Bitcoin Price Analysis – Bearish in the interim

Bitcoin (BTC) has risen 16% over the past ten days, after falling 42% throughout May and June. The market cap stands at US$114.69 billion, with US$3.58 billion traded in the past 24 hours.

Hash rate and difficulty continue to post record highs as more and more ASICs are added to the network. Mining profitability has hit an all-time low, meaning that miners who account for a significant percentage of the hash rate are mining at a loss. However, a large drop in hash rate occurred after a mining farm in Asia was destroyed in a flood. The event illustrates the importance of decentralized mining facilities and the risks to the network if mining becomes too centralized.

As difficulty rises, mining profitability will continue to decrease, given that transactions per day remain relatively low. 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 miners, both by mining pool and geographically. The next Bitcoin block reward halving is slated for May 2020.

Another metric that can be used to monitor the status of the network is the number of Nodes. The total number of nodes has increased 22% since this time last year, but has decreased since March. These statistics include mining and non-mining nodes. Although archival nodes are not incentivized directly with a block reward, they ensure network consensus. Based on global distribution, the United States and Germany have the highest percentage of nodes.

Meanwhile, the number of transactions per day has averaged 180,000-200,000 since June. This metric has declined significantly for all cryptocurrencies. Transaction costs have also declined significantly with nearly 0 fees waiting to be collected for processing the 1,300 pending transactions.

On-chain transactions per day 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 transaction being sent individually. The ratio of outputs per transactions has risen significantly since this time last year, suggesting the practice has become a mainstay.

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 the NVT ratio can correlate with extreme highs or lows in price.

Although NVT is difficult to compare between coins that 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.

The transaction fee reduction is multifactorial. Although a decrease in transactions per day means fewer transactions need to be cleared, SegWit, which currently accounts for ~39% of transactions, has also been a significant contributing factor in the average fee decline.

SegWit transactions occupy less block space than equivalent non-SegWit transactions, allowing SegWit transactions to pay less total fees to achieve the same fee rate as non-SegWit transactions. Daily SegWit usage has steadily increased since January.

The SegWit soft fork also enabled the possibility of further second layer network upgrades like the Lightning Network. Since going live on March 15, the Lightning Network (LN) has continued to gain traction as new channels come online.

The software solution enables trusted, bidirectional, off-chain, hub and spoke payment channels and also promises the possibility of instant payments, microtransactions, and increased scalability. 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.

Several developments still remain on the Bitcoin protocol roadmap to increase scalability and privacy. Bulletproofs and Mimblewimble offer privacy solutions with complete fungibility between transactions. Schnorr signatures and signature aggregation bring the potential for storage and bandwidth reduction by at least 25%. Merkelized Abstract Syntax Trees (MAST) offers three benefits; smaller transactions, more privacy, and larger smart contracts.

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 ninth consecutive week, mostly on Binance, OKEX, and Bitfinex. In Asia, Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) volumes are down as a percentage of trading since last week.

Another Bitcoin ETF application was sent to the U.S. Securities and Exchange Commision this week by the Chicago Board of Exchange. The Winklevoss ETF, COIN, was rejected by the SEC last year. A mainstream Bitcoin-backed ETF would offer investment for those who are not familiar with directly holding cryptocurrencies. This new demand would potentially impact the price significantly.

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. The platform recently implemented mandatory Know Your Customer and Anti Money Laundering (KYC/AML) requirements, which may provide increased legitimacy going forward. This will also push so-called dark money transactions onto other avenues.

Technical Analysis 

Bitcoin has found a little life over the past few days, but remains in an interim bearish trend. The strength or weakness of this trend can be analyzed with the Wyckoff Method, Pitchforks, exponential moving averages (EMAs), chart patterns, and Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

Price structure on the daily chart seems highly correlates to a typical Wyckoff Accumulation phase, which can be used as a rough interpretation of a trading range. The price of BTC is potentially forming a “Spring” with this new local low, but it may also represent another support test. 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.

Price has bounced on the mean reversion point of 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 half of the trend. Based on the diagonal resistance, a maximum upside target of ~US$10,000 is possible.

On the two-day chart, price remains below the 200EMA with a bullish 50/200EMA cross. A declining volume profile is suggestive of price consolidation. A bearish 50/200EMA cross before consolidation resolves has a bearish bias. This would be the first cross of this type since 2015.

A giant falling wedge reversal chart pattern has potentially formed. Price will coil tighter and tighter in the drawn channel until price has substantial volume to move outside the boundaries. Triangles typically break after ¾ full, or around July 15th. The projected price target, ~US$17,000, is taken from the depth of the widest point of the wedge and moved to the lowest potential breakout point.

An inverted Adam and Eve double top chart pattern, or inverted Cup and Handle, has 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).

On the four hour chart, an inverted head and shoulders reversal chart pattern has developed with a 1.618 fib extension and measured move of US$7,400 and US$7,800 respectively. The Inverted Head and Shoulders is validated through the shape of the market structure, descending volume profile, an on volume breakout of diagonal neckline resistance, and a throwback to that resistance which confirmed as support. The most conservative long entries will trigger above US6,800 with stop losses below US$6,400.

Turning to the Ichimoku Cloud on the daily 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 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$7,850. The daily 200EMA is also at this level, providing additional confluence for resistance.

The spread of the TK lines is forming a C-Clamp, which has indicated reversals in price trajectory twice this year. There was also an active bullish RSI divergence, meaning, the price has moved lower on less momentum, suggesting the potential reversal.

Lastly, the CME futures have now joined the fray with one contract representing 5BTC and, despite being cash-settled, have significantly influenced price. The December to June contract settled on July 5th. The May open interest for CME futures stood at 2,827 contracts with an average daily volume of 3,931 contracts.

Conclusion

Despite declining daily transactions, NVT has begun to decrease, suggesting more on-chain value is being transmitted. SegWit and batching have massively improved scalability going forward for the next swath of heavy network usage. Although many months away from mainstream use, the Lightning Network has also greatly improved the consistency of low-cost transaction fees for microtransactions. Future improvements to come for scalability and privacy include; bulletproofs, MimbleWimble, Schnorr signature aggregation, and MAST.

Technicals are trending bearish in the interim, with suggestions of price reversal to ~US$8,000. A low timeframe reversal chart pattern will complete after a break of US$6,800. Higher timeframes show a continued bull trend since 2015 which has recently mean reverted after an explosive Q4 2017. Price structure continues to mirror a Wyckoff accumulation period suggestive of a resumption of a low timeframe bull trend.

Despite declining daily transactions, NVT has begun to decrease, suggesting more on-chain value is being transmitted. SegWit and batching have massively improved scalability going forward for the next swath of heavy network usage. Although many months away from mainstream use, the Lightning Network has also greatly improved the consistency of low-cost transaction fees for microtransactions. Future improvements to come for scalability and privacy include; bulletproofs, MimbleWimble, Schnorr signature aggregation, and MAST.