Bitcoin Price Analysis - Uncharted territory

The month of August has been excellent for Bitcoin as it continues to push all-time highs (ATHs). With the Bitcoin Cash split now history, many investors have likely re-entered.

Market cap made a new high of $71.6 billion, higher than that of PayPal and approximately the GDP of Oman.

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The Bitcoin network hash rate has fallen slightly, but is still projected for a 2.15% difficulty adjustment in 10 days. This would bring the cumulated difficulty change +113.74% since January 2017.

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SegWit is set to activate near the end of this month, with SegWit2x, otherwise known as the New York Agreement, potentially activating later this year. Most of the Bitcoin Core developers do not support SegWit2x.

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The Bitcoin mempool size, or size of unconfirmed transactions, is down significantly since the Bitcoin Cash split.

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Meanwhile, Bitcoin Cash remains near previous lows of 0.05BTC. Most of the recent blocks for Bitcoin Cash have been <100kb.

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Global OTC volume is down slightly across the world, with one exception: Venezuela which is currently in political turmoil.

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Japan’s trading volume has overtaken the United States, and now accounts for 46% of the volume globally. Bitfinex remains the top USD exchange by volume, although they recently announced that they will no longer accept unaccredited US customers. 

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Technical Analysis

As Bitcoin continues to make ATHs, price discovery continues to occur. This means that determining an exact top is difficult, until buyers get exhausted. Order Books get thin on the ask side as fewer and fewer people want to sell, which helps accelerate price further.

Since the end of the bear market in late 2015, we have now reached the 3.618 fibonacci level of the previous ATH in November 2013 and the low in January 2015.

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In order to assess where the current trend is relative to recent prices, I use the Pitchfork, with an anchor drawn from the Bitfinex hack. The median line (red) of the Pitchfork gives the expected mean of the trend. Price will continually attempt to return to this diagonal. Each diagonal of the Pitchfork can be thought of as a potential reversal zone or support/resistance line. The upper yellow diagonal zone being ‘most overbought,’ or the top bounds of the trend, and lower yellow diagonal zone being ‘most oversold,’ or the bottom bounds of the trend.

Price is currently pulling back from the upper diagonal resistance after briefly peaking above, which increases the validity of the diagonal resistance. Should price break the upper diagonal resistance, this would invalidate the Pitchfork and a new Pitchfork would need to be drawn.

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My other favorite indicator for diagnosing the health of a trend is the Ichimoku Cloud. The Cloud system is a constant, auto-drawn indicator which quickly offers an immense amount of valuable information on any time frame. The Cloud is best used at higher time frames as more data generally provides more accurate signals and less false positives.

The indicator uses moving averages and 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 (T) is over the Kijun (K) sentiment is bullish. K over T would indicate bearish sentiment. When the Lagging Span (LS) is above the Cloud and above the price sentiment is bullish, below the Cloud and price would indicate bearish sentiment.

On the weekly timeframe, all cloud signals remain bullish. The distance of price from the TK lines and the cloud suggests the rate of the trend has been steadily increasing. So long as the cloud remains thin, and has an upward bias, the trend remains strongly intact. When the cloud begins to thicken due to a tight ranging zone in price for a significant period of time, as it did in 2016, this would suggest a trend reversal is possible.

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On the daily timeframe, all cloud signals are also bullish. The Cloud itself has been bullish since late November. It has also remained relatively thin, barring the thickening of the cloud in July 2017 which first indicated a tight ranging zone with the possibility of a large pullback. The pullback did occur and found support on the opposite edge of the cloud, which is often the case.

These price moves are a setup for edge to edge trades. They can occur on any timeframe and trigger when the candle closes in the cloud or you are sure the candle will not reverse. A similar edge to edge setup was seen on the daily in March 2017. The most notable edge to edge setup occurred on the weekly chart (above), triggering in October 2016.

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On the four hour time frame, all cloud signals are also bullish. Although signals are bullish, suggesting no actionable entry at this time, Kijun is printing support around $3470. Although this is $700 below current price, Kijun bounces occur frequently enough that consistently placing orders on or near them is highly profitable. The orders needs to be moved as the Kijun moves up.

Kijun bounces occurred in February, March, April, May and July 2017 on the daily chart (above). Kijun bounces are a way to enter a trend after missing the initial move or re-enter a trend after taking profit. The Kijun itself essentially represents a 50% retracement from recent extreme high and low. This concept has been incorporated in Dow Theory.

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The ascending triangle measured move target has been hit, which again illustrates the importance of identifying and understanding chart patterns. The triangle broke up when at least three quarters full, and was confirmed with a large spike in volume.

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Historically, Bitcoin has had several ascending triangles break to the upside. The most notable being the ascending triangle which broke up in May 2016, bringing price back above $500.

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Lastly, I come back to the quarterly OkCoin futures settlement chart, which has consistently synced rather well with the top or bottom of the interim trend. While not exactly actionable on it’s own, it is interesting to consider with other charts. Should this trend continue, expect a large pullback before or around September with another new ATH around late December.

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Japan’s regulatory warmth towards Bitcoin has no doubt influenced their rise in trading volume globally. Investors and traders in the United States have fewer and fewer exchanges to use as an on-ramp. Coinbase’s recent $100 million fundraising announcement is no surprise considering they have a near monopoly in the United States, especially among retail or casual users.

Price discovery means just that, we are in uncharted territory. Support and resistance will be found based on supply and demand. Overall, the longstanding trend remains healthy and intact. Although highs beyond $4400 are possible, technicals, including Pitchfork and Ichimoku Cloud, are showing a pullback more likely than continuation.