Bitcoin Price Analysis – All eyes on US$11,500
Bitcoin (BTC) has been highly volatile over the past 10 days, with an average daily range frequently exceeding US$1,000. The market cap now stands at US$162.6 billion on US$5.66 billion in trading volume over the past 24 hours. The BTC market cap currently accounts for 44.65% of all cryptocurrencies.
During the end of the bull run in December, BTC experienced a rather large supply shock. As discovered by a Reddit user, the Mt. Gox bankruptcy trustee, Nobuaki Kobayashi, moved 36,000 BTC, which according to the wallet address transaction times, was sold in five lots between December and February.
Those transactions directly correlate with drops in the BTC price (white asterisk). The trustee was authorized to sell both BTC and Bitcoin cash to cover debts amounting to over US$400 million. The most recent creditor meeting report can be viewed here. The next court proceeding related to the bankruptcy isn’t scheduled until September 18th, 2018.
It’s unclear whether the coins were simply market sold directly on an exchange like Bitfinex, or if an attempt to sell the coins OTC was made first. Many months ago, the CEO of Kraken CEO Jesse Powell, had recommended to Kobayashi that the coins be sold OTC, which would help prevent order slippage. The remaining coins held can also be sold by the trustee or returned directly to Mt. Gox users. It is also possible that the previous CEO of Mt. Gox, Mark Karpeles, will be returned the remaining coins. According to a November 2017 story by Reuters, in Japan “by law, any funds left over in a bankrupt company’s estate after creditors have been paid go to shareholders”, which in this case is Karpeles. Some of the remaining Mt. Gox wallets and balances can be viewed here. Of the 200,000 BTC once held by Mt. Gox, ~164,000 BTC remain in the possession of Kobayashi.
The United States Securities and Exchange Commission (SEC) released a statement last week on the unregulated nature of cryptocurrency exchanges. The SEC is also particularly interested in exchanges which offer ICOs, which may or may not represent a unlicensed security. While not a direct enforcement action on any one exchange, the statement was seen as a shot across the bow of any exchange not currently registered in accordance with securities law.
After banning domestic exchanges in September 2017, China has announced it will begin slowly regulating cryptocurrencies, as opposed to an outright ban. Zhou Xiaochuan, governor of the country’s central bank, the People’s Bank of China, has admitted that cryptocurrencies are inevitable but added; “we do not currently recognize Bitcoin and other digital currencies as a tool like paper money, coins and credit cards for retail payments. The banking system does not accept it.”
If exchanges like Bitcoin China reopen, a flood of capital will likely enter the market. Many Chinese traders have already begun using exchanges based in Hong Kong, Japan, or elsewhere.
Japanese regulators have become increasingly concerned with unregistered exchanges as well as exchange security following the US$400 million hack of the Japanese exchange Coincheck. On March 8th, Japan’s Financial Services Agency (FSA) suspended operations of two Japanese exchanges, FSHO and BitStation, for 30 days. In April 2017, Japan passed legislation recognizing BTC as legal tender and as of September 2017, the FSA officially recognized 11 companies as registered cryptocurrency exchange operators.
Thailand has also taken a soft approach to regulation of cryptocurrencies, recently enacting a “special law” that “will regulate the purchases and sales of cryptocurrencies and ICOs in order to avoid market manipulation, money laundering, tax evasion, as well as multi-level marketing schemes.”
Unlike a government fiat currency controlled by a central bank, BTC has a planned monetary policy. Inflation currently stands at 3.85%, set to decrease in a disinflationary stepwise fashion over time. The next block reward halving is currently set for May 2020.
On the network side, BTC hash rate and difficulty continues to increase month over month. This trend should continue unabated, with several new mining hardware products being shipped by Q2 this year. Mining locations continue to expand outside China through an ‘orderly exit’, especially to Washington state, Iceland, and Western Canada thanks to cheap renewable or alternative energy and low ambient temperatures. Jihan Wu, head of the Chinese mining companies Bitmain and AntPool, registered a new company in Washington State, ‘Ant Creek’, in June 2017. Even Canadian energy producers are directly entering the mining foray due to cheap energy access.
The current rate of block discovery reflects the continued addition of hash rate. Miners currently find a block every ~9.5 minutes, on average. Mining profitability is currently near an all time low, reflecting levels not seen since July 2017. Price, transaction fees, network difficulty, block times, and block reward all influence mining profitability.
Mining and non-mining network nodes have continued to increase substantially since September of last year. An expansive node network is critical to maintain decentralization and prevent nefarious actors from attempting to exploit the trustless nature of the blockchain. The global distribution of nodes is concentrated in the United States, China, and Germany.
Transactions per day have continued to decline sharply since December, reaching levels not seen since March 2016. The transaction highs largely mirror the bitcoin price chart itself. Individual transactions have also declined due to batching, where one transaction is sent to many addresses at once instead of each transaction being sent individually. Transaction fees have also fallen dramatically in response to decreased network traffic and increased use of SegWit.
Transaction outputs rose dramatically over the previous use with the increased application of batching by several exchanges. Conscious scaling efforts by high-traffic users such as exchanges are critical to prevent higher than usual transaction fees seen over the past six months. Outputs overall have begun to decrease with the decline in network usage generally.
SegWit adoption continues to hold above 30%. SegWit provides a scaling solution that effectively decreases the size of a transaction, allowing for more transactions to be squeezed into each block. Bitfinex and Coinbase both started using the update in late February.
Pending transactions fees have decreased dramatically since December and January due to increase scalability and decreased network usage. There are currently only ~4,000 unconfirmed transactions. Unconfirmed transactions peaked on December 22nd with 261,000 transactions in the mempool.
The Lightning Network (LN) is a protocol that implements trusted, bidirectional, off-chain, hub and spoke payment channels. LN is designed to enable microtransactions that are confirmed in milliseconds. There are 1883 nodes with 4763 channels currently operating on the testnet, down slightly over the past month. The second-layer protocol remains in very early stages on the mainnet, although it is growing in popularity, and should be used with caution.
Exchange traded volume this week has been led by the USDT and USD markets, mostly on Bitfinex and OKEX. The BTC/BTS trading pair on the decentralized exchange CryptoBridge has surpassed both the JPY and KRW pairs. The Korean premium remains in the Korean Won (KRW) market, where BTC sells for ~2.4% more on average.
There are also two regulated futures products being offered in the United States. The Chicago Board Of Exchange futures contract (below) is set to expire on March 14th. The Chicago Mercantile Exchange futures contract expires on the last trading day of the each month. Chicago has quickly become a cryptocurrency trading hub, now even offering bitcoin-related classes at local colleges.
Global over the counter (OTC) volume remains down sharply from December and January, at less than half its all time high. Despite this, Mexico and Venezuela posted a record high in volume for their respective currencies over the past week. One user recently reported a restaurant in Tulum, Mexico taking cryptocurrencies directly as payment.
Google trends search interest for the term “bitcoin”, currently at a five month low, has largely followed the price chart. Search interest can be used to gauge sentiment for new money entering the system as well as bitcoin’s stage in various media hype cycles.
Over the past month, many traders have begun comparing the current price action to the selloff following the 2013 ATH. Although there is a striking resemblance, the 2013 price unwinding was fueled by the eventual closure of the largest BTC exchange, at the time, Mt. Gox. While this price fractal can certainly repeat itself sans exchange closures, the BTC ecosystem stands on much different footing fundamentally.
The overall trend now stands on the bearish to neutral side of long-term support, indicating a possible trend shift. Indicators such as the Candlestick and Chart Patterns, Ichimoku Cloud, Moving Averages, and Pitchfork help determine entry and exit points, as well as the state of the current trend. Further background information on the technical analysis discussed below can be found here.
On the monthly chart, February’s candle closed as a dragonfly doji, a bullish reversal sign. These candles typically occur after the end of bearish momentum, and close with a long lower wick and little to no upper wick. Upward momentum will be confirmed with a bullish close of the following candle, which closes on March 30th.
On the weekly chart, using the Ichimoku Cloud, price has breached the Kijun, a long-term support. A definitive Kijun bounce would have indicated bullish continuation, whereas a breach leaves the status of the trend indeterminant. Relative strength index (RSI) has also dropped below 50, a momentum reset, for the first time since 2015. A stronger likelihood of bullish continuation would occur if the RSI holds near 50. A definite break of the 50 level would suggest a reach below the 30 level and the beginning of a bear trend.
On the daily chart, the Ichimoku Cloud metrics are bearish. The Cloud is useful for determining the state of the overall trend. A signal for trade probability can be determined by using four metrics; price’s relative position to the Cloud, the color of the Cloud, the Tenkan (T) and Kijun (K) cross, and the Lagging Span. The best entry always occurs when the signals flip from bearish to bullish or vice versa.
The current Cloud metrics on this time frame are; price below the Cloud, the Cloud has a bearish twist, the TK cross is bearish, and Lagging Span is below Cloud but above Price. As is often the case, the Kijun (red line) acts as a major level of support or resistance for the trend. Until the Kijun is breached, the trend remains intact.
A long entry will not occur until the Kijun and Cloud are breached. The Kumo twist on March 6th (yellow arrow) was not breached successfully. The next opportunity for a long entry will occur with an Edge to Edge Kumo trade. This triggers with a candle close inside the Cloud with the target being the opposite edge of the Cloud, ~US$12,600 in this case. The most bearish scenario would occur following a bullish then bearish TK recross below Cloud with a failure to breach Cloud resistance.
A Pitchfork on the daily chart with anchor points in February, May, and July shows price reaching the 1.618 level again on the recent drop. The 1.618 level is borrowed from Fibonacci extensions and was also roughly seen as resistance at US$15,700 and US$17,000.
Buying in the current zone comes with the risk of a bearish invalidation of the Pitchfork, which occurs with a significant break below the lowest diagonal support. The upside potential is a return to the median line, followed by a test of the upper limit. If price maintains the trend, a price of ~US$30,000 by July 1st is possible based on the mean of the trend.
On the twelve hour chart, repeated head and shoulders reversal patterns have formed over the past three months. Traditionally, this pattern consists of two highs or lows with a higher high or lower low in the middle. The entry for these patterns occurs on the breach of the neckline after the formation of the right shoulder, with a stop loss above or below the right shoulder.
In both cases now, price has breached the right shoulder. With the pattern that formed from December through January, the eventual measured move target of US$6,250 was reached. Despite the current inverted head and shoulders pattern appearing to have failed, if the pattern plays out similarly, a measured move target of US$18,000 will be reached after breaching the neckline. In this case, the neckline represents a yearly pivot, drawn on January 1st, which represents a key mathematical area of support and resistance from the prior year.
On the four hour chart, price has formed a W double-bottom reversal with a bullish divergence on the daily 200EMA. EMA values can be adjusted based on the timeframe to effectively display the same EMA from a higher or lower timeframe. The 1200EMA on the four hour chart is equivalent to the 200EMA on the twenty-four hour chart. Double bottoms or tops can be remembered as “M for Murder” or “W for Win”. These formations on higher timeframe support are typically strong indicators of reversal.
Lastly, the OKEX quarterly futures rollover begins in mid-March. The rollover dates have been significant since 2015, with an alternating top/bottom price pattern between contract expirations. Based on this pattern, the bottom for the quarter will occur during the current contract, and the top for the next quarter will occur near the beginning of July. The quarterly premium over the past month has been largely non-existent. A large premium over spot, as was seen throughout December and January, is typically an excellent indicator of bullish sentiment.
Overall interest in Bitcoin, as well as network usage, have declined dramatically since December and January. Despite this, mining efforts and network scaling have continued to improve and expand in 2018 as regulatory agencies around the globe have begun to play catch-up with enforcement of rules to safeguard investors.
Technicals are neutral and murky with no clear suggestion of trend continuation or trend reversal. The most obvious resistance stands at the yearly pivot at ~US$11,500. Breach of this zone would confirm the February’s bullish monthly close, return above the weekly Kijun, a bullish daily Edge to Edge Kumo trade, and a break of neckline resistance on the potentially invalidated inverted head and shoulders. Both the OKEX quarterly futures and CME monthly futures rollover near or at the end of March, potentially sparking a definitive direction to a bullish or bearish trend.
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