Bitcoin Price Analysis – PBoC crushes volume

On the People’s Bank of China’s behest, the four major Chinese bitcoin exchanges introduced trading fees this week, causing a significant drop in volume. While the exchanges have been charging for withdrawals, a tiered fee structure incentivised traders to maximize their volume in any way possible. Traders have long since suspected Chinese exchange volume to be manipulated through things such as wash trading and “volumizing.”

Bitcoin reacted positively when the fees went live, but the long term effects remain to be seen. More accurate volume figures are undoubtedly a benefit for traders. Outside investors however, may see the significant decline in trading volume as a bearish event, despite the previous volume manipulation.

Following the rally to new All Time Highs (ATH) in China, and subsequent crash, bitcoin has been in a consolidation period, often seen after large price movements. We won’t be able to judge how much Chinese Yuan (CNY) volume has been lost until price action returns. Chinese traders will be taking a break around the 28th of January, Chinese New Year. The break is typically one week before and after the New Year. An accurate evaluation of the CNY market will be possible after the holiday.

Volume on Localbitcoins (LBC) continues to rise globally, with spikes in ATH volume over the past two weeks in several countries. LBC is an off exchange, peer to peer service which connects buyers and sellers in various countries around the world. Volume, in dollar terms, on LBC is a metric that can been interpreted as open interest around the globe, which can be directly influenced by political events in any given country.

Where there is a rise in inflation or capital controls, such as venezuela, you’d expect volume to be high. Where there is easy access to bitcoin exchanges, such as China, you’d expect volume to be low. Over the long term, with a global rise in interest coupled with the deflationary aspects of bitcoin, you’d expect price to continue to increase accordingly due to supply and demand principles.

A less publicised event occurred on the 22nd of January, a +16.64% difficulty adjustment due to a large increase in hash rate. The Bitcoin protocol implements a mining difficulty adjustment every 2016 blocks, which is generally every two weeks. Each difficulty adjustment is retrospective, which means that the hash rate can increase dramatically before the network adjusts. As the hash rate increases, block times decrease.

The new difficulty created a large backlog of transactions, as block times returned to their ten minute standard. This can be tracked in the size of the mempool. At the peak, there were over 60,000 unconfirmed transactions, meaning transactions were stuck in the network, waiting in transit. While this is to be expected after such a large difficulty adjustment, blocksize and scalability solutions, like SegWit, aim to reduce the number of transactions on the network.

Repeated clogged network events like this are certainly bearish because, despite the ability for the network to autocorrect and recover, there are periods of large backlogs and an extremely slow network.

If you’re ever using a wallet that does not use an automatic fee, and leaves that to your discretion, live fee estimators such as 21.co’s provide an excellent guide. This will help you determine the appropriate fee without getting your transaction stuck in the network unconfirmed.

Long Term Technical Analysis

A reversal pattern, known as the head and shoulders, or in this case, inverted head and shoulders (iHS), has completed on the weekly timeframe. Although a true head and shoulders pattern has a descending volume profile until the pattern completes, as discussed above, Chinese volume has been fake for many months. The current volume is undoubtedly higher now that it was during the 2013 bubble.

Commonly, once the neckline is broken, there is a retest of support or resistance, as is the case currently. The target can be measured from the neckline to the tip of the head, and extended from the neckline onwards. This gives a conservative long term target of $1340 on the BLX. A reach for this target is likely to be followed by resistance, and a pullback, near the target. The pattern would be invalidated with a weekly candle close below the neckline.

Fibonacci extensions, drawn from the January 2015 low to the December 2016 high, provides additional resistance targets or potential reversal zones within the range of the inverted head and shoulders target.

Medium Term Technical Analysis

The one day Ichimoku Cloud is showing a bearish Tenkan/Kijun (TK) cross above the cloud, which is a widely used signal for closing long positions.

Sentiment remains bullish as long as price remains above the cloud. Sentiment is now leaning bullish-neutral, and will continue to do so until a bullish TK cross reoccurs above cloud, an extremely bullish continuation signal. Once the price closes in the cloud, sentiment shifts to neutral. Should the price close below the cloud, sentiment leans bearish.

There is also a continuation chart pattern, the cup and handle, possibly forming.

Although the resistance is diagonal, the 50% fib has been breached by the pullback, and the traditional volume profile does not match. It’s possible that the pattern plays out with a measured target of ~$1500 (not shown).

Four hour Bollinger Bands are showing consolidation, with a decrease in BBand expansion after each successive move from the established high. This, coupled with volume, suggests a much larger move building in the near future, once the market has recovered from the December volatility.

Conclusion

PBoC FUD has largely abated, but the PBoC continues to loom over Chinese exchanges. Another PBoC announcement can and will occur, although we can expect the probability of additional announcements to decrease as time passes. Should price reach for a new ATH, in CNY terms, we can expect more bitcoin capital controls from PBoC. Technicals near team are leaning bearish until volume returns, which we can expect to see after the Chinese New Year.

Disclaimer: The information presented in this article is general information only. Information provided on, and available from, this website does not constitute any investment recommendation.