Bitcoin (BTC) has dropped ~17% over the past twelve days, after a bullish rally throughout most of July, and is currently down 65% from the record high in December. The market cap stands at US$120 billion, with US$1.78 billion traded in the past 24 hours.
Globally reported over the counter (OTC) volume, from LocalBitcoins.com, also remains sharply down from December and January and continues to decrease. Venezuelan Bolivar trading volume remains high, fueled by hyperinflation in the region. Similar to Venezuelan launching the Petro, China, India, Russia, Iran, Japan, Singapore, Jamaica, and Kyrgyzstan are all experimenting with a nationalized cryptocurrency. Iran and Russia hope to use crypto to de-dollarize oil trade and skirt U.S. sanctions. The entire balance of Petros remains in a single NEM address.
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 avenues. In 2014, one U.S individual, Thomas Costanzo, used a peer-to-peer trading platform to launder 81BTC worth of drug money, saying to undercover federal agents that “it was a great way to limit their exposure to law enforcement.” Costanzo is now serving a 41 month jail sentence in Federal prison.
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. Tether is a centralized cryptocurrency pegged to the US Dollar, and has been under continued scrutiny over a lack of transparency regarding the reserve USD backing the coin.
Former FBI director Louis Freeh has remarked on continued demand for market wide crypto audits. Freeh is also a named partner of the law firm Freeh, Sporkin & Sullivan LLP (FSS), which was retained by Tether to provide legal advice and counsel regarding a review of bank account documentation, Tether’s relevant policies and procedures and a randomized inspection of the numbers of Tethers in circulation and the corresponding currency reserves. Tether subsequently released a proof of funds report in June. While there a possible conflict of interest remains, Freeh is highly reputable and well known for his private investigations on Penn State University, FIFA, and Daimler Chrysler.
At the same time, in both an article and a podcast with Trace Mayer, Wall Street veteran Caitlin Long discussed the dangers of harmful financialization, whereby a market of unbacked paper claims on BTC is being created. In the metal market, this continues to be a growing issue, the paper claims on gold and silver per ounce are 233:1 and 517:1 respectively.
Long argues that this leveraged based financialization is harmful and decouples the asset from its real value. These types of unbacked paper certificates for BTC already exist on the CBOE and CME futures and will likely also exist on the ICE futures platform.
In 2015, Mayer discussed the likelihood of positive financialization as one of the seven network effects for BTC, including; remittances, micropayments, peer-to-peer lending, and the exchange of stocks and securities. Both Long and Mayer conclude that negative financialization, based on custodians lending the asset for leverage on paper claims, will be much harder to achieve as long term holders will be unlikely to provide their private keys to a custodian for this type of financialization.
In Asia, the Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) volumes have remained subdued compared to last year. Korea’s Upbit exchange recently underwent an audit and was found to be holding 100% of customer funds with an additional 27% in reserve. Korea’s largest exchange, Bithumb, resumed deposits and withdrawals this week after briefly halting them after a hack in late June costing US$30 million.
OKEx futures, which use a socialized loss system for futures settlement, stole the limelight in the exchange arena this week after a US$416 million long trade was margin called and remained uncleared into settlement. A trade is margin called, or liquidated, when the account value falls below the minimal value. A limit order is then placed on the orderbook equal to the size of the liquidated position. If the position is not cleared, it remains “open” until settlement, which occurs once each week.
Normally, these open liquidations are closed by price action. However, price dropped far below the liquidation price of US$8,020 on the quarterly futures contract and was not cleared. When this occurs, the insurance fund, which accrues funds through clearing liquidations, pays for the difference. When the insurance fund is empty, the losses become socialized, meaning clawback occurs on trader’s profits for that week. Although this system seems risky from a trading perspective, OKEx futures have been known to many users as the “woodchipper” due to its efficiency at clearing open liquidations and minimizing socialized losses.
Even after adding 2,500BTC of OKEx’s own capital pool into the insurance fund, a ~17% clawback occurred. A 10% clawback also occurred earlier in July. OKEx also announced plans to mitigate this problem in the future by; increasing margin ratios when opening larger positions on cross-margin, applying maximum position sizes when on fixed-margin, adjusting the margin ratio formula, adjusting the liquidation price mechanism, adjusting how forced liquidations impact the market, and optimizing the use of the insurance fund.
Within the wider industry, Square, a mobile payment service similar to Venmo, revealed that it’s Cash.App accrued US$37 million in BTC revenue last quarter, netting US$400,000 in profit, double the previous quarter. Square also disclosed that they are now using private brokers for BTC transactions rather than public exchanges.
Another BTC payment processor, BitPay, revealed that its service processed US$1.2 billion in 2017. BitPay recently had its seventh anniversary and is used by over 100,000 merchants worldwide. BitPay also has a history of supporting the failed SegWit2x fork and strongly supporting Bitcoin Cash, including deceptively subsidizing BCH fees while overcharging for BTC fees.
Coinbase announced a WooCommerce plugin this week, allowing for quick and simple online transactions in BTC and LTC. WooCommerce is an open source eCommerce plugin for WordPress, which accounts for more than 28% of all online stores. WooCommerce has also been used on the Lightning Network through Jack Mallers’ the Zap wallet.
The Intercontinental Exchange announced the Bakkt App which will allow for both a physically delivered BTC futures and a payment gateway developed by Microsoft and used at Starbucks. A spokesperson for Starbucks clarified that they are, “not accepting digital assets at Starbucks. Rather the exchange will convert digital assets like Bitcoin into US dollars, which can be used at Starbucks,” as reported by Motherboard. Ex-Starbucks CEO Howard Schultz has previously said that, “I don’t believe that Bitcoin is going to be a currency today or in the future,” but has been enthusiastic about using blockchain technology.
Germany’s second-largest stock exchange, Börse Stuttgart, is also releasing a crypto app and infrastructure for end-to-end crypto custody, while Japan’s SBI holdings announced the expansion of its crypto footprint by developing a crypto derivatives platform.
In further news, the Mt. Gox bankruptcy and creditor saga continues, after a civil rehabilitation announcement in June. Another announcement was released this week pointing to continued preparations for rehabilitation by returning approximately 166,000 BTC and 168,000 of BCH to users. The revised policy noted that the first payment to creditors will be made swiftly after the approval and confirmation of the rehabilitation plan, likely in May or June 2019.
The rehabilitation plan also mentions cash and “altcoin” holdings which will be sold and distributed to users as well. There has been no direct reference to the myriad of other Bitcoin forks also available to be claimed, which represent several millions of dollars as well.
Turning to the state of the network, despite mining profitability currently nearing 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 through mining pools and geographically. The next Bitcoin block reward halving is slated for May 2020.
One of crypto’s largest producers of mining hardware, Bitmain, reported US$1.1 billion in net profit for Q1 2018. There have also been continued rumors and reports that Bitmain is preparing for an IPO, following a Series B funding round yielding a $15 billion valuation. In September 2017, Bitmain received US$50 million during a Series A funding round from Sequoia Capital and IDG Capital. Another hardware focused company, Canaan Creative, filed for a US$1 billion IPO in May. The company intends to list in Hong Kong.
The head of the Bitmain and AntPool, Jihan Wu, has previously registered a company in Washington State. Ant Creek LLC. was registered in June 2017. In April this year, Walla Walla County endorsed a land lease and purchase option, which will allow Ant Creek LLC to develop a mining operation. Washington State has been a hotbed for crypto mining operations due to cheap electricity and large swaths of undeveloped land.
While the number of transactions per day has averaged 180,000-200,000 since June it has slowly been increasing. This key metric has declined significantly for a number of leading cryptocurrencies throughout this 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. Unconfirmed transactions have also declined dramatically this year. There are currently less than 2,000 transactions pending confirmation.
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 averaged 2.9 outputs per transaction over the course of the 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.
Additionally, the protocol upgrade SegWit, which currently accounts for ~38.5% 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.
Bitcoin days destroyed (BDD), 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 a 10 days ago and then they spend it, 100 bitcoin days have been destroyed.
The highest months in BDD since Bitcoin’s inception have strongly correlated with highs or lows in Bitcoin 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. Over the past year, BDD has continued to decline, suggesting that long term holders will keep funds in dormant cold storage.
Using a 30-day Kalichkin network value to transactions (NVT) ratio, BTC remains in the upper-third of its historical range. 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. NVT has not been this high since January 2015, which suggests decreasing 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, such as batching and Lightning Networks, the new normal for NVT may take many months to determine.
Turning to developer activity, Bitcoin Core v0.16.2 was released over the past week with minor improvements to the network, while the BTC project on GitHub has had a cumulative 1,775 commits over the past year. Most coins use the developer community of GitHub, where files are saved in folders called “repositories” or “repos,” and changes to these files are recorded with “commits.” Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity.
As the Bitcoin price trend turns from bearish to neutral, capturing the beginning of the next change in market direction is essential for maximizing returns. The strength or weakness of the current trend can be analyzed with the Wyckoff Method, Pitchforks, Ichimoku Cloud, oscillators, chart patterns, and exponential moving averages (EMAs). 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 Support (LPS) is an ideal opportunity for a long entry, or an opportunity to add to an existing long position.
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 at the median line. Based on the diagonal resistance and previous rate of change, a potential upside target of ~US$10,000-US$12,000 is possible.
Looking at 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 position would not be warranted until price breaks above the Cloud. The flat Kumo and Kijun at US$10,000 and US$11,000 should act as strong resistance, but will also act as a magnet for price. 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.
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).
Additionally, three oscillators measuring momentum that have all begun to turn or flip bullish; RSI is flirting with a close above 50, which represents bullish territory, Stoch RSI has crossed bullish and breached 20 (not shown), and MACD signal lines have crossed bullish with a bullish histogram.
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). Again, a long entry based on traditional Cloud strategy does not trigger until price breach’s the Cloud. A candle close above the Cloud would be the first time that has occurred the entire year. A long flat Kumo at ~US$7,850 should act as a magnet for price.
On the two-day chart, price had breached both the 50EMA and 200EMA. The declining volume profile is suggestive of price consolidation. The current 50/200EMA cross is bullish and bullish continuation would be likely if the EMAs touch but fail to cross bearish. The 50 and 200EMAs on the daily chart remain crossed bearish (not shown) with price below the 50 and 200EMA.
The BTC network has never been subject to the levels of institutional interest currently being observed. Globally, stock exchanges, derivative markets, commerce solutions are increasingly understanding that crypto is a serious asset class. Collectively, this effect will substantially increase financialization and liquidity of BTC.
Technicals continue to 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 phase. High timeframe trend indicators and oscillators have flipped from bearish to neutral or outright bullish. A bullish Kumo breakout, should it occur, will likely be the beginning of a sustained, multi-week bull trend. A BTC ETF decision by the SEC as early as August could be the catalyst needed to immediately spark price action towards the US$10,000 level.