Bitcoin (BTC) has experienced several sudden price movements since breaking US$4,200 in mid-November. The market cap currently stands at US$62.8 billion, with US$2.28 billion traded in the past 24 hours. Since mid-January, Bitcoin price action has essentially correlated with the other top 10 cryptocurrencies in the BNC Market Cap table.
BTC is the only coin, with transactions fees, that has experienced steadily increasing transactions per day since April 2018 (line, chart below). BTC also has more transactions per day than the other top 10 cryptocurrencies combined. Transactions per day have declined throughout 2018 for most cryptocurrencies and assets. The average transaction value in USD (fill, chart below), on the other hand, has continued to decline after reaching US$79,000.
A rise in transactions per day with a decline in the average value of those transactions clearly shows that more transactions with smaller amounts are being sent through the network. The continued growth in transactions per day can be attributed to VeriBlock, which helps secure other blockchains through the "Proof of Proof" (PoP) consensus mechanism. PoP embeds the current state of other blockchains into the BTC blockchain, making other blockchains less vulnerable to PoW vulnerabilities like a 51% attack. The Veriblock team includes Jeff Garzik, previous BTC Core dev, and head dev of the failed SegWit2x initiative.
Source: coinmetrics.com
Bitcoin days destroyed (BDD) spiked in December, hitting an all time high, and surpassing the previous record set in November 2018. So far, January's BDD is also elevated based on historical data. BDD can be used to measure coin velocity over time. For example, if someone has 10BTC that they received 10 days ago, and then they spend or move the BTC to another wallet, 100 BTC days have been destroyed. This metric accrues over time and resets any time the coins are moved.
The months with the highest BDD have historically correlated with highs or lows in price. A spike in BDD in July 2017 was likely related to the Bitcoin Cash hard fork. On June 20th, a spike in BDD preceded a drop in Bitcoin price two days later. However, 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 over the counter (OTC) brokers.
Source: oxt.me
The 30-day Kalichkin network value to on-chain transactions ratio (NVT) has again begun to rise (line, chart below) after declining to less than 20. Kalichkin's NVT does not account for inflation or the use of off-chain transactions, which would decrease the overall NVT ratio. However, NVT remains in the upper-third of the historic range, which paints a bearish picture. While inflection points in NVT can correlate with extreme highs or lows in price, a rising NVT should be seen as bearish due to increasing network utility.
Daily active addresses (DAA) have continued to increase since the lows in April but have declined over the past few months (fill, chart below). On December 30th, 2017, DAA exceeded one million. A large uptick in DAA should be seen as a bullish indicator for price as it suggests an increase in on-chain BTC demand. As off-chain transaction facilities increase, daily active addresses may stagnate or decline. Further, there continues to be grassroots interest in BTC, as suggested by 1,714,226 members and 5,424 meetups worldwide on meetup.com.
Source: coinmetrics.com
The network hash rate has increased significantly since December 21st, indicating a substantial increase in mining activity. The increase followed a 35% decrease in difficulty across four difficulty adjustments late last year. Difficulty then increased by 10% on December 31st and nearly 5% on January 13th, both increases reflecting the added hashing power.
Network difficulty adjusts up to +/-25% after 2016 blocks have confirmed. As hash rate drops before a difficulty adjustment, block times increase. As hash rate increases before a difficulty adjustment, block times decrease. Average block times are currently just below 10 minutes with the next estimated difficulty adjustment projected to be -1% in six days.
Source: bitinfocharts.com
Approximately 33% of all BTC blocks mined over the past week were mined with overt version-rolling ASICBoost. This percentage has continued to increase since mid-October 2018 when Bitmain released firmware to activate overt ASICboost on the Antminer S9.
Unlike covert ASICBoost, overt ASICBoost has no detrimental network effects while making mining more profitable for miners using it, by requiring less energy usage. Overt ASICBoost is also SegWit compatible whereas covert ASICboost is not. Additionally, covert ASICBoost encourages small or empty blocks because the mechanism involves transaction reordering.
Source: asicboost.dance
Despite disruptions in hash rate and increasing block times throughout December 2018, pending transactions have continued to decline since mid-November. Pending transactions spiked to almost 40,000 in the setting of the Bitcoin Cash hard fork as some miners and mining pools moved hash rate from BTC to Bitcoin Cash. Any spike in pending transactions has been short lived and cleared almost completely within a few hours or days. Throughout most of 2018, pending transactions remained far below the 200,000-250,000 range seen during the December 2017 trading frenzy.
Source: https://jochen-hoenicke.de/queue
The average BTC block size (fill, chart below) has remained far below the block limit of ~2.2MB since March of 2018. Despite an increase in average block size since June, average transactions fees (line, chart below) have not increased substantially and currently average US$0.248. Fees have essentially continued to decline since July and are currently at pre-December 2016 levels.
A low and non volatile transaction fee market can be attributed to the general decline in network use as a whole. Additionally, an increase in transaction batching, SegWit use, and off-chain channels like the Lightning Network and Liquid side chains have also contributed to removing network strain and keeping fees low. However, Liquid currently has almost no network traffic.
Source: coinmetrics.io
Transaction Batching involves sending one transaction with many outputs instead of sending each transaction individually. Batching is most effective when used by high transaction volume market participants, such as crypto exchanges and miners, which benefit more from the reduced fees.
Transactions with only one output have declined steadily since March 2016. Almost 90% of all transactions are sent with at least more than one output, with a majority of those transactions having two outputs. In May 2018, a study found that ~12% of all transactions were batched, accounting for between 30–60% of all on-chain transactional value.
Source: https://p2sh.info/dashboard/db/batching
Segwit adoption increased steadily throughout most of 2018 and currently accounts for ~38% of all network transactions. The recent decline in SegWit transactions as a percentage of all transactions may be attributed to VeriBlock, which does not use SegWit transactions. SegWit, or BIP141, was activated on August 23rd, 2017 via user activated soft fork and allows individual transactions to occupy less block space than a traditional transaction.
Although both non-SegWit and SegWit transactions can be sent over the network, SegWit users pay less in accumulated fees to achieve the same number of transactions. SegWit also allows for an effective blocksize limit above 2MB. As fees on non-SegWit transactions have declined significantly, users may feel less inclined to use SegWit addresses, which may explain the decline in SegWit use towards the end of the year.
Source: https://p2sh.info/dashboard/db/segwit-usage
SegWit also enabled the possibility of further second layer network utilities like the Lightning Network (LN), which facilitates trusted, bidirectional, off-chain, hub and spoke payment channels. The LN also paves the way for the possibility of instant payments, micro and nano-transactions, and increased network scalability.
Since going live on March 15, 2018, the LN has continued to gain traction. There are now more than 25,428 available channels, with a channel value of 562 BTC, or US$2 million at current prices. 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 with one on-chain network fee when the channel is closed.
Source: https://p2sh.info/dashboard/db/lightning-network
Turning to developer activity, Bitcoin Core released version 0.17.1 on December 25th with various bug fixes and performance improvements. On GitHub over 170 developers have contributed a cumulative 3,278 commits to the BTC project over the past year, mostly on the main repo.
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," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity and interest.
BTC exchange traded volume over the past 24 hours has been dominated by Tether (USDT), with the United States Dollar (USD) markets representing about a third of USDT volume. Stable coin volumes represent 68% of all BTC volume over the past 24 hours. Exchanges with the most volume over the past 24 hours include CoinBene, OEX, OKEx, and Binance.
In Asia, volume on the Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) pairs have remained subdued throughout the entire year, and currently account for less than 4% of global volume. These Asian fiat markets may increase substantially as regulatory scrutiny in the region is clarified.
A BTC premium (right panel, chart below) between Bitfinex, where USDT is a major currency, and Coinbase nearly reached US$1,000 on October 15th, but has held below US$200 recently. Furthermore, USDT/USD is currently trading at US$1 (left panel, chart below). The BTC premium is currently just under US$66 or ~1.75% and is returning to the historic range seen during normal market conditions. As confidence in Bitfinex and free-flowing USDT return, the premium between the two exchanges should continue to decline as traders arbitrage the difference.
Global over the counter (OTC) volume, from LocalBitcoins.com, finished the year higher than any period in 2018. The biggest increases in BTC and notional value have come from South American countries where inflation or hyperinflation has devalued local currencies. The first BTC ATM will be opening in Venezuela over the next few weeks. Additionally, BTC ATM provider Coinme has partnered with Coinstar, a coin counting machine common in grocery stores across the United States.
Google Trends for the term "bitcoin" remained down sharply over the course of 2018 with a slight uptick towards the end of the year. Despite the declining interest, the search "what is bitcoin" was the most popular "what is" Google search of 2018.
A slow rise in searches for "bitcoin" preceded the bull run in Q4 2017, likely signaling a large swath of new market participants at that time. A 2015 study found a strong correlation between the google trends data and BTC price. A 2017 study concluded that when the U.S. Google "bitcoin" searches increased dramatically, BTC price dropped.
Technical Analysis
BTC price action has been meandering on lower time frames, but volumes continue to decrease, suggesting consolidation for a bigger move. Technical analysis becomes limited on lower time frames when markets are trendless, unpredictable or irrational. Roadmaps for key decision points on high timeframes can be found using exponential moving averages (EMAs) and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.
On the daily chart, the 50/200EMAs have been bearishly crossed since May 15th. Price has mostly been held below the 50EMA since that cross. A break above the 50EMA would be a strong bullish indicator with a likely push towards the 200EMA at US$5,450. There are no active volume or RSI divergences on the daily timeframe.
Long/short open interest on Bitfinex (top panel, chart below) is currently net long and rising. USD lending rates on Bitfinex have spiked recently as available funding has disappeared. Rising lending rates and disappearing USD funding have typically correlated with local tops in price, as there is no available USD available for margin trading.
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.
On the daily chart, the Cloud metrics are bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and Lagging Span is below price and below Cloud. A long entry based on traditional Cloud strategy would not be warranted until price breaches the Cloud. Price has remained below the Cloud since mid-January. If the current local low holds without price making a lower low, then a move towards the Cloud at US$5,000 becomes more and more likely.
Lastly, the opening and expiration dates of the Chicago Mercantile Exchange (CME) BTC futures contracts can have a significant impact on price. The October 29th contract is set to close this week with a new contract set to open on January 28th. The September 4th contract opened at almost exactly the local top for price. The current three-month futures contract opened December 31st. The CME facilitates trading in the largest portion of derivatives contracts in the world. The BTC futures contracts opened in December 2017 on low volume, but volumes for the product have increased significantly throughout 2018.
Conclusion
Network fundamentals show a significant rise in transactions per day over the past month which can mainly be attributed to VeriBlock, a mechanism for securing other blockchains using the BTC blockchain. VeriBlock does not use Segwit and some have called the mining strategy "transaction spam." Off-chain, the Lightning Network continues to grow as well. Hashrate and block times have stabilized with virtually no pending transactions while block size is growing with no impact on the fee market.
Technicals are bearish, warranting another wait and see approach prior to a trend reversal. Price has drifted lower over the past two weeks on declining daily volume, which is typically indicative of a consolidation period. Trend indicators suggest the US$5,000 as a reversal target should price gain bullish momentum. New lower lows would likely bring price towards the previous consolidation zone from May through August 2017, from US$2,000-US$3,000.