage of overt version-rolling ASICBoost on the network has ranged between 33% and 40% over the past few months, and currently accounts for approximately 35% of all blocks mined. SlushPool mined the first over 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.
Despite disruptions in hash rate and increasing block times throughout December 2018, pending transactions have continued to decline, and have been relatively low since mid-November. During the Bitcoin Cash hard fork, pending transactions spiked to almost 40,000 as some miners and mining pools moved hash rate from BTC to Bitcoin Cash.
Since the beginning of the year, any spike in pending transactions has been short lived, having been cleared almost completely within a few hours or days. Recent months have seen pending transactions remain below 10,000 on most days. Throughout 2018, pending transactions remained far below the 200,000-250,000 range seen during the December 2017 trading frenzy.
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, average transactions fees (line, chart below) have not increased substantially and currently average US$0.38. Fees have essentially declined since June 2018, and are currently at pre-February 2017 levels. There has been increasing discussion over the long-term sustainability of network security with the current fee structure, specifically after the block reward runs out in 2100.
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. However, Liquid currently has almost no network traffic.
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). Over 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).
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% of total volume.
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.
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 over 37,600 available channels, with a total channel value of 805 BTC. The channels work much like a tab at a restaurant, which remain open until the client settles the bill. This format allows for numerous transactions to occur with one on-chain network fee when the channel is closed. Transactions sizes are currently capped at ~0.04BTC while the network is still being developed and built.
On January 19th, 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. Jack Dorsey, CEO of both Twitter and Square and investor in Lightning Labs, received the relay on February 4th and has continued to discuss the importance of Bitcoin and LN on Twitter, including a recent announcement that Square will be hiring up to five Bitcoin developers. Dorsey has also hinted at one day including LN transactions on Twitter natively. The LN trust transaction was also sent through the Blockstream satellite in Earth’s orbit.
A new tipping service on Twitter using LN has been growing in popularity. Tippin.Me is similar to the previous on-chain version ChangeTip and 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. Another LN based service went live earlier this year. Ln.pizza allows U.S. users to instantly purchase Domino’s pizza with a 5% discount by using the LN.
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 on April 3rd, 2018. 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.
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 15% of total volume. The exchanges with the highest reported volume over the past 24 hours include OEX, Bitforex, and CoinBene. Stable coin volumes, which have grown to account for 50% of trades in recent weeks, currently represent ~73% of all 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 3.7% of global volume. The BTC/CNY pair currently holds an 11% premium over the BTC/USD pair. The so-called Kimchi premium on the BTC/KRW pair, which existed during the bull market, has vanished completely. These Asian fiat markets may increase substantially if regulatory scrutiny in the region is clarified or if domestic mainland Chinese exchanges open again.
The Brazilian real (BRL) pair has been increasing in volume over the past few weeks and has surpassed all Asian and European pairs. The BTC/BRL currently holds a 3.7% premium over the BTC/USD pair. This follows a trend of increasing volumes coming out of all of South America in the past few months, likely related to the political upheaval and humanitarian crisis in Venezuela.
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 has 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, 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.
A price deviation between the USDT and USD exchanges continues to persist (right panel, chart below), specifically between Bitfinex and Coinbase. 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 has remained near US$100, or about 2.5%, while the USDT market rate has been more volatile but currently remains near US$1.00. The premium is currently 1.85%.
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. On March 8th, 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.
Global over the counter (OTC) volume, from LocalBitcoins.com, finished 2018 higher than any period throughout the year and has remained at those levels since January 2019. 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, South Africa, and the United States.
Google Trends for the term "bitcoin" remains pinned firmly on the floor and also remained down sharply over the course of 2018. 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.
BTC price volatility has dropped dramatically over the past few weeks as price has trended up slightly. Overall, price action continues to flirt 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 50 and 200 day EMAs are a litmus test for the trend, and have been bearishly crossed since May 15th, 2018. Price had been mostly lower than the 50 EMA since that cross, until early March with a break North and a quick return to test the 50 EMA as support. The 50 EMA and historic volume (horizontal bars) both suggest the US$3,980 should act as significant support. A clean break above the 50EMA should signify bullish momentum with a likely push towards the 200 EMA at US$4,750.
There are currently no volume or RSI divergences. Long/short open interest on Bitfinex (top panel, chart below) is currently slightly net long with short positions dropping over the past few days and long positions increasing since mid-March.
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 weekly chart, the Cloud metrics are bearish; price is below the Cloud, the Cloud is bearish, the TK cross is bearish, and the Lagging Span is below price and below the Cloud. A long entry based on traditional Cloud strategy would not be warranted until price breaches the Cloud.
Comparing current price action to 2014, 2015, and 2016, a similar Cloud fractal has begun to form. This pattern previously took 300 days to turn bullish after multiple support and resistance tests. If repeated, similar price action would break US$6,200 around September 2019. In the near term, the Tenkan at US$4,800 will likely act as resistance. Over the course of the next two years, the Cloud projects a target of US$10,250 based on the long flat Kumo at that price level. However, if the current lows do not hold, falling towards the previous all-time high at US$1,000 always remains a possibility.
On the daily chart, the Cloud metrics are bearish to neutral; price is in the Cloud, the Cloud is newly bullish, the TK cross is bullish, and the Lagging Span is above price and in the Cloud. This is the first bullish Kumo twist since November 2016 and typically is highly indicative of a trend change. However, a long entry based on traditional Cloud strategy would not be warranted until price breaches the Cloud.
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 reversal chart pattern, the Adam and Eve, completed with multiple firm rejection at the horizontal resistance. The hallmarks of the pattern include a V and U-shaped price structure with a declining volume profile which increases in volume once horizontal resistance is broken. Both the 1.618 fib extension and measured move of the pattern point to the US$5,000 range as a price target. Price may continue to range while making higher lowers and get rejected at the US$4,100 level, which would form an ascending triangle.
Lastly, the opening and expiration dates of the Chicago Mercantile Exchange (CME) BTC futures contracts can have a significant impact on price. The CME facilitates trading of the largest portion of derivatives contracts in the world.
The CME BTC futures contracts first opened in December 2017 on low volume, but volumes for the product have increased significantly throughout 2018. At the end of February, the CME saw the highest volume ever in a single day for the BTC futures product.
The January 28th, 2018 contract opening saw a price fall within the first few days, which has consistently been the case on the two month contracts since inception. The September 4th contract opened at almost exactly the local top for price. Shorts which opened at the start of the December 31st three-month contract are currently slightly underwater.
Based on previous volatility zones around the open and close of CME contracts, March 28th to April 1st should be highly volatile for price. Additionally, this time period marks the end of Q1 and the beginning of Q2, meaning all other quarterly futures contracts will also be refreshed during this time period.
On-chain transactions per day have continued to show a sustained and significant rise over the past few months, which can mainly be attributed to VeriBlock, a mechanism for securing other blockchains using the BTC blockchain. VeriBlock does not use Segwit and some have called the mining strategy "transaction spam." Block size has also continued to grow due to VeriBlock, with no impact on the transaction fee market. Hashrate has increased substantially over the past few months with a large expected increase coming in 11 days. Block times have trended below 10 minutes thanks to the increasing hashrate with no sustained queue pending transactions. 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 remain neutral to bullish, warranting a wait and see approach prior to any potential trend reversal. Trend indicators, including the weekly Tenkan, daily Cloud, and daily 200EMA suggest the US$5,000 zone as a reversal target should price gain bullish momentum. An Adam and Eve bullish reversal chart pattern also has a price target of ~US$5,000 adding to the bullish confluence. Despite the recent rejection at US$4,100, price has remained above the daily 50EMA and above the daily Kijun. Price action below US$3,600 would likely bring price towards the previous consolidation zone from May through August 2017, from US$2,000-US$2,800.