Bitcoin Price Analysis – Regulators warm to cryptocurrencies

Bitcoin (BTC) has continued to unwind and is now down almost 70% from the record high on December 17th. Cryptocurrencies as an asset class have followed suit. The combined market capitalization has dropped from highs over US$800 billion in December to just under US$400 billion. The BTC market cap currently stands at US$128 billion, down from US$324 billion on December 17th, with US$10 billion traded in the past 24 hours.

The talking point of the week has been the US Senate hearing regarding “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.” While the stereotypical negative connotations of extreme market volatility and speculative mania were cited several times the meeting overall was optimistic. The biggest concern for regulators is fraud and market manipulation affecting investors on main street, whether through unregulated exchanges or fraudulent Initial Coin Offerings (ICOs).

The chairman of the U.S. Commodity Futures Trading Commission, J. Christopher Giancarlo, focused on the increasing public interest in BTC and other cryptocurrencies, from millennials to the elderly. “We owe it this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response,” Giancarlo said, “not a dismissive one.” The chairman also mentioned the continued need to learn and educate consumers, many of whom search for information at public libraries. He touted blockchain technology as an important invention with the ability to reveal and check counterparty risk. If it had existed during the financial crisis in 2008 there “may have had more and better policy choices available to respond to the crisis.”

The chairman of the U.S. Securities and Exchange Commission (SEC), Jay Clayton, gave a bleaker and more concerned outlook on virtual currencies, which “only work if integrated with the financial system.” Clayton focused on possible fraud and abuse regarding ICOs, which he dubbed “security offerings under a new label” which often have “nothing to do with distributed ledger technology.” He warned that although no ICOs have yet to register with the SEC, using “semantic gymnastics” are “squarely in the crosshairs of the division.”

The other major talking point has been that Coinbase announced four U.S. banks – JPMorgan Chase, Bank of America, Citi, and Capital One – are blocking purchases with a credit card. One Coinbase user on Reddit also mentioned that his bank now treats purchases through Coinbase with a credit card as a cash advance, with additional fees.

Coinbase increased the limit on credit card bitcoin purchases in October 2017. Instant buys allowed verified users with a U.S. bank account or credit card to buy up to $25,000 in BTC. New users buying BTC with credit cards undoubtedly helped fuel the price increase throughout November and December.

The number of BTC transactions per day has dropped precipitously since then. This may appear to indicate that network activity has decreased, but the number transaction outputs over time tells a different story. Metrics like the network value to transactions ratio will need to be reworked to reflect these changes.

Scalability is still a concern as user adoption increases. When transactions per day were at their highest, fees and unconfirmed transactions were also higher than ever. Batching transactions, or sending one transaction to many people instead of each transaction being sent individually, is an immediate way to decrease the number of transactions sent over the network. This change is most effective with entities like exchanges, who are among the highest users of the network, become cognizant of the burden to the network and implement batching.

However, fees have now decreased substantially. The median transaction fee is now US$2.50. Pending transactions have also decreased. There are currently less than 8000 pending transactions, as opposed to over the 250,000 transactions pending in late December. SegWit transactions currently account for 14% of the total. Coinbase announced plans to implement SegWit addresses over the next few weeks which will increase SegWit usage on the network significantly.

Hashrate and difficulty continue to increase despite a drastic decrease in mining profitability, while mining profitability will continue to decrease so long as more hashrate is added to the network. Mining profitability is currently analogous to May 2017.

A drop in price generally decreases network decentralization over time. Any reductions in mining profitability favors larger-scale miners who can sustain a temporary drop in profitability, or afford to mine at a loss for a longer period of time.

Of 115 countries surveyed by Elite Fixtures, the cheapest location to mine a single BTC is Venezuela, where it costs US$531 in electricity alone. The most expensive location is South Korea, costing $26,170. The average price to mine a bitcoin of the countries surveyed was ~US$7,200.

Bitcoin exchange-traded volume this week has been led by the US Dollar (USD), US Dollar Tether (USDT), and Japanese Yen (JPY) markets. Global over-the-counter volume remains down from records set in December while holding pre-December levels. Google trends for the search term “bitcoin” reflects this pattern as well.

Technical Analysis

The price of bitcoin now stands on the bearish side of long-term support, indicating a possible trend shift. Indicators such as the Ichimoku Cloud, Moving Averages, and Pitchfork help determine entry and exit points, as well as the state of the current trend.

On the weekly chart, using the Ichimoku Cloud, price has breached the Kijun, a long-term support. A definitive Kijun bounce would have indicated bullish continuation, whereas a breach leaves the status of the trend indeterminant. Relative strength index (RSI) has also dropped below 50, a momentum reset, for the first time since 2015. A stronger likelihood of bullish continuation would occur If the RSI holds near 50 for the next two weeks. A definite break of the 50 level would suggest a reach below the 30 level.

The Ichimoku Cloud metrics on the daily chart are all bearish. Although this would trigger a short entry, the distance of price from the Kijun suggests that the asset is heavily oversold. An optimal short entry would occur when price returns to the Kijun but does not breach the Kijun, which would indicate bearish continuation. February 6th also marked the highest daily trading volume since China banned trading in early 2017. Volume spikes such as this are highly suggestive of a trend reversal, as was the case on September 15th.

A long entry will not trigger until all metrics flip bullish again, which may not occur for several weeks. The Kumo twist on March 6th is the zone with the highest likelihood of price breaching the Cloud. If price is below Cloud at that time, price will treat this zone as a magnet for upward momentum. Price is also currently below the 200EMA, a litmus test for trend status.

The RSI has now reached oversold levels below 30 on the daily chart. Some momentum traders treat this as a long entry signal, with trades staying open until price reaches overbought levels above 70. The moving average convergence/divergence (MACD) oscillator is also heavily bearish. A bearish cross of the moving average and signal line on December 19th with a breach of 70 on the RSI indicated a momentum flip. A bullish cross on MACD and breach of 30 on RSI may also indicate a momentum flip.

A Pitchfork on the daily chart with anchor points in February, May, and July shows price reaching the 1.618 level on the recent drop. The 1.618 level is borrowed from Fibonacci extensions and was also roughly seen as resistance at US$15,700 and US$17,000.

Buying in the current zone comes with the risk of a bearish invalidation of the Pitchfork, with a significant break below the lowest diagonal support will invalidate the Pitchfork. The upside potential is a return to the median line, followed by a test of the upper limit.

The Ichimoku Cloud metrics on the four-hour chart are also all bearish. An optimal short entry would occur when price returns to the Kijun but does not breach the Kijun or a bearish TK recross occurs, both which would indicate bearish continuation.

Lastly, there is potentially a bullish reversal pattern, the inverted head and shoulders, with a 1.618 fib extension and measured moves of US$11,500 and US$13,105. The horizontal levels of this pattern strongly correlate with support and resistance levels from previous order blocks.

Conclusion

U.S. regulators are broadly optimistic in regards to cryptocurrencies, but cautious when discussing ICOs specifically. The BTC network continues to show signs of improving scalability, with a rise in batched transactions and SegWit adoption.

Technicals suggest the possibility of the beginning of a bear trend, based on the collapse of several long term support levels. While there is nothing suggestive of definitive imminent reversal, a volume peak and a chart pattern suggest an interim bottom may be near.