Cryptocurrencies fell in price in 2022.
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Bitcoin if recent technical signals are to be believed, huge profits can be made.
Investors are looking for a bottom in bitcoin as the cryptocurrency has lost more than 60% from its all-time high of around $69,000 in November. About $2 trillion has been wiped from the entire cryptocurrency market in recent months.
Measuring the performance of Bitcoin miners can give investors clues about where the digital currency is headed next.
Miners confirm transactions on the bitcoin network by using highly specialized and power-hungry computers to solve complex mathematical puzzles. They are rewarded with bitcoins for their efforts. As more bitcoins are mined, these puzzles become harder to solve.
During a market downturn, the depressed price of bitcoin can make it unviable for many miners to continue their operations. They then sell some bitcoins to stay afloat. But they also turn off their rigs to save money.
This happened during the recent market downturn and can be demonstrated by the “hash rate”, which is a measure of the computing power used to mine bitcoin. since mid-May, when the market really starts selling, the 30-day average hashrate (monthly average value) fell more than 7% and at one point saw a 10% drop. This indicated that the miners had turned off their machines.
The hash rate, studied in various ways, is used by crypto investors to try to understand when the market may go down, as capitulation and shakeout miners are often associated with the end of the bitcoin cycle.
“Historically speaking, capitulations in the mining market tend to align strongly with overall market bottoms,” Matthew Kimmell, digital asset analyst at CoinShares, told CNBC via email.
Hash rate and buy signal
After that, Charles Edwards, founder of quantitative crypto fund Capriole Investments, came up with the idea of ”hash tapes” in 2019 to determine bitcoin’s buying opportunities.
When the 30-day moving average for the hash rate falls below the 60-day moving average, it is called a bearish cross and means miners are shutting down machines. Usually sales are associated with these events. As more miners are removed from the market, the difficulty of mining bitcoin decreases as 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 in the ecosystem,” Edwards told CNBC.
But using Edwards’ method, when the 30-day moving average for the hashrate crosses above the 60-day moving average, the worst of miners’ capitulation tends to be over.
When this happens in conjunction with bitcoin’s 10-day moving average rising above its 20-day moving average, a “buy signal” flashes, according to Edwards.
I said that those crosses happened on Saturday.
According to Edwards, buying bitcoin at these points in the past would have generated strong returns, depending on how long you held the cryptocurrency.
For example, buying bitcoin on the August 2016 buy signal would have returned the investor more than 3,000% if it had reached the December 2018 peak, when bitcoin hit a new record high.
A recent buy during the last buy signal in August 2021 would have yielded more than 50% if bitcoin had sold to a record high in November 2021.
“I created Hash Ribbons in 2019 to identify when major Bitcoin mining submissions occurred, as they typically mark major Bitcoin price bottoms after recovery from these events,” Edwards said. “Historically, these have been great times to invest in Bitcoin with incredible returns.”
CoinShares’ Kimmell said the logic behind the buy signal is that if the price of bitcoin “tends to consistently outperform the hashrate prior to a period of high price growth, then a trend rebound in the hashrate marked by the 30-day moving average for the hash rate intersection” with the 60-day moving average. above the average, which “could mean that a rebound in the bitcoin price has already begun.”
“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 number of other metrics and qualitative evidence,” he said.
Close to the bottom?
CoinShares has created a chart to show the relationship between hash rate and bitcoin price. And it’s broken down into areas where there’s been a “gold rush” as the price of bitcoin rises and the subsequent washout of inventory and shakeout of miners as the price falls.
In a chart provided to CNBC, CoinShares shows that the market is currently in a period of turmoil that precedes a rebalancing and rally in prices. Currently, according to the chart, the bitcoin price line is below the hash rate.
The chart shows the movement of the bitcoin hash rate against the bitcoin price at different stages of the cycle.
But that could signal a bottom is near, according to Kimmel.
“It is impossible to say that we have reached a complete capitulation, but there is evidence that we are in the phase of the mining cycle where capitulation occurs most. Second, if the previous cycles have predictive power, then yes, the price of bitcoin will consistently exceed the hashrate. It is likely that before a period of high price growth will,” Kimmell said.
Vijay Ayyar, vice president of corporate development and international at cryptocurrency exchange Luno, agrees.
“I think we’ve seen signs of a broad surrender, given the events of the previous months. So we may have the beginnings of a bottom forming. Usually bitcoin is consolidating in a range as a whole, which indicates a rally. It could be,” Ayyar told CNBC. said with a text message.
Bitcoin has been trading in a tight range around $18,000 to $25,000 since mid-June.
However, due to the broader macroeconomic environment, there are risks that these indicators may not be as positive as in the past.
The current global economy is in a very different state than the previous cryptocurrency cycle. There is rampant inflation and rising interest rates globally, aspects that did not exist before.
US stocks, and particularly riskier assets like the Nasdaq, to which bitcoin is closely linked, have seen a huge sell-off this year.
“Of course, all this is still based on historical similarity and we are in a different macro environment,” Ayyar said.
“The main risk remains the economy and inflation, but even then we’re not at, or closer to, peak inflation, and so that means we’re closer to bottoming out in risk assets.”
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