Bitcoin (BTC) has remained in a shrinking price range for the past 120 days. The market cap now stands at US$124.75 billion, with US$1.98 billion traded in the past 24 hours.
Despite a climbing hash rate, which continuously posts record highs, transactions per day remain sharply down from last year. Transaction fees and unconfirmed transactions are also down dramatically from last year, which is a win from a network user point of view. Transaction batching and SegWit adoption, a protocol improvement allowing for cheaper transactions and large block size, have played a significant role.
According to the Global Cryptocurrency Benchmarking Study by the Cambridge Centre for Alternative Finance, the number of active Bitcoin wallets is nearing 25 million and has been increasing steadily since 2015. Although wallets can be created but not destroyed, wallet usage can be seen as a loose metric for adoption and interest.
Globally reported over the counter (OTC) volume from LocalBitcoins.com remains sharply down from December and January, with upticks in volume in a few countries. OTC volume spikes tend to correlate with geopolitical uncertainty and trade instability, much of which is being fueled by the Trump administration’s economic policies. The platform also recently implemented Know Your Customer and Anti Money Laundering (KYC/AML) requirements, which may provide increased legitimacy.
Chinese OTC volume has remained consistent since February 2017, when domestic exchanges were barred from transacting. Although increasing slightly, the volume is at levels typical for a country without access to full-fledged exchanges.
Despite the ban, in recent comments to the Chinese Academy of Engineering, Chinese President Xi Jinping recently lauded blockchain applications as “breakthrough” technology. Additionally, the U.S. and China appear to be headed for a prolonged trade war fueled by new U.S. tariffs and reciprocal Chinese tariffs, which may also fuel OTC interest.
Canadian OTC recently reached record highs in both CNY and BTC denominations, in the setting of ongoing North American Free Trade Agreement (NAFTA) negotiations. Canadian PM Justin Trudeau acknowledged that “No NAFTA is better than a bad deal.” President Trump has already exited the Trans-Pacific Partnership (TPP) on the basis that it was a bad deal for the U.S., but the TPP may be revived due to Chinese trade tensions.
Iranian OTC volume also spiked recently, potentially in response to the US dropping the Iran nuclear deal. RT recently reported that India will pay for Iranian Oil in Rupees to skirt U.S. sanctions, while Iran switched to the Euro for financial reporting.
South American countries Argentina, Brazil, and Chile have all had increases in volume over the past few weeks as well. Peru has posted a record high in the Peruvian Sol and BTC denominations. Venezuela continues to post record highs in Bolivar volume, fueled by hyperinflation. The entire region seems inexorably linked due to instability and Venezuelan mass migration. The re-election of Venezuelan president, Nicolás Maduro Moros, signals that this economic meltdown will continue. There have been some reports that the Venezuelan government has begun “confiscating everything to mine cryptocurrencies themselves.”
Ongoing Brexit and recent Italian government debt crisis has not fueled Euro OTC volume as of yet. If the Italian debt crisis mirrors the debt crisis Greece experienced in 2015, OTC volume may rise sharply. According to economist Desmond Lachman, “only Greece has a higher debt-to-GDP ratio [than Italy] among countries in the eurozone,” but Italy’s economy is 10 times larger than Greece. In September 2017 Circle launched it’s OTC services in Italy, and is therefore well-positioned ahead of any turmoil.
U.S. and Russian tensions seem to vacillate between heated or friendly on any given day depending on who you ask, with the proxy war in Syria generally stoking tensions between the two. Russia’s gold reserves have been increasing every quarter for the past few years, recently hitting a fresh all time high, and may suggest less tolerance for the U.S. dollar as the global reserve currency. Iran and Russia have also recently been in talks to use cryptocurrencies to bypass U.S. sanctions. The Russian legislature passed a draft of law regarding regulatory clarity for cryptocurrencies and digital transactions.
Bitcoin exchange traded volume this week has been led by the Tether (USDT) and USD markets for the fifth consecutive week, mostly on Binance, OKEX, and Bitfinex. In Asia, the JPY volume has increased since last week but remains down as a percentage of total volume. The Korean Won (KRW) volume has almost double since last week and the premium has increased as well, currently at 2.4%. China's’ Yuan (CNY) volume remains minimal based on it’s historic domination in the past.
Bitcoin price structure has remained in consolidation purgatory since cooling off from a meteoric rise near the end of 2017. Periods of ranging, indecisive price action are critical for the market to regain momentum for a move in either direction. A key hallmark for this is a descending volume profile, which has been the case since the low set in February.
Although consolidation within a trend should always be assumed as trend continuation, casting a wide net with analysis, while avoiding analysis paralysis, and mapping out several scenarios is the key to eliminating surprises. Predicting the exact future price is less important than reacting to the price action with a potential trajectory and predetermined target.
This process can be done with Chart Patterns, Ichimoku Cloud, Moving Averages, Pitchforks, and historic macro trends. Further background information on the technical analysis discussed below can be found here.
A symmetrical triangle has formed as price has consolidated, making lower highs and higher lows. In Technical Analysis of Stock Trends (1948), Edwards and Magee suggest that roughly 75% of these triangles lead to a continuation of the trend, while the rest mark reversals. In any case, this pattern will be a ‘trade the breakout’ situation as it will likely lead to weeks of trend follow through. Breakouts post consolidation typically occur after at least 66% of the triangle has completed (yellow highlight).
A multi-month descending volume profile also breeds the possibility for other chart patterns. On the weekly chart, an inverted Head and Shoulders reversal chart pattern. The most obvious problem with this pattern is the left shoulder dips below the trough of the head, which may invalidate the pattern entirely. Nonetheless, the potential structure remains with a 1.618 fib extension and measured move of US$12,000 and US$14,000 respectively.
On the daily chart, an inverted Adam and Eve double top chart pattern is also possible, although there are many issues with its current structure and placement relative to price. The Adam (V) nor the horizontal support are completely clean or expected.
Inverted patterns are typically seen at the top or markets, not after a downward move. While this makes the probability of the pattern becoming a reality less likely, it does not mean that it cannot happen. An inverted Head and Shoulders appeared on the weekly Oil chart after a significant downward move as well, which reached it’s 1.618 fib extension almost exactly on target.
If this inverted Adam and Eve is real, 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.
Bollinger Bands, a measure of price volatility, have also coiled tighter and tighter, as illustrated by the Bollinger Band Width (BBW) indicator. An oscillator similar to RSI, %B, which shows the depth of price relative to the Bands, shows a growing bullish divergence as price dips lower without further expansion of the Bands themselves.
The Ichimoku Cloud uses 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, nearly bearish Cloud, newly bearish TK cross, and Lagging Span in price and above Cloud. Together, these signals suggest the trend is neutral but leaning weakly bullish because price remains above Cloud. This is the first TK cross since 2015, while the previous bearish TK cross in a similar position led to a multi-month downtrend. TK crosses on high timeframes are significant and should be seen a long exit signal for trade entries which began in 2015.
Price itself is below the Kijun and, seemingly, in no-man’s land. A long entry would not be warranted until price is above the Kijun with a bullish TK cross, essentially also above the neckline of the head and shoulders chart pattern.
The Cloud metrics on the daily time frame are; price below Cloud, bearish Cloud, newly bearish TK cross, and Lagging Span below price and Cloud. A long entry based on traditional Cloud rules does not occur until the Cloud is breached by price. A short entry has triggered with a bearish TK cross below Cloud, the strongest type of entry signal in the Cloud system. Optimal short entry occurs with a Kijun bounce at US$8,200.
On the two day chart, price is flirting with a clean breach of the 200 Exponential Moving Average (EMA) while being bound below the 50EMA as well. A 50/200EMA cross on this timeframe would be the first since November 2015, with the last bearish cross (red) resulting in a multi-month downtrend.
On the daily chart, price is below the 200EMA, and the 50/200EMAs hold a bearish cross. With multiple EMA crosses occurring in succession on the same timeframe, any one cross becomes less valuable as an actionable signal. There is currently a mild hidden bullish divergence on RSI. Open long/short interest on Bitfinex is net long and has remained essentially flat over the past few weeks (top panel, chart below).
A Pitchfork on the daily chart starting in 2017, with anchor points in January, May, and July, shows price reaching a similar distance below the mean (red line) as was reached above the mean in December. Price has closed this pitchfork for several days suggesting bearish invalidation. If price returns to inside the Pitchfork, a return to the mean is possible.
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~$5,300 is possible should price return to the mean (red line) of the prior trend.
The OKEX quarterly futures rollover begin at the end of June. The rollover dates have been significant since 2015, with an alternating top/bottom price pattern between contract expirations. The entire quarter has been essentially flat thus far, potentially bucking the longstanding trend.
The quarterly premium (blue) over the past month has been shrinking each day, with the weekly futures (green) price now below spot. Futures below spot price is an example of backwardation. A large premium over spot, as was seen throughout December and January, is typically an indicator of bullish sentiment, including exuberance and euphoria. This was an example of contango.
For better or worse, economic and trade policies worldwide have begun to dramatically shift with multiple political uncertainties. Bitcoin, and cryptocurrencies broadly, have more recently represented a global futures market to price-in credit risk or lack of confidence in leadership. CNBC recently discussed Bitcoin as a fear gauge for the market, similar to the volatility index.
Technicals are the most bearish they have been in months. Based on the current price structure, breaking up would be much more surprising than breaking down. Admittedly, trend-based indicators like the Cloud become more noisy with non-trending price action, and therefore less reliable for actionable signals. However, even when zooming out on the price action, many of the technicals remain bearish. Currently, the trend indicator to watch is the 50/200EMA on the two day timeframe.
Although too early to determine, one ray of hope would be the possibility of this entire consolidation period representing re-accumulation. Essentially, the entire bull trend from 2015 has been reset, which gives plenty of fuel for a new all time high just as easily as returning to new lows. The direction may be unclear, but the volume-based momentum will be obvious.