Bitcoin (BTC) has continued to range in a tighter and tighter zone over the past few months with 30, 60, and 120-day volatility pushing yearly lows. The market cap stands at US$112.37 billion, with US$1.42 billion traded in the past 24 hours.
The number of Bitcoin transactions per day has slowly increased since April, and has averaged between 180,000 and 230,000 since June. This key metric has declined significantly for almost all cryptocurrencies throughout the year. In contrast, the Visa payment network, VisaNet, handles an average of 150 million transactions per day and is capable of handling more than 24,000 transactions per second.
Transaction costs have also declined significantly, averaging US$0.59 per transaction, which is almost a two year low. In December, high network volume brought transaction costs to meteoric heights. The transaction cost reduction can be attributed to; the decline in the price of Bitcoin, the decline in total transactions per day, Transaction Batching, SegWit, and use of the Lightning Network.
Although the batching ratio has trended downward since February, there have been several days where the ratio has spiked far above average. Overall, this indicates a cognizant industry wide effort towards increasing transaction efficiency. Unfortunately, a significant drawback of batching is decreased transaction privacy, which is currently at the forefront of Bitcoin research and development.
BIP141, or the soft fork protocol upgrade activated on August 23rd, 2017 known as SegWit, currently accounts for ~41% of transactions. A SegWit transaction occupies less block space than a traditional transaction, allowing SegWit users to pay less in accumulated fees to achieve the same number of transactions. SegWit also allows for an effective blocksize limit above 2MB. SegWit adoption has continued to increase despite an overall decline in transactions per day throughout the year.
Since going live on March 15, 2017, the LN has continued to gain traction. There are now more than 12,000 available channels. The channels work much like a tab at a restaurant, which remains open until the client settles the bill. This format allows for numerous transactions to occur without a network fee, until the channel is closed.
A push for further adoption of LN continues to grow. On September 10th, Lightning Labs released an alpha version of an LN desktop app. Square co-founder and CEO Jack Dorsey was an investor in a Lightning Labs seed round. In May, Dorsey hinted at a Square and Lightning Labs partnership in the future, "we want to go back to that original idea of being able to purchase a coffee [with bitcoin]. And that's why we're working with Lightning Labs. Whatever it takes to get there, we're going to make sure it happens."
In August, downloads of Square’s cash.app exceeded Venmo, a mobile payment service owned by PayPal. The cash.app team also recently announced Bitcoin purchases in all 50 states. Square also received approval for a cryptocurrency merchant gateway patent. Down the road, Square, the cash.app, and potentially Twitter, may integrate LN for certain BTC payment transfers.
Jack Mallers and the Zap team also continue to release updates for their LN wallet. Zap previously worked for WooCommerce payments, an eCommerce plugin for WordPress, which accounts for more than 28% of all online stores.
Daily active addresses (DAA) have increased (fill, chart below) since April, but remain down significantly from highs in January. A large uptick in DAA should be seen as a bullish indicator of price, as it suggests an increase in demand. There are also currently over 28 million user wallets.
BDD increased slightly in August, potentially related to an old wallet associated with Mt. Gox and Silk Road moving 111,000 BTC, some of which ended up on Bitfinex and Binance.
The months with the highest BDD have historically correlated with highs or lows in price. A spike in BDD in July 2017 was likely related to the Bitcoin Cash hard fork in August. On June 20th, a spike in BDD preceded a drop in Bitcoin price two days later. However, this should not be seen as a 1:1 correlation. A rise in BDD can also represent custodial providers moving coins between wallets, which is typical of major exchanges or OTC brokers.
The core of mining is solving Proof of Work (PoW), which has lead to ASIC proliferation throughout the network. ASIC farms gravitate towards cheap land and cheap power with several recent stories of new North American farms being built, including; Canada, Washington, Oregon, New York, Virginia, and Texas.
While many factors influence mining profitability, such as price, block times, difficulty, block reward, and transaction fees, decreasing profitability adds to the risk of further centralizing mining, both through mining pools and geographically. The next Bitcoin block reward halving is slated for May 2020.
Avenues to purchase Bitcoin, or participate in the price action, continue to increase. On August 31st, the Yahoo! Finance app, with a reported 70 million unique visitors each month, enabled BTC trading. Morgan Stanley also announced this week that they will enable swap trading tied to the CME Bitcoin futures contract. Morgan Stanley manages over US$2 trillion, including funds from more than 3.5 million households in the U.S. alone. Wirex also announced expansion of its services throughout Canada, while Overstock.com will enable BTC purchases in 2019 through the biometric Bitsy wallet.
Comparing Q4 BTC price action over the past five years suggests a large move in the making. All but Q4 2014 saw bullish price action and all have had moves above 50%, accounting for the decline throughout January 2015. The leading bias of any upcoming move, as well as a bullish and bearish roadmap, can be determined using the Wyckoff Method, chart patterns, Pitchforks, exponential moving averages, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.
Price also sits within a large Falling Wedge, making successive lower highs and lower lows. This pattern can precede bullish reversal, and typically resolves when 75% full, experiencing a more explosive move when 80% complete. Using Bulkowski’s measure rule, a bullish target of US$11,000 and a bearish target of US$4,200 are projected. There are no active bearish RSI divergences on the daily timeframe as RSI has begun to coil with price.
On the daily chart, the Cloud metrics are bearish to neutral; price below the Cloud, Cloud is bearish, the TK cross is bearish, and Lagging Span is above price and below Cloud. A long entry based on traditional Cloud strategy would not be warranted until price breaches the Cloud. The long flat Kijun at US$7,865 represents a magnet for price. The Cloud continues to thin, suggesting an opportunity for a bullish Kumo twist and bullish Kumo breakout within the next few months.
Network fundamentals continue to suggest a vast improvement in scaling capacity and stewardship by the entire industry. Increases in both interest and access to Bitcoin at the retail and institutional levels continue to pave the way for further adoption and understanding. Increases in OTC emerging markets globally, in the setting of both inflation and sanctions, suggest a move away from government-backed fiat currency towards deflationary, peer-to-peer, uncensorable, and permissionless digital assets.
Technicals, including historical volatility and price action, suggest at least a 50% move over the next three months. Overall, indicators lean bearish to neutral over this time period. Key indicators for bullish price action include price above the; multi-month diagonal resistance of both triangle chart patterns, multi-year bullish pitchfork median line, daily 200EMA, and/or daily Cloud. Key indicators for bearish price action are much simpler, closing below the US$5,800-US$6,000 zone would likely result in bearish follow-through.