Following a bearish capitulation, the Bitcoin Difficulty Ribbon is expected to turn positive soon as more miners come online.
Bitcoin has seen several rallies in 2021, but it has recently been bearish, as evidenced by miners going offline, according to the Bitcoin Difficulty Ribbon. As with all trends, several rallies, corrections, or pullbacks in which the trend appears to reverse, only to resume the original trend over time, are part of both bullish and bearish markets. Bitcoin’s recovery has now lasted 120 days. This is similar to the 2018 bear market, when $250 billion was wiped off the market value of Bitcoin, sending it to $3000. It took 164 days for the price to recover.
How mining affects pricing
The Bitcoin Difficulty Ribbon is a graph of mining difficulty based on simple moving averages. Moving averages, as an aside, remove sharp, short-term fluctuations. On cryptocurrency charts, two averages are commonly used: SMA (Simple Moving Average) and EMA (Exponential Moving Average) (Exponential Moving Average).
The ribbon aids in visualizing the impact of mining difficulty on Bitcoin’s price. The mining difficulty calculates the number of hashes required to mine a single block. Every 2016 blocks, the value is adjusted. The values provided by the difficulty ribbon are quantified using a normalized standard deviation. Low values have historically denoted periods near the bottom.
The more difficult the proof-of-work mathematical problem, the more difficult it is for smaller miners to validate transactions because they lose money when trying to cover production costs. As a result, once mining is complete, the production cost payments put downward pressure on the coin price because weaker miners must sell more coins.
When this selloff becomes unsustainable, i.e. when miners can no longer validate blocks without earning more than they spend, they capitulate, compressing the ribbon. As a result, the strong miners are able to sell less, resulting in less selling pressure and bullish price behavior.
A recent example of halving a reward
Miners capitulate when mining rewards are halved and the market price has yet to catch up. This is the best time to invest in Bitcoin. Many Litecoin miners gave up in 2019 when the hash rate fell from 472.99 TH/s in mid-July to 296.54 TH/s in early September.