With new technology comes new indicators (crypto)

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With new technologies come new ways of using market indicators.

While the biggest cryptocurrencies like Bitcoin and Ethereum have rallied in recent weeks, some of these new indicators have not confirmed the rally, questioning its sustainability.

Today, I’m going to introduce you to this new indicator regime and discuss what this divergence can tell us about the next big move in highly correlated cryptocurrencies and crypto stocks.

Public blockchains are fully open to the public

Before getting into the new regime of indicators which can now be used by traders to measure crypto trends and possible sentiment extremes / divergences, it is important to have a very basic understanding of what is really going on on the market. the Blockchain.

The process of transferring Bitcoin funds from one user to another begins with the submission of a transaction request.

Nodes, which are computers connected to other computers on the blockchain network, verify the details of the transaction.

Bitcoin transactions consist of three distinct elements: input (sender), header (information about the transaction and funds), and output (information about the recipient).

Once these items are verified, the transaction is approved, funds are transferred, and the transaction becomes part of the Bitcoin public ledger.

Each transaction undergoes 6 confirmations before being fully verified, and the entire process can take anywhere from 10 minutes to 16 hours.

Public blockchains are fully open to the public and accessible to anyone, meaning anyone with an internet connection is allowed to contribute and interact with a given blockchain.

So anyone can download public blockchain software and run their own node, allowing them to verify their information and / or add new blocks to the blockchain.

Due to their openness to everyone’s contribution, popular public blockchains such as Bitcoin and Ethereum are made up of thousands of nodes actively contributing to the maintenance of their blockchains.

This forms a global, decentralized network of independent nodes where each node communicates and checks the work of other nodes instead of a single entity, or a small group of entities, controlling the system.

Although participants can remain anonymous while creating a blockchain transaction, information regarding many metrics generated during those transactions, such as transaction size and number of active addresses, is public information that can be viewed. transformed into indicators that traders can use to make better decisions. .

Data comes from indicators

As shown in Figure 1, Bitcoin encountered resistance near $ 51,000 as it approached the 61.8% retracement level of the April to June sell last Monday.

Figure 1

As a general rule, when the price of a security that we are trading or want to trade is approaching a high level, we want to use secondary indicators (other than price) such as sentiment or momentum to get a feel for it. difficulty in moving around. through this level.

The indicator that I want to present to you today is one that you will never find in any technical analysis book, and probably will not come across while reading articles on trading in the crypto space.

The indicator I’m referring to is the number of active addresses.

Specifically, this indicator represents the number of unique addresses that were active in the network as sender or receiver, and only addresses that were active in successful transactions are counted.

For our purposes today, let’s think of this data set as an indicator of the demand side, which are metrics like certain volume studies that a trader would typically use to gauge the amount of demand underlying a price trend.

In Figure 2 below, I have plotted the 7-day average of this indicator (solid blue line) against the chart of Bitcoin (dashed blue line).

Figure 2

Source: bitinfocharts.com

In the graph above, you will notice that the demand for the Bitcoin network, measured here by the number of active addresses (solid blue line), has increased or decreased at roughly the same rate as the price of the cryptocurrency. these last months.

More recently, however, you will notice that the number of active addresses (solid blue line) has been slow to keep pace with the rise in the price of Bitcoin (dashed blue line).

Traditionally, these indicators of network effects on the demand side are powerful predictors of future price movements.

Therefore, as the price of Bitcoin looks down on the traditional technical resistance (61.8% retracement) shown in Figure 1 above, this obvious lack of demand should be considered by anyone playing Bitcoin or crypto stocks. on the long side as a reason to be on the lookout for any signs that the Bitcoin rally from the July lows is collapsing.

At the same time, the recent strength in Bitcoin prices can possibly be seen as strong HODLing, which, if prices remain stable and demand in the form of active addresses begins to rise again, could trigger a FOMO rally as buyers reluctant are forced to chase the rally.

In other words, the price of Bitcoin is at a critical point between critical resistance at $ 51,000 and support at $ 43,935, and the next big move is expected to occur on either side of that range.

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