Bitcoin Price Analysis – A slow bleed

Bitcoin (BTC) has slid 20% in the past week and is now down 70% from the record high in December 2017. The market cap stands at US$107.13 billion, with US$2.5 billion traded in the past 24 hours.

Transactions per day also continued to decline since December and are currently around 200,000. Transactions have not only declined due to a lack of network use but also transaction batching, where one transaction is sent to many addresses at once instead of each trasnsaction being sent individually.

Transaction fees, which increased dramatically throughout 2017, have also declined significantly. This fee reduction is also multifactorial. Although a decrease in transactions per day means fewer transactions need to be cleared, SegWit, which currently accounts for 34% of transactions, has also been a significant contributing factor in the average fee decline.

Unconfirmed transactions have also decreased dramatically since last year. There are currently around 20,000 pending transactions, most of which were sent with a 1 satoshi fee. Recently, there was a large uptick in unconfirmed transactions which was attributed to UTXOs being cleared. UTXOs are similar to loose change, and accumulates with transactions. If transaction fees are high, they continue to accumulate and remain unspent, but when transactions fees are low, these UTXOs can be unlocked and used.

Using a 30-day Kalichkin network value to transactions (NVT) ratio, BTC remains in the upper-third of its historical NVT value. NVT has not been this high since January 2015 but has begun to turn downward recently, which suggests increasing on-chain network usage based on the dollar amount being transacted. Additionally, inflection points in NVT ratio can be correlated to extreme highs or lows in price.

Although NVT is difficult to compare between coins which use different transactions types, the ratio can be used to assess a network’s relative utility over time. XRP, LTC, and DOGE are currently the only coins with an NVT lower than BTC.

Hash rate and difficulty continue to post record highs, with ongoing shipments of ASICs from multiple mining companies, including Bitmain and Halong. There are now almost 10,000 public nodes and the network is capable of more than 80 exaFLOPS. One exaFLOPS is a billion billion calculations per second. In November 2017, the top 500 supercomputers in the world held a combined speed of 0.250 exaFLOPS. The human brain operates at an estimated 1 exaFLOP. The hardware cost for a 51% attack on the network is now estimated at US$6.57 million at current prices, and the hardware would require US$9 million in electricity costs to maintain for one day.

BTC inflation currently stands at ~3.8% and will continue to decrease in a stepwise fashion until the remaining coins are mined. Inflation in the United States is currently around 2.8%. The next Bitcoin block reward halving is scheduled for May 2020, but will arrive slightly sooner if more and more hash rate is continually added to the network. As miners are added to the network, the net block time is slightly less than 10 minutes.

Bitcoin exchange traded volume over the past 24 hours has been led by the Tether (USDT) and the United States Dollar (USD) markets for the sixth consecutive week, mostly on Binance, OKEX, and Bitfinex. In Asia, Japanese Yen (JPY) and Korean Won (KRW) volumes are unchanged since last week. Chinese Yen (CNY) volume has increased dramatically since last week but remains minimal based on its historic domination.

Globally reported over the counter (OTC) volume from LocalBitcoins.com remains sharply down from December and January and continues to decrease. Venezuela continues to post record highs in Bolivar volume, fueled by hyperinflation.

Technical Analysis

Bitcoin has broken the low of April and looks to be heading lower on bearish continuation. The status of any emerging or nascent trend can be determined using Moving Averages, Chart Patterns, Ichimoku Cloud, and Pitchforks. Further background information on the technical analysis discussed below can be found here.

Price has convincingly broken the multi-month symmetrical triangle, or coil. This will likely lead to weeks of trend follow through. There is currently no bullish RSI divergences on the daily timeframe. The 50/200EMAs hold a decidedly bearish cross. Open long/short interest on Bitfinex leans long, with shorts flat and longs rising (top panel, chart below).

The daily price structure highly correlates to a stereotypical Wyckoff Accumulation phase. The price of BTC is potentially forming a “Spring” with this new local low. The Wyckoff Method can be used to help determine where price sits within a cyclical pattern. 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.

On the daily chart, an inverted Adam and Eve double top chart pattern or inverted Cup and Handle have possibly completed. There are many issues with both structures and placement relative to price. Neither the Adam (V) nor the horizontal support are completely clean or expected. An inverted Cup and Handle is more typical after a sustained downtrend, not a ranging market.

Inverted patterns are typically seen at the top or bottom of markets, not after a downward move. While this makes the probability of these patterns becoming a reality less likely, it does not mean that they cannot happen. An inverted Head and Shoulders appeared on the weekly Oil chart after a significant downward move as well, reaching it’s 1.618 fib extension almost exactly on target.

If this inverted Adam and Eve comes to fruition, it yields a price projection of ~US$2,900 and US$4,600 based on the measured move and 1.618 fib extension. The measured move target nearly matches the low set in September, as well as the previous resistance throughout June and August. The inverted Cup and Handle also holds a similar price projection (not shown).

Turning to the Ichimoku Cloud on the weekly chart, there are four 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.

The Cloud metrics on the weekly time frame are; price above Cloud, bullish Cloud, bearish TK cross, and Lagging Span in price and above Cloud. Together, these signals suggest the trend remains bullish to neutral based on price position and the bearish TK cross. A long entry would not be warranted until price is above the Kijun at US$10,000. As price will likely fall through the Cloud in the next few weeks, a bear trend based on the Cloud will begin. The flat Kumo and Kijun at US$10,000 should act as strong resistance. Weekly RSI is below 45 for the first time since 2015 and there are no bullish divergences.

The Cloud metrics on the daily time frame are all bearish; price below Cloud, bearish Cloud, bearish TK cross, and Lagging Span below price and Cloud. A long entry based on traditional Cloud rules does not trigger until price breach’s the Cloud.  A bearish Kijun bounce should be expected and any bullish reversals will be met with resistance at the Kijun, currently ~US$8,000. There is no bullish RSI divergence.

Lastly, price has returned to the original upward trending Pitchfork beginning in 2015, with anchor points in January, May, and August of that year. Price broke North of this trend in October 2017 and again currently sits in the upper limits. A downside target of US~$5,500 is possible should price return to the mean (red line) of the prior trend.

Conclusion

Despite heavy pullbacks in price, the network continues to perform better than ever. Transactions are cleared quickly and fees are low. The economical use of block space through batching and SegWit are strong contributing factors. Hash rate continues to rise despite declining prices, which may begin to pinch out smaller mining operations due to shrinking profits.

Technicals are all bearish, suggestive of an emerging trend. The next strong support at US$5,500 correlates with a year old mean of the previous bull trend. The sliver of bullish hope that remains is cradled in the bosom of a Wyckoff accumulation phase. If this low holds, either with a capitulation wick or as is, a spring for a new bull trend is possible.

Despite heavy pullbacks in price, the network continues to perform better than ever. Transactions are cleared quickly and fees are low. The economical use of block space through batching andSegWitare strong contributing factors. Hash rate continues to rise despite declining prices, which may begin to pinch out smaller mining operations due to shrinking profits.