Cryptocurrencies have taken a tumble in 2022.
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Bitcoin could be poised for outsized gains if recent technical signals are to be believed.
Investors have been looking for a bottom for Bitcoin since the cryptocurrency has lost more than 60% of its value from the all-time high of nearly $69,000 it hit in November. Almost $2 trillion has been wiped out from the entire crypto market over the past few months.
A measure of bitcoin miner activity could give investors a clue as to where the digital currency is headed next.
Miners validate transactions on the Bitcoin network using highly specialized and high-performance computers to solve complex mathematical puzzles. You will be rewarded with bitcoin for your efforts. As more bitcoin is mined, these puzzles become more difficult to solve.
During market slumps, a low bitcoin price can make it unprofitable for many miners to continue operations. They then sell some bitcoin to keep themselves afloat. But they are also shutting down their mining rigs to save money.
That’s what happened in the recent market crash and can be proven by the “hash rate,” a measure of the computing power used to mine bitcoin. Since mid-May, when the market really started to sell, the 30-day moving average hash rate (a monthly average) has fallen by more than 7%, and at one point saw a 10% plunge. This signaled that miners were shutting down their machines.
Researched in a number of ways, the hash rate is used by crypto investors to gauge when the market might bottom, as miner capitulation and a market shakeout are often associated with the late stages of a Bitcoin cycle.
“Historically, capitulation in the mining market has tended to correspond closely with overall market bottoms,” Matthew Kimmell, digital asset analyst at CoinShares, told CNBC via email.
Hash rate and a buy signal
Building on this, Charles Edwards, founder of quantitative crypto fund Capriole Investments, came up with the idea of “hash ribbons” in 2019 to identify buying opportunities for Bitcoin.
When the 30-day moving average for the hash rate falls below the 60-day moving average, it is called a bearish cross and signals miners to shut down the machines. Usually the sale is associated with these events. As more miners are taken out of the market, the difficulty in bitcoin mining becomes less as there is less competition.
With less competition, more miners could re-enter the market and a recovery could occur.
“These ‘capitulations’ are painful events for miners within the ecosystem,” Edwards told CNBC.
But with Edwards’ method, when the 30-day moving average for the hash rate crosses back above the 60-day moving average, the worst of miner capitulation tends to be over.
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When this happens along with Bitcoin’s 10-day moving average price trading above the 20-day moving average price, Edwards says a “buy signal” flashes.
He said these crossings occurred on Saturday.
Historically, buying Bitcoin at these points would have yielded strong returns depending on how long you held the cryptocurrency, according to Edwards.
For example, buying Bitcoin at the buy signal in August 2016 would have given an investor a return of more than 3,000% if held until the peak in December 2018 when Bitcoin hit a new record high.
More recently, buying during the most recent buy signal in August 2021 would have yielded more than 50% if Bitcoin had sold at the November 2021 record high.
“I created hash ribbons in 2019 to identify when a major bitcoin mining capitulation has occurred, as once recovery from these events resumes, they typically mark major bitcoin price bottoms,” Edwards said. “Historically, these were great times to allocate to Bitcoin, with incredible returns.”
CoinShares’ Kimmell said that the logic behind the buy signal is that when bitcoin price “tends to steadily outperform hashrate before a period of high price growth, then there is a tendency for hashrate to recover,” marked by the moving 30 -Day moving average for hashrate breaching above 60-day moving average “may mean bitcoin price rally has already started.”
“I don’t think this metric should be solely relied upon to make an investment decision, but it can certainly be helpful when coupled with a range of other metrics and qualitative evidence,” he added.
down near?
CoinShares put together a chart to show the correlation between hash rate and bitcoin price. And it’s divided into areas where there’s a “gold rush” when the price of Bitcoin goes up, and a subsequent inventory flush and miner purge when the price goes down.
In a chart provided to CNBC, CoinShares suggests that the market is currently in the adjustment phase, which usually precedes a rebalance and price rally. Right now, the Bitcoin price line is below the hash rate according to the chart.
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The chart shows the movement of the bitcoin hash rate against the bitcoin price at different stages of the cycle.
CoinShares
However, according to Kimmell, this could be a sign that a bottom is near.
“It is impossible to say if we have reached full capitulation, but there is evidence that we are in the phase of the mining cycle where capitulation occurs most frequently. Second, if previous cycles have predictive power, then yes, bitcoin price would consistently outperform hashrate, likely preceding a period of high price growth,” Kimmell said.
Vijay Ayyar, VP of Corporate Development and International at crypto exchange Luno, agrees.
“I think we’ve seen broad signs of capitulation given what’s happened over the past few months. Therefore, it is likely that we could have the beginnings of bottoming out. Normally, bitcoin consolidates in a range for the whole, indicating accumulation, which we can also see,” Ayyar told CNBC via text message.
Bitcoin has been trading in a tight range of around $18,000 to $25,000 since mid-June.
However, there is a risk that these indicators will not be as positive as they have been in the past due to the broader macroeconomic environment.
The current global economy is in a very different state than previous cryptocurrency cycles. There is runaway inflation and rising interest rates around the world, things that haven’t existed before.
Risky assets like US stocks, and particularly the Nasdaq, to which Bitcoin is closely correlated, have seen a major sell-off this year.
“Of course, all of this is still based on historical similarity, and we’re in a different macro environment,” Ayyar said.
“The main risk remains the economy and inflation, but even then we are closer to an inflation peak than not and so it also shows that we are closer to a bottom than not in risk assets.”
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