Bitcoin Price Analysis – Reversal in the near-term

Bitcoin (BTC) has continued to ratchet higher, rising 94% since December 1st, on continued institutional and retail interest. The market cap now stands at US$316 billion on US$6.1 billion in trading volume over the last 24 hours.

Hash rate and difficulty continue to make new highs, with hash rate nearing 15 exahashs per second. This far exceeds the estimated computational power required to simulate a human brain in real time. Difficulty, which is adjusted every 2016 blocks, has seen six double-digit percentage increases this year, with a seventh due in a few hours.

The hash rate boon in recent years has been directly related to the development of Application-Specific Integrated Circuits (ASICs) designed solely for mining cryptocurrencies. The most recent ASICs from Halong Mining, which have quickly sold out, promise 16TH/s of computing power per rig. These rigs are connected in mass in large warehouses all across the world, often where electricity is cheap and/or subsidized.

The largest concentration of mining is in China, although this may change abruptly with regulatory oversight. Venezuela also has a large mining community, thanks to political unrest and cheap electricity. In the United States, Louisiana and Washington State are the cheapest places to mine based on electricity costs, with Hawaii and Alaska being the most expensive.

If Bitcoin miners were a country, they’d rank 60th in the world in terms of electricity consumption, between Belarus and Bulgaria. One estimate by Digieconomist suggests that Bitcoin mining will consume the entire global energy output by 2020, if the pace continues at the current rate. This global footprint has been under fire recently as awareness of Bitcoin grows.

Peter Van Valkenburg of CoinCenter, a non-profit research and advocacy center focused on the public policy issues facing cryptocurrency in Washington D.C., has argued that instead of destroying the planet, Bitcoin will push the energy market towards more sustainable alternatives, driving an energy revolution. Mining in Canada and Iceland currently use hydro and geothermal power, while wind and solar are among the cheapest energy sources currently available. Bitcoin advocate Andreas Antonopoulos also shares this view and expresses concern for the hidden resource needs in other payment platforms.

Despite the increasing hash rate, difficulty adjustments create relatively steady block times,  around 10 minutes per block, based on the Bitcoin protocol. This keeps block rewards and transaction confirmations relatively steady as well.

As transactions per day increase, recently hitting a high of 490,000, the block size limit is reached and real estate in the block size becomes more and more scarce, hence increasing transaction fees. While fees in USD terms continue to increase, fees in BTC terms have remained relatively steady.

SegWit has allowed for an effective increase in the block size limit by decreasing the size of each SegWit transaction. Hardware and software wallets, along with smaller companies who use Bitcoin transactions, have led SegWit adoption. Larger companies in the space have dragged their feet despite being aware of SegWit, or supporting SegWit2x, for over a year. Coinbase and GDAX have announced that they will support SegWit addresses in 2018.

There are currently around 100,000 unconfirmed transactions, down from over 175,000 earlier this month. Although this looks dire, more than 50% of the current transactions in the mempool are attempting to pay a fee of $US0.0038/byte. Leading up to December, most of the mempool was filled with essentially zero fee transactions.

While the blockchain continues to fill, tomorrow is the first full trading day of the Chicago Mercantile Exchange (CME) BTC futures product. The product is currently live, although with low liquidity. The CME facilitates trading in the largest portion of derivatives contracts in the world. The Chicago Board Options Exchange launched their cash-settled futures product on December 11th. The contract will be available on TD Ameritrade tomorrow.

BTC exchange traded volume has been led by the US dollar (USD), Japanese Yen (JPY), and Korean Won (KRW) pairs on Bitfinex, Coincheck, and Bithumb respectively. In addition to record traffic, GDAX, Bitfinex, BitMex, Bittrex, and Kraken have all reported continued and sustained DDoS attacks.

Global over-the-counter volume on LocalBitcoins reached new all time highs, in most of the countries with available data. This suggests that global on-ramping and awareness of BTC has never been higher.

Technical Analysis

The price of Bitcoin continues its upward ascent, flirting with US$20,000 on several exchanges. Based on the Pitchfork of the current trend, price is on track for US$30,000 in early January.

The Pitchfork is an indicator that projects a diagonal trend using three anchor points. The median line (red) represents the mean of the trend while the top and bottom zones represent overbought or oversold territory, respectively.

The Ichimoku Cloud on the daily chart indicates that all signals remain strongly bullish, with Kijun support around US$12,300. The last long entry signal, a bullish TK cross above Cloud on October 7th, has yielded a 328% move. A long exit signal would occur on a bearish TK recross.

The Cloud uses a moving-average-type system with dynamic support and resistance to make projections of key zones, as well as capturing 80% of any given trend. As long as the price remains above the Cloud, sentiment remains bullish. Price in the Cloud indicates a neutral trend, and below the Cloud indicates a bearish trend.

When the Tenkan (blue) is over the Kijun (red) sentiment is bullish, as shown below. When the Kijun is over the Tenkan sentiment is bearish. When the Lagging Span (dark green) is above the Cloud and current price sentiment is bullish, as shown below. When the Lagging Span is below the Cloud and current price sentiment is bearish.

The best entry signals when using this indicator occur when the trend is obvious, but 1 or 2 of the signals have yet to become confluent on a higher timeframe trend.

On the four hour chart, price has formed a rising wedge. This is typically a bearish reversal pattern, with a descending volume profile. There is also a growing bearish divergence on RSI and Volume, meaning price has continued to move up on less momentum.

While rising wedge has formed several times over the past year, on various timeframes, most of them have preceded bullish continuation and not a reversal. Resistance stands between US$20,000-$22,000 with support around US$14,850-$15,850.

On a wider timeframe, the one hour chart, Ichimoku Cloud signaled a long entry on December 15th with a Kumo breakout and bullish TK cross. At the time, price was also bound in a bullish continuation pattern, an ascending triangle.

The Cloud signal proved to be reliable, with a break of the ascending triangle horizontal resistance confirming a long trade entry. The chart pattern yields a 1.618 Fibonacci extension and measured move of US$21,000 and US$23,500 respectively.

Lastly, the OKEX quarterly futures rollover date begins in nine days, and continues throughout the remainder of the month. The rollover dates have been significant since 2015, with an alternating top/bottom price pattern between contract expirations. Based on this pattern, the top for the quarter will likely occur around December 17th.

Price is also the furthest from the 200EMA it has been during the entire trend, only adding to evidence that price is overbought and a support test will likely occur sooner rather than later.

Conclusion

Worldwide institutional and retail interest continues to grow unabated, perhaps stronger than ever, with many users reporting problems with exchange verification allowing them to trade or buy cryptocurrencies. All of the exchanges have reported record traffic over the past month.

Technicals suggest an immediate target of ~US$22,000 with a heavy reversal in the near-term based on previous cyclical moves since 2015.