Cryptocurrencies have crashed in 2022.
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bitcoin could be set for outsized gains if recent technical signals are to be believed.
Investors have been looking for a bottom for bitcoin ever since the cryptocurrency lost more than 60% of its value from the all-time high of nearly $69,000 it hit in November. Nearly $2 trillion has been wiped from the entire crypto market in recent 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, power-hungry computers to solve complex mathematical puzzles. They are rewarded in bitcoin for their efforts. As more bitcoins are mined, solving these puzzles becomes more difficult.
During market declines, a depressed bitcoin price can make it unprofitable for many miners to continue trading. They then sell some bitcoin to stay afloat. But they also turn off their mining equipment to save money.
That happened in the last market crash and can be demonstrated by the “hash rate,” a measure of computational power used to mine bitcoin. As mid-May, when the market really started to sell off, the 30-day average hash rate (a monthly average value) fell more than 7%, and at one point saw a 10% drop. That indicated that the miners were shutting down their machines.
The hash rate, studied in various ways, is used by crypto investors to try to figure out when the market might bottom, because miner capitulation and shakeout are often associated with the last stage of a bitcoin cycle.
“Historically speaking, capitulation in the mining market has tended to correspond strongly with overall market lows,” Matthew Kimmell, a digital asset analyst at CoinShares, told CNBC via email.
Hash rate and buy signal
Following this, Charles Edwards, founder of the quant crypto fund Capriole Investments, came up with the idea of ”hash tapes” in 2019 to identify opportunities for bitcoin.
When the 30-day moving average for the hash rate falls below the 60-day moving average, this is called a bearish crossover and indicates that miners are turning off the machines. Usually the sale is associated with these events. As more miners are taken out of the market, the difficulty of mining bitcoin decreases because there is less competition.
Due to reduced competition, more miners may re-enter the market and a recovery may occur.
“These ‘capitulations’ are painful events for miners within the ecosystem,” Edwards told CNBC.
But using Edwards’ method, when the 30-day moving average for hash rate crosses back above the 60-day moving average, the worst of the miner capitulation tends to be over.
When this happens in conjunction with bitcoin’s 10-day moving average price exceeding the 20-day moving average price, then that’s when a “buy signal” flashes, according to Edwards.
He said those crossings occurred on Saturday.
In the past, buying bitcoin at these points would have generated hefty returns depending on how long you held the cryptocurrency, according to Edwards.
For example, buying bitcoin on the buy signal of August 2016 would have given an investor a return of over 3,000% if it had held until the peak of December 2018, which is when Bitcoin hit a new record high.
More recently, buying during the recent buy signal in August 2021 would have yielded a return of over 50% had Bitcoin sold at the all-time high in November 2021.
“I created Hash Ribbons in 2019 as a way to identify when a major Bitcoin mining capitulation had occurred, as once the recovery resumes these events typically mark major Bitcoin price lows,” he said. Edwards. “Historically, these have been good times to invest in Bitcoin, with incredible returns.”
CoinShares’ Kimmell said the logic behind the buy signal is that if the bitcoin price “tends to consistently outperform the hashrate before a period of high price growth, then a trend rebound in the hashrate,” marked by the 30-day moving average for the hash rate crossover. above the 60-day moving average, “it may mean that the rebound in bitcoin price has already started.”
“I believe that this metric should not be relied upon alone to make an investment decision, but it can certainly be useful if combined with a host of other metrics and qualitative evidence,” he added.
CoinShares has put together a chart to show the correlation between hash rate and bitcoin price. And it breaks down into areas where there is a “gold rush” as the price of bitcoin rises, and a subsequent inventory dump and reorganization of miners as the price falls.
In a chart provided to CNBC, CoinShares suggests that the market is currently in the restructuring period that usually precedes rebalancing and price rally. Right now, according to the chart, the bitcoin price line is below the hash rate.
The graph shows the movement of the bitcoin hash rate against the bitcoin price at different stages of the cycle.
But this could indicate a bottom is coming, according to Kimmell.
“It is impossible to say whether we have reached full capitulation, however, 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, the bitcoin price would consistently exceed the hashrate.” likely precede a period of high price growth,” Kimmell said.
Vijay Ayyar, vice president of corporate and international development at crypto exchange Luno, has a similar opinion.
“I think we have seen broad signs of capitulation given the events of the past few months. So it is likely that we could have the beginning of a bottom forming. Typically Bitcoin consolidates in a range to a whole indicating accumulation, which is what you may be seeing,” 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 are risks that these indicators may not be as positive as they have been in the past due to the broader macro environment.
The current global economy is in a very different state than it was in previous cryptocurrency cycles. There is rampant inflation and rising interest rates globally, things that haven’t been there before.
Risky assets like US stocks and in particular the Nasdaq, to which Bitcoin is closely related, have seen a huge sell-off this year.
“Of course, all of this is still based on historical similarities, and we are in a different macro environment,” Ayyar said.
“The main risk is still the economy and inflation, but even then we are closer to a peak in inflation than otherwise and so this also shows that in risk assets we are closer to a bottom than to a bottom.” otherwise”.
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