Bitcoin Price Analysis – The current bullish pennant

After finishing 2017 up ~1300%, Bitcoin (BTC) is down from all time highs. The cryptocurrency’s market cap now stands at US$229 billion, with US$3.95 billion traded in the past 24 hours. Trading volume should begin to increase again as traders return from their year end celebrations.

Hash rate and difficulty continue to rise as more miners join the network. With multiple mining innovations in the pipeline and new hardware on the horizon, expect the hash rate to continue to rise unabated.

The most cost-efficient Bitcoin miners are application-specific integrated circuits (ASICs) which are specifically designed for mining. The largest ASIC producer is currently Bitmain, a Chinese company headed by Jihan Wu. Bitmain Antminers account for a large percentage of the total hash rate. Both the S9 and L3+ models are currently sold out.

A new contender for efficiency, based on computations per kilowatt, is Halong Mining’s Dragonmint 16T. Halong has been taking pre-orders since November and is aiming to deliver the mining hardware in March. The company is headed by pseudonymous Bitcoin Core developer BtcDrak, who wants to bring more competition to the mining space.

Another Chinese company, Canaan Creative, will be shipping their own mining hardware in the first quarter of 2018. The Avalon 8 will be less efficient than the Dragonmint 16T, but more efficient than the Antminer products. Bitfury is also touting a new chip with higher efficiency. The Georgian-based company already has a range of products, all of which are currently sold out. According to several users who have inquired about purchasing the new miners, there is a US$2 million minimum buy order.

Miners are currently concentrated where electricity is cheap, including China, Venezuela, Canada, and Washington State. The heavy concentration of mining in China means Bitcoin’s decentralized nature is under threat should the Chinese government decide to shut down these operations. However, the Bitcoin network will automatically adjust the difficulty following a sudden drop in hash rate. This adjustment occurs every two weeks, on average, so any shock to the network would be relatively short lived.

Many Chinese miners are reportedly relocating, with British Columbia, Canada being an optimal location due to its cheap hydroelectric power and cooler temperatures. The increased geographic distribution of mining locations ensures no single point of failure and no network disruptions should a crackdown occur.

According to Bitnodes, there are currently ~11,000 reachable active nodes across the world, with the greatest concentration in the United States, Germany, and China. Full nodes are essential for the decentralized peer to peer trust component of any crypto network. Each node ensures consensus and ensures miners are being honest with transactions in the ledger. Although only miners can build the chain, nodes are responsible for validating the chain and ensuring immutability.

While miners will typically run full nodes to propagate the blocks they find more efficiently, other participants run full nodes to help support the network and increase decentralization. Nodes can be added with wallets and hardware such as a BitSeed or Raspberry Pi, but there is no direct incentive to do so, an issue which some cryptocurrencies address through the Proof of Stake consensus algorithm.

Bitcoin Core developer Jonas Schnelli is working on a cheaper out-of-the-box full node, in partnership with the Swiss-based hardware wallet company Digital Bitbox. The Blockstream Satellite also adds another network connection opportunity, albeit one-way. The satellite network provides a way to receive new blocks and ensure nodes stay in sync. Transactions can be sent using other communication channels such as SMS or conventional satellite internet services.

However, one of the biggest criticisms of the Bitcoin network leading into 2018 continues to be the fees. This complex and multifaceted issue has many players and moving parts involved.  The most obvious driver, and an issue for debate for a number of years, is the size of Bitcoin blocks. Segregated Witness (SegWit) provided some relief through a soft fork last year. The protocol change effectively reduces transaction size, but SegWit adoption is currently around ~12%.

Two of the largest Bitcoin exchanges, Bitfinex and Coinbase, are yet to offer access to SegWit addresses to their users. These exchanges do not give users the option of prioritizing transactions with higher fees and do not batch transactions, both of which would greatly reduce transaction fees.

CEO Brian Armstrong has said that Coinbase is working to implement these solutions but has not given a timeline. The exchange briefly disabled Bitcoin transactions on January 11th and the effect on the network was an immediate decrease in both network transactions and fees.

Because of Coinbase’s explosive user growth in 2017, their impact on the network has also grown by several orders of magnitude. These detrimental effects will not change without on-ramp competition or changes in how the company interacts with the network. There are currently ~160,000 unconfirmed transactions at the time of writing.

Exchange traded volume has been led by the US Dollar Tether (USDT), Japanese Yen (JPY), and US Dollar (USD) markets. USDT, which is pegged to the USD, has seen an increase in volume recently as traders seek safe haven from declining BTC prices.

Trading in the Korean Won Markets (KRW) has been hampered by misreporting from Western news outlets, specifically Reuters, regulatory uncertainty, and remarks by a rogue government official on a potential cryptocurrency ban. However, legislation will likely mirror that of Japan and other Western nations and not that of China. Volume has declined accordingly but a price premium remains.

Global over-the-counter (OTC) volume has pulled back since December, although many countries continue to push all time price highs. No data is readily available for OTC South Korean volume.

Technical Analysis

Historically, over the past three years, January has been a mediocre month for BTC bulls. This correlation also matches the market cycles hypothesis which correlates with the OKcoin, now OKEX, quarterly futures expiration dates. January and July have preceded the beginning of relative bearish reversal periods, whereas April and October have preceded the beginning of relative bullish reversal periods. This has occurred irrespective of the macro trend.

These cycles also match Wyckoffian markup or markdown, with corrections before continuation in each phase. Based on the previous and projected time point, a new all time high is unlikely until approximately July 2018, with optimal entries around April 2018.

An argument against this hypothesis is the parabolic nature of the trend, which signals hastening speed with contracting periods of consolidation between each move. The parabola would suggest a bottom and move higher much sooner than July 2018, should the trend continue. Depending on how this is drawn, there is still some room left for consolidation before a move higher.

A Pitchfork can also be used to show how the trend has hastened over the past year. Pitchforks use three anchor points to predict a price channel with diagonal potential reversal zones. BTC bullishly invalidated a long standing, multi-year Pitchfork after several resistance and support tests in and on the upper limit.

A more current Pitchfork shows that the price is consolidating within the lower bounds of the trend (yellow). A break to the lower diagonal support (turquoise) will signify a strong buy signal based on this 12 month trend, most of which has been held below the median line (red). Buying in that zone comes with the risk of a bearish invalidation of the Pitchfork, with the upside potential being a return to the medium line, followed by a test of the upper limit.

On the daily chart, the Ichimoku Cloud is currently bullish but is threatening a bearish TK cross, a long exit signal.

The Cloud uses a moving-average-type system with dynamic support and resistance to make projections of key zones, as well as capturing 80% of any given trend. As long as the price remains above the Cloud, sentiment remains bullish. Price in the Cloud indicates a neutral trend, and below the Cloud indicates a bearish trend.

When the Tenkan (blue) is over the Kijun (red) sentiment is bullish, as shown below. When the Kijun is over the Tenkan sentiment is bearish. When the Lagging Span (dark green) is above the Cloud the current price sentiment is bullish, as shown below. When the Lagging Span is below the Cloud the current price sentiment is bearish.

The best entry signals when using this indicator occur when the trend is obvious, but 1 or 2 of the signals have yet to become confluent on a higher timeframe trend.

The current structure resembles two previous pullbacks to the 200EMA after a bearish TK cross and complete span of the Cloud. These dips, in August 2016 and July 2017, occurred in the setting of major fear uncertainty and doubt, the Bitfinex hack and Bitcoin Cash fork respectively. A similar event over the next few weeks would result in a similar outcome. The 200EMA currently resides around US$8,500.

On the four hour chart, the 50/200EMAs crossed and recrossed four times in 2017, all resulting in a push higher after reaching support at the 850EMA, currently at US$9,865. A bearish cross of the 50/200EMA recently occurred, and should history repeat itself, a touch of the 850EMA will follow.

To contradict this, there is an active bullish continuation chart pattern with a 1.618 fib extension and a measured move of US$28,000 and ~US$30,000 respectively. A pennant of this nature typically resolves when three-quarters full or greater, which will occur within the next 10 days.

Conclusion

After a bumper year packed with eventful and volatile trading opportunities, 2018 is quickly shaping up to be no different. The Bitcoin protocol roadmap continues to address the high fee environment with various upgrades that can now be implemented on top of SegWit. Bitcoin mining continues to drive ASIC production and manufacturing even if all of the upcoming hash rate is not used to mine Bitcoin.

Technicals for the quarter are mixed but are beginning to lean bearish. An unexpected event may act as fuel for a deeper drop. Market cycles suggest no new highs until around July. This would invalidate both the parabolic trend and the current Pitchfork. Daily Cloud and four hour EMAs suggest a deep support test sooner rather than later, based on similar previous fractals. The most immediate evidence for such a retrace will occur after the failure of the current bullish pennant, which is possible within the next 10 days.