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Bitcoin Price Analysis – Turning the corner

Network fundamentals have slowly started to turn the corner since April, as the need for network scalability has ebbed since December. Increasing transaction Batching, SegWit adoption, and Lightning Network use all represent improved network efficiency compared to one year ago. The continued rise in hash rate also suggests the network is more secure than ever from attempts at reversing transactions or double-spending coins.

Bitcoin (BTC) is up more than 25% from the August local low around US$5,800, but remains down 63% from the record high in December. The market cap stands at US$126.86 billion, with US$2.43 billion traded in the past 24 hours.

The number of Bitcoin transactions per day has been slowly increasing since April and has averaged between 180,000 and 220,000 since June. This key metric has declined significantly for a number of cryptocurrencies throughout the year. Transaction costs have also declined significantly, as has the average transaction value in USD, which can be partially attributed to the decline in the price of bitcoin, as well as Transaction Batching, SegWit, and use of the Lightning Network (LN).

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Transaction batching has contributed to more efficient transactions, by allowing one transaction to be sent to many addresses at once instead of each transaction being sent individually. The ratio of outputs per transactions, or batching ratio, has averaged 2.7-2.9 outputs per transaction over the course of the year, suggesting the practice has become a mainstay. Although the batching ratio has trended downward since February, there have also been several days where the ratio has spiked above 3. Overall, this indicates an industry wide effort towards increase transaction efficiency.

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The protocol upgrade SegWit, which currently accounts for ~43% of transactions, has also been a significant contributing factor in more transaction efficiency. SegWit adoption continues to increase despite an overall decline in transactions per day throughout the year. A SegWit transaction occupies less block space than a traditional transaction, allowing SegWit users to pay less in accumulated fees to achieve the same number of transactions. SegWit also allows for an effective blocksize limit above 2MB.

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The SegWit soft fork also enabled the possibility of further second layer network upgrades like the Lightning Network (LN), which enables trusted, bidirectional, off-chain, hub and spoke payment channels. This also paves the way for the possibility of instant payments, microtransactions, and increased scalability.

Since going live on March 15, the LN has continued to gain traction, now with almost 12,000 available channels. 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 without a network fee, until the channel is closed.

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Unconfirmed transactions have declined dramatically this year. There are currently ~10,000 transactions waiting for their first confirmation, after peaking well above 180,000 in December. The pending transaction fees associated with these transactions have also dropped, averaging far below 1BTC per block, with the mempool holding between 2.5-5.0MB. The size of the entire blockchain is currently above 174GB, with the average block size over the past seven days at 0.8MB.

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In a recent medium post, cryptopoiesis adjusted the network value to transactions ratio (NVT) equation to account for both inflation and use of off-chain LN transactions. Even accounting for these adjustments, NVT remains high, which suggests a market value not supported by the economic activity of the blockchain.

Inflection points in NVT can correlate with extreme highs or lows in price. NVT is difficult to compare between coins that use different transactions types, but the ratio can be used to assess a network’s relative utility over time.

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On further transaction analysis, Bitcoin days destroyed (BDD) has continued to decline, suggesting that long term holders are keeping funds dormant in cold storage. BDD increased slightly in August, potentially related to an old wallet associated with Mt. Gox and Silk Road which recently moved 111,000 BTC, some of which has ended up on Bitfinex and Binance.

BDD is 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 10 days ago and then they spend it, 100 bitcoin days have been destroyed.

The months with the highest BDD since Bitcoin’s inception have strongly correlated with highs or lows in 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 or OTC brokers.

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Turning to other key network metrics, BTC network hash rate and difficulty continue to post record highs, pushing mining profitability toward record lows. The core of mining is solving Proof of Work (PoW), which has lead to ASIC proliferation throughout the network. ASIC manufacturers, like Bitmain, have done extremely well since 2013, reportedly profiting a net of US$1.1 billion in Q1 2018 alone. With a potential IPO around the corner, Bitmain is seeking a US$15 billion valuation. The company also currently holds a ~US$600 million position in Bitcoin Cash with Bitmex Research reporting market losses of US$328 million since purchase.

While many factors influence mining profitability, such as price, block times, difficulty, block reward, and transaction fees, decreasing profitability adds to the risk of further centralizing mining, both through mining pools and geographically. The next Bitcoin block reward halving is slated for May 2020.

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In turn, the markets reflect the network metrics above. Global over the counter (OTC) volume, from LocalBitcoins.com, has been trending downward throughout the year, and has continued to decline after a small uptick two weeks ago. Venezuelan Bolivar (VEF) trading volume continues to post record highs, fueled by hyperinflation in the region.

LocalBitcoins volume has essentially followed Bitcoin price action over the past few years. In January, LocalBitcoins implemented mandatory Know Your Customer and Anti Money Laundering (KYC/AML) requirements. While this may provide increased legitimacy going forward, it will also push so-called dark money transactions onto other platforms.

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BTC exchange traded volume over the past 24 hours has been led by the USDT and the United States Dollar (USD) markets for the fifteenth consecutive week, mostly on Binance, Bithumb, OKEx, and Bitfinex. Turkish Lira (TRY) volume has increased over the past month in the setting of increasing unease regarding President Erdogan’s policies.

On the heels of a Coinbase report detailing the landscape of cryptocurrency in higher education globally, the South Korean Ministry of Science And Technology has launched a large-scale blockchain program. The Coinbase study found that 42% of the world’s top 50 universities offer at least one course on crypto or blockchain in several disciplines.

In Asia, the Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) volumes have remained subdued compared to last year. Although the share of Asian volume is relatively low compared to USD, the country holds a high interest in crypto trading. Last week, Japan’s largest e-commerce company Rakuten announced the purchase of a cryptocurrency exchange. Japanese exchanges have also been bolstering security with the use of biometric authentication for user accounts.

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Technical analysis

The price of bitcoin has begun to flatten after intense selling this year. The strength or weakness of the current trend, as well as the start of a new trend, can be analyzed with long/short ratios, the Wyckoff Method, Pitchforks, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

Long/short open interest on Bitfinex remains net short, following a sharp bump in shorts recently. There is a strong possibility of a short squeeze as price moves higher, where bearish traders are forced to buy back into the market to cover their positions. However, the recent increase in shorts may represent a hedge for the 31,500BTC long position accumulated recently.

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The Wyckoff Method can be used to help determine where price sits within a cyclical pattern. Price structure on the daily chart continues to correlate highly with a typical Wyckoff Accumulation phase. 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 with another accumulation period around the yearly pivot at US$11,000.

Further, BTC price structure has now formed a Wyckoff style low-volume spring, followed by a Sign of Strength (SOS). A break below the previous resistance at US$6,800 is potentially a support test or second spring. 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 ¾ full. There are no active bearish RSI divergences on the daily timeframe.

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Price remains near the median line (ML) in the upward trending Pitchfork which started in 2015, with anchor points in January, May, and August of that year. Price will continually attempt to return to the ML throughout any given trend. A price rise above the ML would likely have a maximum upside target of ~US$10,000-US$12,000. The 50/200EMAs are currently bearishly crossed, but may form a bullish Golden Cross soon, suggesting further upside.

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On 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 to neutral; price is entering Cloud, Cloud is bearish, the TK cross is bearish, and Lagging Span is above price and in Cloud. A long entry based on traditional Cloud strategy would not be warranted until price breach’s the Cloud. The long flat Kijun at US$7,865 represents a magnet for price.

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On the four hour chart, the cloud metrics are bullish; price is above Cloud, Cloud is bullish, TK is bullish, and Lagging Span is above Cloud and above Price. After traversing Cloud resistance, price closed above the Cloud with a Kumo breakout, a long entry signal. Price has continued moving North, largely held by the Tenkan support, suggesting a strong trend.

Additionally, price has formed a potential bearish reversal pattern known as the Rising Wedge with a not-so-perfect descending volume profile. The pattern suggests that mean reversion is likely soon, near the Kijun at US$7,000 with the first key support at the Tenkan, or US$7,250. Kijun bounces throughout a trend can occur frequently and lead to further trend continuation. There is also a growing bearish RSI divergence as price makes higher highs on less and less momentum.

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Conclusion

Network fundamentals have slowly started to turn the corner since April, as the need for network scalability has ebbed since December. Increasing transaction Batching, SegWit adoption, and Lightning Network use all represent improved network efficiency compared to one year ago. The continued rise in hash rate also suggests the network is more secure than ever from attempts at reversing transactions or double-spending coins. Bitcoin has also been increasingly in the public eye, with ongoing adoption in Asia, and emerging markets Turkey and Venezuela, out of necessity.

Technicals show a strong chance of a continued march towards US$11,000 in the coming weeks as suggested by the Wyckoff roadmap. In the near term, a pause or pullback to ~US$7,000 is likely due to weakening bullish momentum on lower timeframes. Ongoing substantial short open interest will provide fuel to create explosive moves higher.


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