Bitcoin (BTC) hit a new all-time high for its hash rate last week, but opinions are divided as to whether the uptrend can continue.
In a Twitter discussion on March 21, Preston Pysh, host of The Investor’s Podcast, I observe the changing behavior in Bitcoin’s hash ribbons metric looking for signs of a new “stop” in the hash rate.
Questions about the hash rate “stop” after all-time highs
Bitcoin has overcome considerable hurdles over the past year for the processing power devoted to mining – the hash rate – to reach a whopping 222 exahashes per second (EH/s) this month, according to estimates from monitoring resource MiningPoolStats.
First was China that caused a mass exodus of miners, and then this year’s measures against the mining centers of Kazakhstan put the cat among the pigeons regarding mining operations.
However, on both occasions there was a full recovery, reinforcing the idea that as long as there is at least one jurisdiction “in favor” of the miners, mining will return stronger than ever.
Hash ribbons use two simple moving hash rate (SMA) to assess the health of miners and have been used to conclude when price lows are approaching based on that health.
Miners have a break-even cost to produce each Bitcoin, and when the spot price is less than that cost, there is a danger that they will start to “capitulate”, or go out of business due to lack of profitability. This has the effect of reducing price performance, and an adjustment in the difficulty of the Bitcoin network is necessary to reduce the production costs of large-scale miners.
In terms of hash ribbons, when the 30-day SMA crosses below the 60-day SMA, this suggests that a capitulation event has occurred, at least large enough to measure.
“A simple 1-month and 2-month moving average of the Bitcoin hash rate can be used to identify market bottoms, miner capitulation, and – even better – great times to buy Bitcoin,” explained Charles Edwards, CEO of asset manager Capriole, which created the metric, in a 2019 blog post.
“When the 1-month SMA of the hash rate crosses above the 2-month SMA, the worst of miner capitulation is usually over, and the recovery begins.”
This time, the events in Kazakhstan could have been the trigger for a capitulation event, which, however, has already been erased in terms of hash rate growth.
“The margins are still very healthy. The production cost is about 30. The electrical (running) cost is about 20,” Edwards responded to Pysh, referencing a theory by Blockware analyst Joe Burnett.
“I think (Burnett’s) reasoning on Kazakhstan makes the most sense. So maybe a little capitulation (provided there is broader market/macro strength).”
Difficulty is at all-time highs
It’s not just about the hash rate: mining difficulty is also enjoying a winning streak that looks set to resume this month after its own brief consolidation.
As the most important of Bitcoin’s fundamental indicators, it is estimates that the difficulty will increase by 4.66% at the next automatic reset in eight days.
The last two adjustments were negative, but only slightly, which means that the next increase will send the difficulty to new all-time highs of 28.73 billion.
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