Bitcoin Price Analysis - The confluence of bullish continuation

Bitcoin (BTC) continues to recover from this years low, set earlier this month. The market cap now stands at US$177.78 billion, with US$3.69 billion traded on exchanges in the past 24 hours.

A recent acquisition has been a hot topic of discussion this week, with Circle buying Poloniex for US$400 million. Boston-based Circle is one of three companies that hold a New York bitlicense and also has plans to release a retail trading app later this year.

Having launched in 2013, following a US$9M Series A funding round, Circle was created to increase mainstream adoption of digital currencies like Bitcoin by providing a payment platform for consumers and merchants. The company has since raised a total of US$140 million in venture capital from investors including Goldman Sachs, IDG Capital Partners, Breyer Capital, Accel Partners, General Catalyst Partners, Baidu, CICC Alpha, EverBright, WangXiang, and CreditEase. Goldman has since started development of a cryptocurrency trading desk of their own.

While putting their money to use, Circle cites Poloniex as an important bridge for “an open global token marketplace.” The cryptocurrency exchange was unable to keep up with the market demand in 2017, having problems with exchange uptime and answering customer support tickets. As a result, Poloniex lost much of its market share to Bittrex. Binance has also now arrived on the scene, only adding to the market competition.

In an interesting twist, Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said it’s too early for his bank to need a bitcoin strategy and that he doesn’t consider the digital currency to be a store of value. Blankfein said that volatility needs to settle down and it "doesn't feel like a currency, doesn't feel like a store of value [...] It works out - and it gets more established, and it trades more like a store of value, and it doesn't move up and down 20 percent, and there is liquidity to it - we'll get to it."

Goldman is far from the only incumbent to take a publically hawkish stance on the asset. In last years annual report, JPMorgan Chase had one reference to cryptocurrency, acknowledging it was a competitor to their business model due to its ability to decrease fees and friction between payments.

JPMorgan CEO Jamie Dimon famously called BTC a fraud, but later expressed regret that he made the remark. The financial giant was also one of three banks, including Bank of America and Citigroup, to begin banning credit card purchases for cryptocurrency earlier this year.

Bank of America CEO Brian Moynihan is also a staunch critic of cryptocurrencies alleging that they represent an untraceable tool for money laundering and other illegal activities, stating “we have limited our relationships [with cryptocurrencies] and I think the thing speaks for itself.”

Former Wells Fargo CEO Dick Kovacevich believes that BTC is a “pyramid scheme,” adding, “it makes no sense.” Citigroup CEO Michael Corbat sees cryptocurrencies as a threat to the existing financial system that allow for tax avoidance and money laundering, which governments won’t allow. He does, however, see potential in nationalized digital currencies, but believes that “cryptocurrency is a bad moniker.”

Bitcoin Price Analysis 1 Mar 2018 1In other news, the Dave Kleiman estate has filed a US$10 billion lawsuit against Craig Wright. Kleiman and Wright were both early BTC miners. The suit alleges that since Kleiman’s death, Wright has “perpetrated a scheme” to “seize Dave’s bitcoins.” The lawsuit is seeking between 300,000 and 1.1 million BTC, to be determined at trial.

Chain analysis of the addresses in the lawsuit by WizSec, the company responsible for making the Mt. Gox and BTCe connection, has found that the addresses are likely not owned by either Craig Wright or Dave Kleiman, but are simply addresses which at one point in time held a significant amount of BTC.

In the meantime, the Bitcoin network metrics continue to tell a complex story as scaling solutions continue to evolve. Metrics to watch include; hash rate and difficulty, transactions per day, network value to transactions (NVT) ratio, unconfirmed transactions, SegWit adoption, transaction outputs (not shown), and Lightning Network growth and usage.

Hashrate and difficulty continue to increase despite a drastic decrease in mining profitability, which will continue to so long as more hashrate is added to the network and price does not increase. Mining profitability is currently analogous to May 2017 (not shown). The leading ASIC manufacturer, Bitmain, may have made as much as US$4 billion last year according to an estimate by CNBC.

Bitcoin Price Analysis 1 Mar 2018 2Transactions per day have continued to decline since December. The transaction highs largely mirror the bitcoin price chart itself. Individual transactions have also declined due to batching, where one transaction is sent to many addresses at once instead of each transaction being sent individually.

BTC price is also very closely related to network activity. The network value to transactions (NVT) ratio (not shown) has increased substantially as a result, now comparable to levels seen in 2015. A lower NVT suggests a cheaper value per unit of on-chain transaction volume. NVT does not account for off-chain transactions.

Bitcoin Price Analysis 1 Mar 2018 3The combination of transaction volume and price have created a tumultuous year for the BTC fee market in 2017, as the scaling debate raged on between factions. Community consensus lead to the implementation of a soft fork with Segregated Witness (SegWit), which won out over a hard fork that merely increased block size. Transaction fees are currently negligible. Transactions can currently be sent for US$0.48 (2 sat/byte) with a less than four hour expected confirmation, according to the hardware wallet Trezor.

Bitcoin Price Analysis 1 Mar 2018 4As transactions have declined, the number of SegWit transactions as a percentage of the total has recently seen an uptick. SegWit provides a scaling solution that effectively decreases the size of a transaction, which allows for more transactions to be squeezed into each block. Bitfinex and Coinbase have both started using the update.

Bitcoin Price Analysis 1 Mar 2018 5SegWit also enables the Lightning Network (LN), a protocol that implements trusted, bidirectional, off-chain, hub and spoke payment channels. LN is designed to facilitate microtransactions that are confirmed in milliseconds. There are 1873 nodes with 5,153 channels currently operating on the BTC testnet. The number of nodes and channels on the mainnet has now started to catch up, with 900 nodes and 1,500 channels, but should be used with caution.

Bitcoin Price Analysis 1 Mar 2018 6Exchange traded volume this week has been led by the USDT and USD markets, mostly on Bitfinex. The Korean Premium remains in the Korean Won (KRW) market, where BTC sells for ~5.5% more on average.

Bitcoin Price Analysis 1 Mar 2018 7Global over the counter (OTC) volume remains down sharply from December and January. Despite this, Venezuela posted a record high in Bolivar volume over the past week.

Bitcoin Price Analysis 1 Mar 2018 8Technical Analysis

In any other market, a 70% pullback from US$19,765 would often be the end of bullish momentum for an extended period of time. However, since the extreme low of ~US$5,950 bitcoin has continued to make several fractals that signal bullish reversal, bucking the micro bear trend. The completion of an inverted head and shoulders on a low timeframe has spurred further bullish momentum on the higher time frames. Further background information on the technical analysis discussed below can be found here.

Bitcoin Price Analysis 1 Mar 2018 9On the monthly chart, February’s candle has closed as a dragonfly doji, a bullish reversal sign. These candles typically occur after the end of bearish momentum, and close with a long lower wick and little to no upper wick. Upward momentum will be confirmed with a bullish close of the following candle, in this case, the March monthly candle.

Bitcoin Price Analysis 1 Mar 2018 10On the daily chart, the Ichimoku Cloud metrics are bearish. The Cloud is useful for determining the state of the overall trend. A signal for trade probability can be determined by using four metrics; price’s relative position to the Cloud, the color of the Cloud, the Tenkan (T) and Kijun (K) cross, and the Lagging Span. The best entry always occurs when the signals flip from bearish to bullish or vice versa.

The current Cloud metrics on this time frame are; price below the Cloud, the Cloud has a bearish twist, the TK cross is bearish, and Lagging Span is below Cloud and Price. As is often the case, the Kijun (red line) acts as a major level of support or resistance for the trend (yellow arrows). Until the Kijun is breached, the trend remains intact.

A long entry will not occur until the Kijun and Cloud are breached. There is a Kumo twist on March 6th which is a zone with a high likelihood of price action. If momentum exists, price will treat this zone as a magnet and move upward.

Bitcoin Price Analysis 1 Mar 2018 11On the twelve hour chart, an inverted head and shoulders has formed. This is a bullish reversal chart pattern. These patterns classically involve two lows with a much lower low in between. The volume profile for any chart pattern should be descending from the initial formation, which is roughly the case here. A descending volume profile is indicative of consolidation. A long entry signal occurs once the neckline is broken, ~US$10,500. Price will then typically return to the neckline to confirm support.

The target for the pattern can be determined through a measured move, the vertical distance from the neckline to the tip of the head, as well as the 1.618 Fibonacci extension from neckline to the tip of the head (blue dashed lines below). Because the neckline is diagonal, both of these values, US$17,230 and US$15,600, should be seen as loose targets. These targets also roughly match the local highs set through December and early January.

Bitcoin Price Analysis 1 Mar 2018 12On the four hour chart, there is another bullish reversal chart pattern in the process of completion, a falling wedge. These patterns classically involve lower highs and lower lows in a tighter and tighter wedge until a break to the upside, typically when the wedge is about three-quarters complete. The volume profile for any chart pattern should be descending from the initial formation, which was the case here. The breakout of the diagonal resistance corresponded with significant volume confirmation.

The target for the pattern can be determined through a measured move, the vertical distance of the previous breakout, or pole, projected upwards from the diagonal breakout (blue dashed lines), as well as the 1.618 Fibonacci extension of the vertical pole. This yields a resistance zone of US$12,900 to US$13,500.

Bitcoin Price Analysis 1 Mar 2018 13Lastly, the OKEX quarterly futures rollover is in mid-March. The rollover dates have been significant since 2015, with an alternating top/bottom price pattern between contract expirations. Based on this pattern, the bottom for the quarter will occur during the current contract, and the top for the next quarter will occur close to July.

Bitcoin Price Analysis 1 Mar 2018 14Conclusion

The traditional finance world is becoming increasingly aware of the growing presence and influence of Bitcoin. As more on-ramps and exchanges are developed, and fully comply with regulatory guidelines, investors on Main St. and Wall St. will begin to enter cryptocurrency with more of an open mind. Despite this, the top banking CEOs are consistently dismissive in public.

Network metrics increasingly suggest that the scalability growing pains seen throughout 2017 have been addressed. The top users of the network, the exchanges, have begun to implement batching transactions and Segwit addresses to alleviate the record high transaction fees seen last year.

Technicals continue to support a bullish reversal after the pullback from record highs in December. Chart patterns like the inverted head and shoulders and falling wedge add to the confluence of bullish continuation suggested by the Cloud in March. A daily close above US$11,000 would be highly suggestive of strong bullish continuation. A new all-time high in price becomes more and more likely throughout May, June, and July.