Bitcoin Price Analysis - Volatility reigns

Bitcoin has been extremely volatile over the past week, now recovering after violent 4% and 8% pullbacks. The market cap for the top cryptocurrency now stands at US$94 billion and flirting with another all-time-high.

Bitcoin Price Analysis 20 Oct 17 1

As the percentage total of SegWit transactions in the network continues to increase, now at ~16%, seeing how the miners and network have responded is important. Transactions per day and fees paid to miners are crucial for the health of the network.

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Due to the block size issue, transactions per day were essentially capped. Now, with SegWit active, the number of possible transactions per day has quadrupled  — as long as transactions use a SegWit address.

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Chris Burniske of ARK investment uses a network value to transactions, or NV/T ratio, which highlights an important metric for valuation of any blockchain. The ratio is currently <100 and suggests the network is not overvalued. Historically, when the ratio is >100, the network has pulled back in price.

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The anti-SegWit crowd claimed it would mean “unfairly cheap” transactions, causing miners to point hash rate elsewhere. Although SegWit adoption is still growing, fees paid to miners are higher than in most of Bitcoin’s existence. This is largely due to the dramatic increase in price over the past year.

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Brave New Coin investigated AntPool’s confirmed blocks, the highest percentage among miners and a pool notorious for confirming empty blocks. AntPool took a staunch anti-SegWit stance, likely because the protocol change prevented Proof of Work gaming, such as ASICboost.

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As the SegWit transactions on the network increase, the number of empty blocks have decreased. The number of blocks smaller than 10KB have almost disappeared entirely. While not definitive proof on its own, certainly a trend to watch going forward (data sources here and here).

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Meanwhile the Bitmain and Bitcoin Cash faction claimed transactions were too expensive and were lobbying for a bigger block size, while at the same time confirming more empty blocks than any other pool by far. Confirming empty blocks decreases transactions per block and therefore increases transactions waiting to be confirmed, especially when unconfirmed transactions are backlogged.

AntPool confirmed a 1.5MB block containing over 2,000 SegWit transactions on October 18th, the largest ever recorded on the Bitcoin mainnet client. A 3.6MB block was confirmed on the SegWit testnet, bringing the theoretical block size ceiling to around 4MB. Hash rate and difficulty also continue to climb to all-time-highs, suggesting miners are confident in the future of the network, despite potentially diminishing returns.

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Bitcoin exchange-traded volume has been shared by Japanese Yen (JPY) and US Dollar (USD) markets over the past 24 hours, with most of that volume coming from Coincheck and Bitfinex.

The Chinese Yuan (CNY) pair continues to hold a negative premium on the index, suggesting sustained selling with a lack of demand. Conversely, the South Korean Won (KRW) and British Pound (GBP) pairs hold a premium, suggesting sustained buying. In both cases, the differentials suggest difficulty with arbitrage in those countries.

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Global over-the-counter (OTC) volume continues to decline. Volume (notional value) in Columbia, Dominican Republic, Pakistan, Poland, Saudi Arabia, Turkey, and the United Arab Emirates have made new highs this week.

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Technical Analysis

Price has quickly snapped back to ATH levels, which is suggestive enough alone that price will continue higher. As price re-enters ATH range, price discovery will continue to propel price as long as there are more buyers than sellers.

Fib extensions from the previous and current high to low range suggest immediate resistance between US$6600-$6900. The 1.272 fib extension of the previous range was hit cleanly as resistance, which suggests that US$6888 should also provide resistance. A cultural psychological resistance at US$6666 is also expected.

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The Ichimoku Cloud on the daily chart shows metrics bullish with the beginnings of a TK disequilibrium suggestive of overbought conditions. Should price fail to make a new ATH, US$4400 (Kijun) will act as strong support. The bullish TK cross above Cloud on October 7th has been very profitable.

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The Cloud on the four hour chart also shows all metrics bullish with a recent Kijun and Cloud support bounce around the psychological zone of US$5000. The Kumo breakout on September 27th still shows an active trend as the TK lines have yet to cross bearish. A trade from that level is currently up 45%.

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A Pitchfork, which is especially useful for price projection beyond all-time highs when there are no support or resistance levels, is showing a likely target of US$8055+. The median line (red) of the Pitchfork gives the expected mean of the trend. Price will continually attempt to return to this diagonal. It has done so twice already.

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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.  A lower capture Pitchfork also has median line around US$8000 currently. As long as price remains in the lower diagonal support, the median line is a high probability target.

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Lastly, there is mild evidence for a low timeframe inverted Head and Shoulders, a bullish reversal chart pattern. The right shoulder has not formed yet, and may not form at all. Should a rejection near ATH occur, a shoulder will likely form.

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The right shoulder support should match the left shoulder support around US$5430, although the second shoulder to form may be diminutive compared to the first, and thus have a higher support level. The 1.618 fib extension and measured move are projected at US$6138 and US$6390 respectively.  

Conclusion

Despite the months' long dispute over SegWit activation, investors and the community have continued to strongly support the change. As the network's transactional capacity increases, so does its potential value. Technicals suggest a run to US$6500 to US$8000 should price breach new ATH, with or without an inverted head and shoulders.