Bitcoin Price Analysis - Turning the corner

Network fundamentals have slowly started to turn the corner since April, as the need for network scalability has ebbed since December. Increasing transaction Batching, SegWit adoption, and Lightning Network use all represent improved network efficiency compared to one year ago. The continued rise in hash rate also suggests the network is more secure than ever from attempts at reversing transactions or double-spending coins.

Bitcoin (BTC) is up more than 25% from the August local low around US$5,800, but remains down 63% from the record high in December. The market cap stands at US$126.86 billion, with US$2.43 billion traded in the past 24 hours.

The number of Bitcoin transactions per day has been slowly increasing since April and has averaged between 180,000 and 220,000 since June. This key metric has declined significantly for a number of cryptocurrencies throughout the year. Transaction costs have also declined significantly, as has the average transaction value in USD, which can be partially attributed to the decline in the price of bitcoin, as well as Transaction Batching, SegWit, and use of the Lightning Network (LN).

Since going live on March 15, the LN has continued to gain traction, now with almost 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.

Inflection points in NVT can correlate with extreme highs or lows in price. NVT is difficult to compare between coins that use different transactions types, but the ratio can be used to assess a network’s relative utility over time.

BDD is a measure of long term holding and coin dormancy, can be used to analyze early adopters cashing out or moving coins between wallets. For example, if someone has 10BTC that they received 10 days ago and then they spend it, 100 bitcoin days have been destroyed.

The months with the highest BDD since Bitcoin’s inception have strongly 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, but 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.

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.

LocalBitcoins volume has essentially followed Bitcoin price action over the past few years. In January, LocalBitcoins implemented mandatory Know Your Customer and Anti Money Laundering (KYC/AML) requirements. While this may provide increased legitimacy going forward, it will also push so-called dark money transactions onto other platforms.

On the heels of a Coinbase report detailing the landscape of cryptocurrency in higher education globally, the South Korean Ministry of Science And Technology has launched a large-scale blockchain program. The Coinbase study found that 42% of the world’s top 50 universities offer at least one course on crypto or blockchain in several disciplines.

In Asia, the Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) volumes have remained subdued compared to last year. Although the share of Asian volume is relatively low compared to USD, the country holds a high interest in crypto trading. Last week, Japan’s largest e-commerce company Rakuten announced the purchase of a cryptocurrency exchange. Japanese exchanges have also been bolstering security with the use of biometric authentication for user accounts.

Technical Analysis

The price of bitcoin has begun to flatten after intense selling this year. The strength or weakness of the current trend, as well as the start of a new trend, can be analyzed with long/short ratios, the Wyckoff Method, Pitchforks, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

Long/short open interest on Bitfinex remains net short, following a sharp bump in shorts recently. There is a strong possibility of a short squeeze as price moves higher, where bearish traders are forced to buy back into the market to cover their positions. However, the recent increase in shorts may represent a hedge for the 31,500BTC long position accumulated recently.

Further, BTC price structure has now formed a Wyckoff style low-volume spring, followed by a Sign of Strength (SOS). A break below the previous resistance at US$6,800 is potentially a support test or second spring. Price also sits within a large Falling Wedge, making successive lower highs and lower lows. This pattern can represent a bullish reversal pattern, and typically resolves when ¾ full. There are no active bearish RSI divergences on the daily timeframe.

On the daily chart, the Cloud metrics are bearish to neutral; price is entering Cloud, Cloud is bearish, the TK cross is bearish, and Lagging Span is above price and in Cloud. A long entry based on traditional Cloud strategy would not be warranted until price breach’s the Cloud. The long flat Kijun at US$7,865 represents a magnet for price.

Additionally, price has formed a potential bearish reversal pattern known as the Rising Wedge with a not-so-perfect descending volume profile. The pattern suggests that mean reversion is likely soon, near the Kijun at US$7,000 with the first key support at the Tenkan, or US$7,250. Kijun bounces throughout a trend can occur frequently and lead to further trend continuation. There is also a growing bearish RSI divergence as price makes higher highs on less and less momentum.

Conclusion

Network fundamentals have slowly started to turn the corner since April, as the need for network scalability has ebbed since December. Increasing transaction Batching, SegWit adoption, and Lightning Network use all represent improved network efficiency compared to one year ago. The continued rise in hash rate also suggests the network is more secure than ever from attempts at reversing transactions or double-spending coins. Bitcoin has also been increasingly in the public eye, with ongoing adoption in Asia, and emerging markets Turkey and Venezuela, out of necessity.

Technicals show a strong chance of a continued march towards US$11,000 in the coming weeks as suggested by the Wyckoff roadmap. In the near term, a pause or pullback to ~US$7,000 is likely due to weakening bullish momentum on lower timeframes. Ongoing substantial short open interest will provide fuel to create explosive moves higher.