Bitcoin Price Analysis – Transactions up, fees down

Bitcoin (BTC) volatility continues to inch towards historic lows, with the spot price down 68% from the all time high set in December. The market cap currently stands at US$111.68 billion, with US$1.75 billion traded in the past 24 hours. The psychological level of a US$100 billion market cap appears to be a key level going forward, after the level was breached in October 2017 and has been retested several times since.

Scrutiny around Tether (USDT) has remained high over the past two weeks, despite two key events. On October 24th, Tether burned US$500 million USDT from the treasury, removing the excess from circulation. On November 1st, Tether announced a banking partnership with Deltec Bank & Trust Limited, located in the Bahamas. The notice included a banking statement revealing Tether was in possession of US$1.8 billion. Circulating USDT has continued to decline since, with USDT flowing into the treasury wallet. Overall, this indicates USDT is freely being redeemed for USD and there are adequate banking reserves.

The market rate for USDT (left panel, chart below) has almost reached parity with the Dollar once again, and is currently at US$0.9914. The historical USDT market rate has never been especially stable at exactly US$1.00. The market rate of USDT has fluctuated during times of excessive volatility, all while the target of 1:1 was maintained.

The Bitcoin premium between Bitfinex, where USDT is a major currency, and Coinbase (right panel, chart below) nearly reached US$1,000 on October 15th, but has begun to decline and is returning to the historical range seen during normal market conditions. As confidence in the exchange and free-flowing banking wires return due to clarity around USDT, the premium should continue to decline as traders arbitrage the difference.

One of Bitfinex’s most active BTC cold wallet addresses has begun to increase again after losing almost 100,000BTC throughout September and October. This increase suggests confidence in the exchange is slowly rising again. Cold and hot wallet addresses on other exchanges remain less active in comparison.

Turning toward the Bitcoin network, the number of BTC transactions per day (line, chart below) has steadily increased since April and reached an eight month high over the past week. Transactions per day have declined throughout the year for all cryptocurrencies and assets, but BTC is the only coin which has had steadily increasing transactions per day since April.

The average transaction value in USD (fill, chart below) on the other hand has continued to decline since January when it reached US$79,000. A rise in transactions per day with a decline in the average value of those transactions suggests more transactions of smaller amounts are being sent through the network. Average transaction value will likely increase dramatically as BTC experiences any increases in volatility. Overall, average transaction value remains high historically, matching two previous highs in December 2013 and February 2016.

Source: coinmetrics.com

The average BTC block size has remained far below the block size limit since March. Transaction costs, which currently average US$0.41, have also declined significantly, matching February 2017 levels. All of this can be attributed to the decline in the price of bitcoin, as well as a dramatic decline in unconfirmed transactions, transaction batching, steadily increasing SegWit use, and the Lightning Network. Blockstream also recently released a beta version of the Liquid side chain, which offers private, near-instant, off-chain transactions between exchanges.

The 30-day Kalichkin network value to on-chain transactions ratio (NVT) has begun to flatten and turn downward, and is currently sitting near a four year high (line, chart below). While inflection points in NVT can correlate with extreme highs or lows in price, a rising NVT should be seen as bearish due to decreasing network utility.

While the NVT ratio can be used to assess a network’s relative utility over time, it’s difficult to compare between coins that use different transactions types. Moreover, Kalichkin’s NVT does not account for inflation or the use of off-chain transactions, which would decrease the overall NVT ratio.

Daily active addresses (DAA) have increased since April, but remain significantly lower than the highs in January (fill, chart below). A large uptick in DAA should be seen as a bullish indicator for price as it suggests an increase in demand. Also, there continues to be large grassroots interest in BTC, as suggested by 1,677,622 members and 5,584 meetups worldwide on meetup.com.

Source: coinmetrics.com

Other key network metrics include network hash rate and difficulty, which appear to have temporarily plateaued after explosive growth since January. Hash rate may continue to increase by about ~15% without the release of new ASICs, as more and more miners have opted towards using overt ASICboost.

Difficulty, which adjusts every 2016 blocks, has had nine decreases of more than 1% since 2016, all but the most recent adjustment preceded an increase in BTC value shortly thereafter. A potential cause for this correlation is increased or decrease BTC being mined in between difficulty adjustments. As difficulty lags a large uptick in hashrate, block times are decreased slightly, more BTC is mined in that period, and more BTC is potentially sold by miners. The opposite is true if hash rate falls substantially before the next difficulty adjustment.

Source: bitinfocharts.com

Turning to developer activity, the main repo for BTC on GitHub has had a cumulative 342 commits over the past 90 days and 1,775 commits over the past year. Most coins use the developer community of GitHub, which was acquired by Microsoft for US$7.5 billion earlier this year. 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.

BTC exchange traded volume over the past 24 hours has been dominated by Tether (USDT), with the United States Dollar (USD) markets representing only a third of USDT volume. Exchanges with the most volume over the past 24 hours include CoinBene, OKEx, Huobi, and Binance.

In Asia, volume on the Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) pairs have remained subdued throughout the entire year, and currently account for less than 6% of global volume. These Asian fiat pairs may increase substantially as regulatory scrutiny in the region is clarified. Hong Kong’s securities watchdog has decided to open a regulatory "sandbox" before regulations are applied. The Monetary Authority of Singapore (MAS) has also adopted this approach of open dialogue with significant success.

Global over the counter (OTC) BTC volume, from LocalBitcoins.com, has largely remained flat over the course of the year. The biggest increases in BTC and notional value globally have come from South American countries including; Argentina, Chile, Colombia, Peru, and Venezuela. Increased interest in BTC in these regions is likely fueled by inflation in Argentina and hyperinflation in Venezuela. OTC volume has also increased in Iran, where U.S. sanctions are set to resume on November 5th, encouraging the use of alternative forms of payment other than the U.S. Dollar for international transactions.

Google Trends for the term "bitcoin" remain down sharply over the course of the year and are sitting at a yearly low. 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 the google trends data and BTC price. A May 2017 study concluded that when the U.S. Google "bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

The spot price of Bitcoin has essentially flatlined, with very little volatility over the past month. Extended periods of low volatility typically suggest a large pending price move. A bullish and bearish price roadmap for the upcoming move can be determined using Bollinger Bands, moving averages, Wyckoff Method, chart patterns, Pitchforks, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the weekly chart, the Bollinger Bands (BBands) are tightening with price below the 20SMA. This suggests bearish bias and a move to the downside. BBands measure volatility and attempt to predict the direction of price action as consolidation is occurring. If a break out occurs while price is below the 20SMA (red), the indicator suggests bearish continuation. The BBands expand with volatility, after the move has happened. Historically, BBands have only been this tight three times, all of which resulted in bullish continuation. RSI on the weekly chart has also been below 50 for most of the year, indicating sustained bearish momentum.

On the daily chart, the 50/200EMAs are currently bearishly crossed, with price held near the 50EMA. A bullish Golden Cross in the coming weeks, would be the first 50/200EMA cross since May and suggest further upside. There are no active bearish RSI divergences on the daily timeframe.

Long/short open interest on Bitfinex is currently net long for the first time since August as shorts have decreased significantly over the past week. Long positions are unchanged over the past week and ~40% below the all time high. BTC and USD funding rates are both relatively low, suggesting that there are ample coins and dollars available to borrow for leveraged trading.

Further, price structure on the daily chart continues to loosely correlate with a typical Wyckoff Accumulation phase. Identifying the accumulation phase can be used to help determine where price sits within a cyclically repeating pattern. An accumulation phase occurs before a new markup phase, or bull trend. BTC experienced one of these classic accumulation periods throughout 2015. A successful accumulation period would be highly indicative of a prolonged bull trend with another accumulation period around the yearly pivot at US$11,000.

Price also sits within a large Falling Wedge, making successive lower highs and lower lows. This pattern can represent a bullish reversal pattern, and typically resolves when 75% full, experiencing a more explosive move when over 80% complete. Using Bulkowski’s measure rule, a bullish target of US$10,500 and a bearish target of US$4,100 are projected.

Alternatively, price continues to build a Descending Triangle, which holds a bearish bias if the pattern forms following a downtrend. As with all triangles, a breakout is expected when the pattern is at least 75% full, experiencing a more explosive move when beyond 80% complete, which is currently the case.

Using Bulkowski’s measure rule, a bullish target of US$12,559 and a bearish target of US$2,000 are projected. The 1.618 fib extension of the triangle width paints a bullish target of US$17,200 and a bearish target of US$1,295. Yearly pivots at US$11,500 and US$3,000 should also be considered as strong support and resistance.

Price also remains in the bottom third of the upward trending pitchfork, which started in 2015 and has anchor points in January, May, and August of that year. Price will continually attempt to return to the median line (yellow) throughout any given trend, currently at US$8,934. A price rise above the median line would likely have a maximum upside target of ~US$15,000-US$18,000 by the end of year. Price will need to maintain a range of US$5,000-US$6,000 in order for the bullish pitchfork to remain valid.

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, the Cloud metrics are bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and Lagging Span is in price and below Cloud. A long entry based on traditional Cloud strategy would not be warranted until price breaches the Cloud. This is known as a Kumo breakout. The long flat Kijun at US$7,138 represents a magnet for price. If price continues sideways, the Cloud will continue to thin, creating an opportunity for a bullish Kumo twist and bullish Kumo breakout within the next few weeks.

Lastly, the opening and expiration dates of the Chicago Mercantile Exchange (CME) BTC futures contracts typically have a significant impact on price. The CME facilitates trading in the largest portion of derivatives contracts in the world. The September 4th contract opened at almost exactly the top of the current price range. A three month contract closed on October 26th, with a new contract opening on October 29th. Price saw essentially no increased volatility in this time period.

Conclusion

Traditional banking wires are slowly being restored with Bitfinex and USDT, which has increased trader confidence, restoring USDT and Bitfinex BTC market prices to within normal limits. Transactions per day on the network continue to increase while fees continue to decline. Nearly 50% of transactions are SegWit and transaction batching remains above a 2:1 ratio, suggesting all users are continuing to be proactive stewards of the blockchain.

Technicals, including historical volatility and sustained lack of price action, suggest at least a 50% move over the next few months. Current indicators lean bearish to neutral. Key indicators for bullish price action include price above; the upper BBand, the multi-month diagonal resistance of both triangle chart patterns, the multi-year bullish pitchfork median line, the daily 200EMA, and/or the daily Cloud. Key indicators for bearish price action are much simpler, closing below the lower BBand and US$5,800-US$6,000 zone would likely result in bearish follow-through towards the US$2,000-US$3,000 range. Breaching the US$5,800-US$6,000 zone would also represent a break below the US$100 billion market cap.