Network mining fundamentals have shown impressive growth in the past few weeks with both hash rate and difficulty reaching new highs.

Bitcoin (BTC) is a decentralized digital currency that was created by Satoshi Nakamoto and released in 2009. The BTC market cap currently stands at US$158.78 billion, with US$7.29 billion traded in the past 24 hours. Money flows over the past day show substantial movements to and from Tether (USDT) at US$2.98 billion, ETH at US$925 million, and the U.S. Dollar (USD) at US$753 million.

Source: coinlib

The rolling 90-day Pearson correlation between BTC and the top 10 cryptocurrencies continues to support bull market conditions. Generally, BTC and the rest of the high market cap coins are highly correlated during a bear market and less correlated during a bull market. Since February 2019, the correlations between major coins and BTC have fallen significantly.

Since the beginning of the year, Monero (XMR) and Ethereum (ETH) have had the longest periods of high correlation, whereas Binance Coin (BNB) and Tron (TRX) have had the longest periods of low correlation. BNB is currently the least correlated to BTC by a significant margin.

Source: coinmetrics

The BTC spot price is currently up more than 180% from the low set in December 2018, but remains down 56% from the current all time high set in December 2017. Relative changes in BTC pricing can be viewed through a traditional Quarterly lense, which often shows a dramatic expansion or contraction. Very few quarters end with less than a 10% price change. Historically, both April and Q2 have been the most bullish periods.

The current quarter ranks as the second highest quarterly gain since 2014 and the seventh highest quarterly gain of all-time. Since 2013, all quarters with a greater than 100% gain have been followed by a negative quarter, suggesting Q3 may close around 10% down.

Turning to mining fundamentals, the BTC network is secured by the SHA-256 consensus algorithm. The most profitable SHA-256 ASIC miners currently available are; the ASICminer 8 Nano Pro, Bitfury Tardis, Bitmain Antminer S17, and Innosilicon T3+ 52T.

Three SHA-256 ASIC miners are set to be released later this year, the; MicroBT Whatsminer M20S, StrongU STU-U8, and MicroBT Whatsminer M21. Typically, as these miners are produced, the manufacturer runs them on the network until shipping orders are filled.

Network factors that influence mining profitability include; price, block times, difficulty, block reward, and transaction fees. Electricity costs are also a significant factor when determining profitability for various ASICs. During the flood season from April to October every year in the Chinese province of Sichuan, electricity drops to a cost of US$0.04 cents/KWh due to the abundance of hydroelectric power. At this electricity price, all ASICs are currently profitable except those manufactured in 2014.

Source: asicminervalue

Both the network hash rate and difficulty have reached a new record highs over the past few weeks, which may reflect relatively cheap electricity currently available in China. As electricity costs decrease and BTC price increases, more and more older ASICs again become profitable to mine. The previous hash rate record occurred in November 2018, and preceded a 50% drop in price over the following month.

Overt ASICBoost, which has no detrimental effects on the network, also makes mining more profitable by requiring less energy usage. The total percentage of overt version-rolling ASICBoost on the network has ranged between 35% and 40% over the past few months, and currently accounts for approximately 40% of all blocks mined.

Network difficulty adjusts up to +/-25% after 2,016 blocks have confirmed. As hash rate decreases before a difficulty adjustment, block times increase. As hash rate increases before a difficulty adjustment, block times decrease. Average block times are currently just under 10 minutes with an estimated 1.38% increase in difficulty projected for the next adjustment in 11 days.

Source: bitinfocharts

BTC inflation currently stands at 3.85%, and is set to decrease in a disinflationary stepwise fashion over time. The next block reward halving is currently 341 days from now, in May 2020, when annual inflation will decrease to 1.80%.

Source: bashco.github.io/Bitcoin_Monetary_Inflation

On the network side, both the on-chain transactions per day (line, chart below) and average transaction value in USD (fill, chart below) have risen significantly since April 2018 and February 2019, respectively. Over the past few weeks, transactions per day have declined slightly after reaching a high of over 450,000 in early May. The current record was set on December 14th, 2017 where nearly 500,000 transactions were sent across the network.

Source: coinmetrics

Compared to the previous period of record breaking transactions per day and price, in late 2017, there are currently very few unconfirmed transactions. There are also very few transactions being sent with a zero fee (blue fill, chart below) compared to several periods in 2017.

Additionally, SegWit allows individual transactions to occupy less block space than a traditional transaction. Segwit, or BIP141, was activated on August 23rd, 2017 via a user activated soft fork. 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 of roughly 2.2MB. The number of transactions using SegWit and the volume of total SegWit transactions stands at 50% and 37%, respectively. If Binance or VeriBlock enabled SegWit transactions, these SegWit usage values would be substantially higher. VeriBlock currently accounts for 9% of all on-chain transactions.

Source: jochen-hoenicke.de

The average BTC block size (fill, chart below) has increased substantially since April 2018 and established a new high on June 14th. Despite a growing block size and increased on-chain use the average transaction fee (line, chart below) is currently US$2.06, compared to a high of US$62 in late December 2017.

Both the lack of zero fee transactions and increased scalability have kept fees substantially lower than similar block sizes in late 2017. Additionally, transaction batching and the increasing off-chain capabilities of Lightning Network have decreased on-chain transaction bloat.

Source: coinmetrics

The 30-day Kalichkin network value to on-chain transactions ratio (NVT) has continued to increase since January, and is currently at 32 (line, chart below). The record NVT high was set on December 2013, which corresponded with the record high in price at that time.

Based on this metric, the probability for a local top in price continues to increase. While Kalichkin’s NVT does not account for inflation or the use of off-chain transactions, which would decrease the overall NVT ratio, the metric remains in the upper-third of the historic range, which paints a bearish picture.

Monthly active addresses (MAA) have increased substantially over the past six-months. MAA has grown to 800,000 from a yearly low of 580,000. Daily active addresses (DAA) surpassed one million on June 14th, which is the first time DAA has been above that level since mid-January 2018. On December 14th, 2017, DAA exceeded 1.28 million.

A large uptick or sustained increase 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 over time.

Source: coinmetrics

The market cap divided by the realized cap (MVRV) is another crypto-native fundamental metric used to asses overbought or oversold conditions. Realized cap approximates the value paid for all coins in existence by summing the market value of coins at the time they last moved on the blockchain. The metric was created through a combination of efforts by Murad Mahmudov, David Puell, Nic Carter, and Antoine Le Calvez.

Historically, periods of an MVRV less than one have represented oversold conditions, whereas periods of an MVRV greater than 3.5 have represented overbought conditions. Both MVRV levels above four have represented all-time highs in price. Currently, MVRV is under the median of both extremes, suggesting the potential for additional upside.

The market cap divided by the realized cap (MVRV) is another crypto-native fundamental metric used to asses overbought or oversold conditions. Realized cap approximates the value paid for all coins in existence by summing the market value of coins at the time they last moved on the blockchain. The metric was created through a combination of efforts by Murad Mahmudov, David Puell, Nic Carter, and Antoine Le Calvez.

Historically, periods of an MVRV less than one have represented oversold conditions, whereas periods of an MVRV greater than 3.5 have represented overbought conditions. Both MVRV levels above four have represented all-time highs in price. Currently, MVRV is under the median of both extremes, suggesting the potential for additional upside.

Source: coinmetrics

Analyzing the age of UTXOs, or unspent coins, can also provide some insights into price movements. Spikes in newly moved coins tend to correlate highly with local tops or bottoms in price, and can represent euphoria or capitulation. Coins which have not moved recently are represented in cooler colors whereas coins on the move are represented by warmer colors.

Coins that have not moved in more than five years now account for 20% of the circulating supply. The 12-18 month age band, or coins not moved since December 2017 – June 2018, holds the next highest distribution at 17% of the circulating supply. The lower age distributions, less than one-month old, have been rising recently, suggesting the potential for a local top at the current price level is growing, although this also may represent exchanges re-arranging cold storage wallets.

Source: hodlwave

Turning to developer activity, Bitcoin Core version 0.18.0 was released in mid-May, providing various bug fixes and performance improvements. The BTC project on GitHub has two active repos, “bitcoin” and Bitcoin Improvement Protocols, “BIPs”. Over 170 developers have contributed over 1,700 commits in the past year, mostly on the bitcoin repo (shown below).

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 developer activity and interest.

Future potential protocol improvements in the pipeline include Schnorr signatures, Taproot, and Graftroot. Schnorr signatures and signature aggregation also bring the potential for storage and bandwidth reduction by at least 25%. Taproot and Graftroot improve upon Merkelized Abstract Syntax Trees (MAST) which offers three benefits; smaller transactions, more privacy, and larger smart contracts.

Source: github

BTC exchange traded volume over the past 24 hours has been dominated by Tether (USDT) trading, with the United States Dollar (USD) markets representing 13.12% of total volume. Stable coin volumes currently represent just under 75% of all reported volume over the past 24 hours.

In Asia, volume on the Japanese Yen (JPY), Korean Won (KRW), Chinese Yen (CNY) pairs have remained subdued throughout the past few years and currently account for less than 3.5% of total volume. These Asian fiat markets may increase substantially if regulatory scrutiny in the region is clarified or if domestic mainland Chinese exchanges open again.

Several potentially game-changing BTC services are also in the works and slated for launch this year. In March, Fidelity Digital Assets announced the launch of a custody service to a select group of eligible clients. The financial behemoth manages over US$2.45 trillion in assets. Bakkt, which raised US$182.5 million from 12 partners and investors in 2018, is also set to launch a physically delivered BTC futures product some time this year. Bakkt is a subsidiary of the Intercontinental Exchange, which also runs the New York Stock Exchange. Starbucks also received a significant equity stake in the Bakkt BTC futures platform.

Fresh applications for the Bitwise and VanEck-SolidX BTC ETFs were also submitted in February to the U.S. Securities and Exchange Commission (SEC). All previous BTC ETF proposals have been rejected by the U.S. regulator, while several other BTC ETNs are available worldwide, and are seeing increasing volumes. Last month, the SEC delayed decisions on both ETF applications. The deadline for the final SEC decision on the pending U.S. ETFs is set for early December 2019.

A price deviation between the USDT and USD exchanges (right panel, chart below), specifically between Bitfinex and Coinbase, has been extremely volatile over the past few months. This has likely been related to both a short halt in withdrawals as well as the LEO Token (LEO) IEO.

The price deviation, which started to increase in mid-October, was due in large part to a decrease in the USDT market rate (left panel, chart below). The BTC price premium has since become negligible as USDT has held a market rate near US$1.00.

Global over the counter (OTC) volume, from LocalBitcoins.com, finished 2018 on a high but has declined as BTC price has increased. Global notional volume has held near or above US$50 million since the beginning of the year, and is currently at US$57 million. In late May, LocalBitcoins discontinued servicing Iran, likely as a result of US sanctions. On June 1st, LocalBitcoins disabled paying for BTC with in-person cash trades.

The biggest increases in BTC and notional volume over the past few months have come from South American countries where inflation or hyperinflation have devalued local currencies. Other increases in volume can also be attributed to geopolitical turmoil. Notional volume has also recently spiked in Ukraine, Hong Kong, India, Kazakhstan, Kenya, Japan, Mexico, Poland, South Africa, South Korea and Thailand.

Google Trends for the term “bitcoin” has increased dramatically over the past few weeks, marking a new yearly high. Throughout the course of 2018, “bitcoin” related searches declined dramatically. 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 google trends data and BTC price whereas a 2017 study concluded that when U.S. Google “bitcoin” searches increased dramatically, BTC price dropped.

Technical Analysis

Strong bullish price action has continued in the setting of institutional demand, the possibility of continued low interest rates from central banks worldwide, a U.S. and China trade war with potential Chinese capital flight, and increasing geopolitical tensions in the Middle East.

As price continues to move higher, a roadmap for trading decisions can be established by using Exponential Moving Averages, Volume Profile of the Visible Range, Pivot Points, oscillators, and the Ichimoku Cloud. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the spot price relative to the 50-day and 200-day Exponential Moving Average (EMA) can be used as a litmus test for the trend. Price surpassed the 50-day EMA in mid-February and surpassed the 200-day EMA on April 2nd. The EMAs crossed bullishly in late April, representing an end to the almost year-long bear trend. The 50-day EMA is currently at US$7,600 and 200-day EMA is currently at US$6,000, both should now act as support.

Volume Profile of the Visible Range (VPVR) also shows a large volume node at US$6,500, which should also act as support (horizontal bars, chart below). Additionally, yearly Pivot Points, or mathematical support and resistance at US$8,130 and US$13,000, should act as support and resistance, respectively.

Over the past few weeks, price has continued to develop a bearish divergence on both volume and RSI, which is suggestive of waning bullish momentum. Long/short open interest on Bitfinex (top panel, chart below) is now 50% short for the first time since mid-May. Most of these shorts are currently significantly underwater.

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 weekly chart, the Cloud metrics are bearish; price is below the Cloud, the Cloud is bearish, the TK cross is bearish, and the Lagging Span is above price and below the Cloud. A long entry based on traditional Cloud strategy would not be warranted until price breaches the Cloud.

Based on price action over the past several weeks, all comparisons to 2014, 2015, and 2016 have been negated. There was virtually no resistance at US$6,500 (Kijun) with the next high probability target at US$10,000. The flat Kumo, which represents a 50% retracement of the previous range, should act as a magnet for price. Any retracements should find support at the Kijun, currently US$6,500.

Additionally, the previous week’s candle closed as a bullish engulfing candle, which traditionally has been a portent of strong bullish momentum. Historically, several weekly candles throughout the 2017 bull run represented bullish engulfing candlesticks (green asterisk) whereas several weekly candles throughout 2018 represented bearish engulfing candlesticks (red asterisk). Both cases represented a high likelihood for trend continuation.

On the daily chart, Cloud metrics remain 100% bullish; price is above the Cloud, the Cloud is bullish, the TK cross is bullish, and Lagging span is above both the Cloud and price. After a Kumo breakout, bearish or bullish, the probability of a new trend forming rises substantially. During this period, price returns to the Kijun many times to confirm support before trend continuation, this is known as a Kijun Bounce. Currently, the Kijun sits just at the US$7,200 level. A sustained Tenkan-Kijun disequilibrium suggests overbought conditions with a lower likelihood of bullish continuation

Lastly, the opening and expiration dates of the Chicago Mercantile Exchange (CME) BTC cash-settled futures contracts, launched in December 2017, have had a significant impact on price. The CME facilitates trades for the largest portion of derivatives contracts in the world.

Last month, the CME saw the highest notional volume ever in a single day for the BTC futures product, exceeding US$1.5 billion. Historically, price volatility tends to increase dramatically nearest any active contract expiration. The next key zone for increased volatility will likely come near the expiration of the December 31st to June 28th contract.

Conclusion

Network mining fundamentals have shown impressive growth in the past few weeks with both hash rate and difficulty reaching new highs. As long as the markets remain bullish, and mining profitability remains positive, miners will likely continue to add hash rate. Additionally, the seasonality of cheap electricity in regions of China supplied by hydroelectric power has likely fueled a mining boom.

Although transactions per day have decreased slightly from local highs a few weeks ago, daily active addresses are once again above one million and the total block size per day has reached a record high. Despite the increase in on-chain activity and use of block space, the fee market has contracted over the past few weeks. Other metrics, including NVT, show an increasing likelihood of a pending pullback in price, whereas the current MVRV suggests plenty of upside potential in the current trend.

Although the trend is strongly bullish, technicals on higher time frames show subtle but growing signs of overbought conditions and waning bullish momentum. A growing bearish divergence on weekly and daily timeframes suggests a pullback has become increasingly likely. Support targets sit at US$6,000 (200-day EMA), US$6,500 (weekly Kijun and VPVR volume node), and US$7,600 (50-day EMA). Should bullish momentum persistent, albeit a lower probability, the nearest upside target, based on the weekly Cloud, sits at US$10,000 and yearly Pivot Point resistance at US$13,000. If shorts continue to open as price moves higher, short capitulation may continue to provide additional bullish fuel.

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