Rare Signal Hinting at Bitcoin Price Bottom Emerges

By August 4, 2022DeFi
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Bitcoin's difficulty ribbon is compressing, indicating a bear market bottom. (ElyPenner/Pixabay)

Predicting a bear market bottom is like catching a falling knife. Even so, traders often attempt to predict one based on how the price behaved relative to critical indicators during previous bear runs. The assumption here is that history will repeat itself.

One such rare signal has emerged, suggesting bitcoin's decline may be flattening and now is the best time to add exposure to the cryptocurrency.

The bitcoin mining difficulty ribbon, comprising short and long-duration simple moving averages on the mining difficulty, has compressed for the first time in over a year, indicating miner capitulation. The previous bear markets, including the one seen in 2014, ended with the ribbon compression, data provided by analytics firm Glassnode show.

Miner capitulation occurs when those responsible for minting coins shut down operations, resulting in a decline in the hashrate and mining difficulty. That reduces the selling pressure, allowing for price stability and an eventual bull revival. Miners often sell coins mined to fund operational costs, adding to bearish pressures in the market.

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Bitcoin's mining difficulty ribbon compresses, signaling market bottom. (Glassnode) (Glassnode)

The ribbon includes 9-, 14-, 25-, 40-, 60-, 90-, 128- and 200-day simple moving averages on mining difficulty, a measure of how difficult it is to mine a block and verify transactions in bitcoin's blockchain.

Recently several miners have capitulated to stay solvent. Mining difficulty is adjusted every two weeks. The number of participants in the mining network and their total mining power determines whether the difficulty is adjusted lower or higher.

While the latest difficulty ribbon compression offers hope to battered bulls, the positive signal should be read in conjunction with macro factors that point to a low probability of a quick bullish reversal.

On Wednesday, the Federal Reserve (Fed) officials said further liquidity tightening is necessary to control inflation, pushing back against market belief that the central bank will slow rate hikes in the coming months and resort to easing next year. The Fed's liquidity tightening has roiled asset markets this year.

In addition, the difficulty ribbon is entirely based on miner flows, which now account for a small portion of the overall market and so may be a less reliable indicator than before 2020. Bitcoin has evolved as a macro asset over the past two years as a result of increased institutional participation.

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