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In 2022, cryptocurrencies have crashed.
Chesnot | Getty Images
Bitcoin If recent technical signals are to be believed, you could be poised to make a very large profit.
Investors have been looking for a bottom for bitcoin since it lost more than 60% of its value from its all-time high of around $69,000 in November. Nearly $2 trillion has been wiped out of the entire crypto market in recent months.
By measuring bitcoin miner activity, investors can get clues as to where the digital currency is headed next.
Miners use highly specialized, power-intensive computers to validate transactions on the Bitcoin network and solve complex mathematical puzzles. They will be rewarded in Bitcoin for their efforts. The more Bitcoin is mined, the harder these puzzles are to solve.
During market downturns, a drop in the price of Bitcoin could put many miners out of business. They then sell bitcoin to survive. But they also turn off his rig mining to save money.
That’s what happened in the recent market downturn, and can be demonstrated by the ‘hash rate’, the measure of computing power used to mine Bitcoin.ever since Mid-May, when the market began to sell in earnest, the 30-day average hash rate (monthly average) dropped by more than 7%, with a 10% drop at one point. This indicates that the miner was powering down the machine.
Hashrate, studied in a variety of ways, is used to determine when cryptocurrency investors are looking to find the bottom of the market. This is because surrender and miner culling are often associated with the later stages of the Bitcoin cycle.
Historically speaking, capitulations in the mining market have tended to coincide strongly with overall market troughs, CoinShares digital asset analyst Matthew Kimmel told CNBC in an email.
Following this, Charles Edwards, founder of quantitative crypto fund Capriole Investments, came up with the idea of “hash ribbons” in 2019 to identify Bitcoin buying opportunities.
When the 30-day moving average of the hash rate falls below the 60-day moving average, this is called a bearish cross and indicates that miners are shutting down their machines. Sales are usually associated with these events. As more miners are removed from the market, the difficulty of mining Bitcoin will decrease due to less competition.
With competition dwindling, more miners are likely to re-enter the market and recover.
“These ‘surrenders’ are painful events for miners within the ecosystem,” Edwards told CNBC.
However, using Edwards’ method, the worst times for miner surrender tend to end when the 30-day moving average of hash rate rises above the 60-day moving average.
According to Edwards, a buy signal flashes when Bitcoin’s 10-day moving average price rises above its 20-day moving average price and this happens at the same time.
He said those crosses occurred on Saturday.
According to Edwards, buying bitcoin with these points in the past has yielded significant returns depending on how long you hold the cryptocurrency.
For example, an investor who bought Bitcoin at the buy signal in August 2016 could have earned a return of over 3,000% if held until the December 2018 peak.
Most recently, if Bitcoin sold to its November 2021 high, a buy at the recent buy signal in August 2021 would have yielded a return of over 50%.
The reason we created hashribbons in 2019 was as a way of identifying when major bitcoin mining capitulations occurred. Historically, now is the perfect time to invest in Bitcoin, and it has yielded incredible returns.
CoinShares’ Kimmell said the logic behind the buy signal is that Bitcoin’s price is “a trend rebound in the hashrate when it tends to steadily rise above the hashrate before the price rises.” We said it would be marked by the 30-day moving average of the cross. A break above the 60-day moving average “could mean that a Bitcoin price rally has already begun.”
While one should not rely solely on this metric to make investment decisions, it can certainly be helpful when combined with a suite of other metrics and qualitative evidence, he added.
CoinShares has put together a graph showing the correlation between hashrate and bitcoin price. It is divided into a “gold rush” where the price of Bitcoin rises, and an area where inventory flushes and miner selection occur as the price falls.
In a chart provided to CNBC, CoinShares suggests the market is currently in a shakeout period that typically precedes rebalancing and price increases. Currently, the Bitcoin price line is below the hashrate according to the chart.
The graph shows the behavior of Bitcoin hash rate and Bitcoin price at different stages of the cycle.
coinshares
But Kimmel said this could indicate a bottom is imminent.
It is impossible to say whether we have reached full surrender, but there is evidence that we are at the stage of the mining cycle where surrender occurs most frequently. If you have, yes, bitcoin’s price is steadily rising above the hashrate — likely ahead of a period of high price appreciation,” Kimmel said.
Vijay Ayyar, Vice President of Corporate Development and International at crypto exchange Luno, shares a similar view.
Given the events of the past few months, I think there have been broad signs of capitulation. So it is possible that a bottom has started to form. I might be watching,” Aiyar told CNBC via text message.
Bitcoin has been trading in a tight range around $18,000 to $25,000 since mid-June.
However, there is a risk that these indicators will not be as positive as in the past due to the broader macroeconomic environment.
The current global economy is in a very different state than previous cryptocurrency cycles. Globally, inflation is rampant and interest rates are rising, aspects that have not existed before.
Risky assets such as US stocks, especially the Nasdaq, which is closely correlated with Bitcoin, have seen big losses this year.
“Of course, this is all based on historical analogies and we are in a different macro environment,” Ayyar said.
While the main risks are still the economy and inflation, it still shows that inflation is nearing a peak is closer than it is otherwise. It shows that we are getting closer.”
