Bitcoin (BTC) lived to die another day this week, rising 10% after breaking US$6,800. Overall, price remains down 63% from the record high in December. The market cap stands at US$114.69 billion, with US$3.58 billion traded in the past 24 hours.
Despite mining profitability currently near an all-time low, hash rate and difficulty continue to post record highs. 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 by mining pool and geographically. The next Bitcoin block reward halving is slated for May 2020.
Meanwhile, the number of transactions per day has averaged 180,000-200,000 since June. This metric has declined significantly for all cryptocurrencies. 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.
Using a 30-day Kalichkin network value to transactions (NVT) ratio, BTC remains in the upper-third of its historical range. NVT has not been this high since January 2015 but has begun to turn downward recently, which suggests increasing on-chain network usage based on the dollar amount being transacted.
Additionally, inflection points in NVT can correlate with extreme highs or lows in price. With the rise of alternative on and off chain methods to send transactions (batching and Lightning Network), what the new normal for NVT is, under these circumstances, may take many months to determine.
Although NVT is difficult to compare between coins that use different transactions types, the ratio can be used to assess a network’s relative utility over time. ADA, DOGE, ZEC, XRP, GNO, LOOM, DCR, TRX, DASH, and OMG are currently the only coins with an NVT lower than BTC.
Unconfirmed transactions have decreased dramatically this year as well. There are currently around 2,000 pending transactions, most of which were sent with a 1 satoshi fee. Since July 13th, pending transaction spikes have declined significantly. This is in stark contrast with December of last year, when pending transactions regularly exceeded 150,000 and peaked at more than 250,000.
There was a large uptick in unconfirmed transactions in July, which can be attributed to UTXOs being cleared. UTXOs are similar to loose change, and accumulate with transactions. If transaction fees are high, they continue to accumulate and remain unspent, but when transactions fees are low, it becomes financially viable to collect the change. Consolidating UTXOs not only unlocks BTC but also decreases blockchain bloat. Coinbase had been identified as one of the biggest offenders of UTXO accumulation, with one wallet accruing almost 7.2 million UTXOs by January of this year. The wallet has since been consolidated to ~21,000 UTXOs.
On-chain transactions per day have not only declined due to a lack of network use but also transaction batching, where one transaction is sent to many addresses at once instead of each transaction being sent individually. The ratio of outputs per transactions has risen significantly since this time last year, suggesting the practice has become a mainstay. There have also been several days this year with a spike in outputs, indicating a concerted effort towards increase transaction efficiency.
Further, since October 2012 (block 201403), the use of op-return outputs per transaction has increased dramatically. OP_RETURN is the code used to embed metadata in a transaction. Normally, only one OP_RETURN output is allowed per transaction. If someone wants to insert N pieces of data in the blockchain, they have to make N transactions, resulting in a separate fee for each transaction.
Transactions with multiple OP_RETURN outputs decreases fees by reducing the number of required transactions. The bitcoin protocol makes these transactions possible, but they are not relayed by peers on the network, so they need to be sent to miners directly. Since the transactions are still valid, miners can mine transactions with any number of OP_RETURN outputs, so long as the block does not exceed the block size limit.
Transaction fees, which increased dramatically throughout 2017, have also dropped since late December and remain relatively low. This fee reduction is multifactorial. Although a decrease in transactions per day means fewer transactions need to be cleared, SegWit, which currently accounts for ~37% of transactions, has also been a significant contributing factor in the average fee decline.
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. Daily SegWit usage has steadily increased since January. A spike in SegWit usage in November was likely due to the proposed SegWit2x hard fork which failed to activate.
The SegWit soft fork also enabled the possibility of further second layer network upgrades like the Lightning Network. Since going live on March 15, the Lightning Network (LN) has continued to gain traction. Lightning network solutions enable trusted, bidirectional, off-chain, hub and spoke payment channels and also promises the possibility of instant payments, microtransactions, and increased scalability. 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. As new channels come online, the cumulative amount of BTC supporting them now exceeds 100BTC.
Several other developments to increase scalability and privacy still remain on the Bitcoin protocol roadmap. In January and February, core developer and ex-Blockstream CTO Greg Maxwell released two papers, Taproot and Graftroot, which increase anonymity and signature aggregation in smart contracts, such as those that enable multisig transactions.
Taproot and Graftroot improve upon Merkelized Abstract Syntax Trees (MAST) which offers three benefits; smaller transactions, more privacy, and larger smart contracts. Schnorr signatures and signature aggregation also bring the potential for storage and bandwidth reduction by at least 25%. Bulletproofs and Mimblewimble also offer privacy solutions with complete fungibility between transactions. Some of these upcoming changes to the BTC scripting system were covered by Peter Wuille this week at a San Francisco developer meetup.
Moving on to trading volumes, the BTC exchange traded volume over the past 24 hours has been led by the Tether (USDT) and the United States Dollar (USD) markets for the tenth consecutive week, mostly on Binance, OKEX, and Bitfinex. In Asia, the Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) volumes have continued to decline week over week. Deposits and withdrawals continued to be closed on one of Korea’s largest exchanges, Bithumb, after a US$30 million hack at the end of June.
In futures trading, the Chicago Mercantile Exchange (CME) revealed that, compared to the first quarter, average daily volume for BTC futures increase 93% in the second quarter. The rate of open interest in futures contracts exceeded 2,400, which accounted for a to 58% increase over the first quarter. BitMex also had a new volume record last week, with more than US$2 billion traded in a single four hour timeframe.
Globally reported over the counter (OTC) volume, from LocalBitcoins.com, remains sharply down from December and January and continues to decrease. Venezuela continues to post record highs in Bolivar volume, fueled by hyperinflation. LocalBitcoins recently 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 avenues.
Bitcoin has returned with bullish exuberance over the past few days but remains temporarily bound by a multi-month bear trend. The strength or weakness of this trend can be analyzed with the Wyckoff Method, chart patterns, Ichimoku Cloud, exponential moving averages (EMAs), and Pitchforks. Further background information on the technical analysis discussed below can be found here.
Price structure on the daily chart continues to correlate highly with a typical Wyckoff Accumulation phase. The Wyckoff Method can be used to help determine where price sits within a cyclical pattern. An accumulation phase occurs before a new markup phase. BTC experienced one of these classic accumulation periods throughout 2015. A successful accumulation period would be highly indicative of a prolonged bull trend.
BTC price structure has now formed a Wyckoff style low-volume spring, followed by a Sign of Strength (SOS). If this interpretation is correct, price currently sits in Phase D which indicates a move to the top of the trading range at ~US$11,000. The Last Point of Supply (LPS) will be the next ideal opportunity for a long entry, or an opportunity to add to an existing long position.
On the weekly chart, there are three oscillators measuring momentum that have all begun to cross or flip bullish; RSI is flirting with a close above 50, which represents bullish territory, Stoch RSI has crossed bullish and breached 20, while the MACD signal lines have crossed bullish and the histogram will flip bullish within a week or two.
Price structure and the descending volume profile also suggest a potential falling wedge chart pattern. If accurate, the pattern indicates a target of US$21,000, which is simply the widest length of the wedge projected vertically at the most likely breakout point. The target is also near the yearly R1 pivot, at US$22,000 (not shown).
Turning to the Ichimoku Cloud, there are four key metrics; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, and the Lagging Span. The best entry always occurs when most of the signals flip from bearish to bullish, or vice versa.
The Cloud metrics on the weekly time frame are; price below Cloud, bearish Cloud, bearish TK cross, and Lagging Span below price and above Cloud. Together, these signals represent a bearish trend. Entering a long entry position would not be warranted until price breaks the Cloud. The flat Kumo and Kijun at US$10,000 and US$11,000 should act as strong resistance. A Kumo twist on the week of December 17th shows a high probability zone for a bullish break above the Cloud, should the momentum exist to do so.
On the daily chart, the Cloud metrics are; price in Cloud, bearish Cloud, bullish TK cross, and Lagging Span below price and above Cloud. This is the first bullish TK cross since May (green arrow). A long entry based on traditional Cloud strategy does not trigger until price breach’s the Cloud. As price enters Cloud, a bullish ‘Edge to Edge’ trade entry triggers, with a target of the opposite edge of the Cloud around US$8,700.
On the two-day chart, price has breached both the 50EMA and 200EMA. The declining volume profile is suggestive of price consolidation. The current 50/200EMA cross has a bearish bias. A bullish re-cross would be the first cross of this type since 2015. Bullish continuation would be supported by the EMAs touching but failing to cross.
Turning to the original upward trending Pitchfork beginning in 2015, with anchor points in January, May, and August of that year, Price has recently bounced off the mean reversion point twice. Price broke North of this trend in October 2017 and again currently sits in the upper half of the trend. Based on the diagonal resistance, a maximum upside target of ~US$10,000-US$12,000 is possible.
Lastly, on the two hour timeframe, the tight horizontal price structure suggests a flag chart pattern with a bullish bias. Long trades will likely trigger after a price breach of US$7,600. The pattern yields a 1.618 fib extension and measured move target of US$8,000 and US$8,400 respectively.
Despite a lack of on-chain transactions compared to late in 2018, network participants continue to embrace batching and SegWit, dramatically increasing overall network capacity and decreasing transaction fees. SegWit is almost a year old on mainnet and has been used broadly without negative implication. The Lightning Network continues to gain users and capacity, and will further the possibility for micro and nano transactions with little to no fees. Future protocol improvements are set to decrease transaction sizes and transaction fees, and increase transaction privacy and transaction functionality.
Technicals suggest a test of the US$10,000 level within the next few weeks, followed by an extended consolidation period before the next bullish markup. Trend indicators on the daily timeframe have flipped from bearish to neutral, while momentum oscillators on the weekly timeframe have begun to flip from bearish to bullish. A BTC ETF decision by the SEC in the month of August could be the catalyst needed to immediately spark price action to the US$10,000 level.