Bull and bear case for the Bitcoin hard fork

Regardless of which way the trend breaks, Bitcoin is about to make a major move which has massive implications for the blockchain token market as a whole.

Let's examine fundamental and technical factors for the August 1st hard fork. 

Macro moves

  • Investors want free Bitcoin Cash and are "cashing in" alts for Bitcoin before the fork. The flow of capital between Bitcoin and Alt coins post fork will provide crucial information for future market moves. 
  • Institutional investors want clarity on where Bitcoin is headed before committing more capital. Recent SEC guidance on ICO regulation bolsters opinion that blockchain assets are starting to be legitimized. 

by AlphaBlockCapital on TradingView.com

Bull Case

The technical case is fairly strong for Bitcoin leading into the hard fork. Price is both above cloud, and the fast moving average stands to cross the slow moving average on any upward movement in price. This creates the strongest Ichimoku bull signal possible, a bull tk cross above cloud. 

If the fork goes smoothly and bitcoin breaks 3,000 USD equivalent value, there is no more resistance to prevent a violent upward pressure on price. 

The bull case is further bolstered by general market sentiment for crypto assets as regulations become more clear, and investors are continually bombarded with Bitcoin related stories in the mainstream financial media. 

Bear Case

The bear case primarily rests on previous performance in the last major bitcoin bull market. However, comparison to the 2013 Bitcoin bull market is made difficult by the vast differences in the development of the technology in the ensuing four years, as well as the proliferation of alt token projects. 

It must be noted thus far Bitcoin has not had a sideways movement lasting more than two months in its history that has not ended in a break to the downside. 

If the double top pattern just below 3,000 USD breaks to the downside the bull market can be declared over. A reversal will likely last many months with a fibonacci retracement to 50% or even 61.8% likely for the entire market capitalization of the blockchain token market. 

Pundits have also used Google Trends to point out searches for phrasing like "Bitcoin Bubble" have preceded previous busts. 

Adjusting investing time frames for blockchain speed

Blockchain markets move at an incredibly frenetic, bordering on violent pace. Could the 24/7 nature of blockchain markets be a major reason for this market behavior?

Traditional US stock markets operate from 9am to 4pm eastern time Monday through Friday with generally low volume after hours trading. Conversely the blockchain markets never close operating 24/7 365. This allows for 5x more trading activity in a given year.

A conservative estimate of 7 hours per day trading 252 days per year yields 1764 hours per year vs 8760 hours a year for 24/7 365 blockchain markets. 

This 5x speed increase means bull and bear markets happen 5x faster. While a typical movement might take months to work out in traditional markets, the same market gyrations in blockchain could resolve in a matters of weeks or even days.

Fundamental analysis

Market speed ups allow less time for fundamental stories to develop. This issue is especially acute as software development tends to take longer than anticipated. Scope creep and impatient investors reacting strongly to updates (or a lack there of) can cause fundamental stories to play out much faster than traditional markets. 

Technical analysis

This speed up can be especially problematic for technical analysis. To combat this problem, many traders have found success adjusting the settings on traditional technical indicators to account for the speed increase.

An interesting example is modifying Ichimoku cloud settings from their original parameters to twice as many periods to account for the additional hours of trading.

The original Ichimoku cloud system relies on a 9 period fast moving average and 26 period slow moving average which corresponds to traditional trading hours.

By doubling the settings to 20 period fast and 60 period slow moving average, many false entry signals can be avoided. This works by effectively dulling the signals so they more accurately reflect the increased trading hours.

First let's examine the traditional 9/26/52/26 settings on the current Bitcoin/USD pair. Fast SMA is shown in red, slow SMA is shown in blue. 

 Traditional settings are overly sensitive and give potentially misleading information about a bullish cross inside of the cloud. 

Traditional settings are overly sensitive and give potentially misleading information about a bullish cross inside of the cloud. 

Next let's examined the "dulled" double settings to try and avoid false signaling. Ichimoku cloud settings are set to 20/60/120/30 per the Josh Olszewicz recommendations.

 Doubled settings show a strong support line at 1850 as the lower bound of the cloud is completely flat. In this double view the current price is also safely above cloud, though a bullish TK cross is yet to happen. If a bullish cross were to happen above cloud it would be a much stronger signal on the doubled settings.

Doubled settings show a strong support line at 1850 as the lower bound of the cloud is completely flat. In this double view the current price is also safely above cloud, though a bullish TK cross is yet to happen. If a bullish cross were to happen above cloud it would be a much stronger signal on the doubled settings.

What block explorers can tell you about token projects

Continuing with the analytics theme from the last post, today we will introduce the concept of block explorer analysis. 

Public block explorers offer a treasure trove of information about potential blockchain token investments. As every transaction and wallet address created is publicly available on most blockchain projects, we can glean an incredible amount of information on how the project is progressing. 

A few caveats before starting:

1. Multiple wallet addresses can be owned by the same person/persons. In addition many users follow security best practices to create a new address for each transaction. An area of active research is blockchain "deanonymization" where programs such as the Bitcoin Graph Explorer can be used to link wallet addresses together through webs of interlinking transaction history. 

2. Anonymous focused projects like Monero, Zencash, Verge, intentionally obscure transactions to protect user privacy and are thus more difficult to analyze. 

Richlists

One of the first block explorer metrics we look at are the percent ownership by the top wallet addresses. This can be used to estimate a Gini coefficient, or how fairly tokens are distributed among members of the project.

As projects progress, distribution of the tokens will increase as tokens are bought and sold openly in the market. As evidenced by the recent Ethereum flash crash, owners with several percent of the overall tokens in circulation can potentially fill the entire order book, drastically effecting the price.

A more insidious example is when founders with large holdings leave the project and slowly sell their holdings into the market which suppresses the price. An example of this occurred when founder Steven Dai (potentially Patrick Dai) left BitBay and continued to flood the market with his holdings for several years. 

Transactions

Digging deeper into transactions, it becomes more clear how money is moving through the system. 

We can glean several interesting findings from analyzing transactions:

1. We can determine how many address holders are a long term investors. Several accumulation deposits into the same address over a period of time helps indicate long term holders.

2. Multiple wallet addresses becoming inactive shows progress in the project is slowing. There is a difference between an individual investor becoming inactive, and large scale inactivity. Confirmed transactions per day can show this metric, though it is a rough measure of real use as bots can easily generate a large portion of network activity.

  Log scale of confirmed transactions per day (source  bitinfocharts.com )

Log scale of confirmed transactions per day (source bitinfocharts.com)

3. We can roughly calculate how many coins have been lost. This is especially interesting as lost funds indirectly boost the price of the remaining tokens as long as development of the project remains active. Analysis done on the Bitcoin blockchain shows hundreds of millions of USD equivalent have potentially been lost. 

New token creation

New token creation is an interesting metric especially when investigating micro cap projects. As an example, the project "Neurocoin" has only one address mining 98% of the entire coin supply.

This illustrates how important block explorer diligence is before making potential investments. While most larger capitalization projects are not as blatant as this example, understanding the flow of capital inside of each system helps make more informed investing decisions. 

Further Reading

Princeton University lecture on de-anonymizing Bitcoin

https://www.coursera.org/learn/cryptocurrency/lecture/qnS76/how-to-de-anonymize-bitcoin

Tracking coin ranking website traffic for user growth

Many investors in the Blockchain space frequently check token tracking websites for quick glance price updates. To gauge the relative growth of new users into the ecosystem, an interesting metric to consider is tracking web traffic analytics for user growth over time.

We like viewing the top token tracking sites in aggregate to filter for change in user preferences over time. Regardless of which token tracking website users prefer, we want to see if the total number of users across sites is increasing or stalling.

As the price of the underlying tokens depends on new money entering the space, this is an excellent place discover more than the basic search interest Google Trends offers.

Let's go one level deeper into users who actively follow the prices and make trades. Statistics from these websites indicate users are either invested in the space, or seriously considering an investment. 

We have used the website SEMrush.com for this analysis. Consider trying their product with a free basic account if you are curious about digging further into the details. 

Coinmarketcap.com

The most trafficked token ranking site shows slower growth since peaking around the price surge in June.

Coingecko.com

The active user count on Coingecko seems to mirror the overall marketcap of the space fairly closely. Dipping during pullbacks, and increasing during pumps.

coingeckoSEMrush

Cryptocompare.com

Growth is in a rapid linear ascent. 

cryptocompareSEMrush

Other interesting findings to explore further in future articles.

News sites

  cointelegraph.com

cointelegraph.com

A large news site focused on cryptocurrencies such as cointelegraph.com

Individual projects

  nem.io

nem.io

Looking into individual projects to gauge growth is an important metric. NEM.io seems to have peaked in popularity coinciding with the price increase and subsequent fall. 

Exchanges

  bittrex.com

bittrex.com

Potentially the most important macro indicator of all to gauge the pulse of new users actively entering the space. GDAX.com shows consistent growth while Bittrex.com has leveled out. Exchanges should also be viewed in aggregate to reduce variation in user preference over time. 

  GDAX.com

GDAX.com

Further Reading

fiatleak.com is an interesting real time tool to see how many fiat dollars are being converted into digital currencies. 

 

Fintech movers and shakers moving and shaking into blockchain

A recent Bloomberg article showcases how movers and shakers in high finance are leaving high paying corporate jobs to jump into Blockchain, lured by the lack of regulation and large potential profits.

Paying close attention to the flow of institutional capital into the Blockchain token space helps make more informed investing decisions.

Takeaways for this article:

1. Beware the ICO... picking protocols vs picking companies

2. Institutional managers front running clients

3. Institutional capital is waiting on the sidelines for regulatory go ahead

This fits with the narrative that smart money is yet to enter the space in a major way. 

Mark Hart, Founder of Morgan Creek Capital Management, details 5% of professional managers have personal exposure to Bitcoin, while only .5% of the institutions they manage have exposure.

This makes sense as few funds want a legally murky asset on their books. As regulation comes to pass, a tidal wave of institutional money sits on the sidelines waiting to enter. 

Our hope is owning percentages of the fundamental protocol layers will shield us from company failures as the space develops, even if several of the protocols we invest in also fail along the way. This venture capital risk/return mindset is important when investing in such volatile assets. 

Our next article will explore the ICO market further with different types of ICOs offered, and what their valuation propositions are. 

Further Reading

Explanation of fat protocols - http://www.usv.com/blog/fat-protocols

Polychain Capital takes protocol layer approach - https://dailyfintech.com/2017/03/28/polychain-capital-a-hedge-fund-investing-at-the-protocol-layer-of-web-3-0/

ETC short term bear case

Using Ichimoku cloud entry to project short term bear case for ETC to 12.5 USD.

Once inside the cloud with a bearish TK cross, signs point to support at the bottom of the cloud.

ETC Ichimoku cloud short term bear case by AlphaBlockCapital on TradingView.com