Bitcoin’s price may have fallen to the bottom in December, according to a non-price metric, which has proved a reliable price indicator in the past.
Bitcoin is currently trading above USD 7,700, after having hit eight-month lows below USD 6,500 in mid-December. The bounce may be encouraging, but the main cryptocurrency is still trapped in a six-month bearish channel.
However, Bitcoin’s difficulty adjustment indicates that the bearish market, which began with highs above USD 13,800 in June 2019, may have reached a low near USD 6,500 in December.
According to data from data.bitcoinity.org, the mining difficulty fell from 13.7 trillion in November to 13 trillion in December, being the first downward adjustment in 12 months.
Historically, major price bottoms have been marked by negative monthly difficulty adjustments, according to digital currency writer and analyst Nunya Bizniz.
For instance, the massive sale after the all-time high of USD 20,000 seen in December 2017 fell near USD 3,100 in December 2018 with the consecutive monthly downward difficulty adjustments in late 2018.
Even before that, the difficulty dropped from 0.0494 trillion (49.4 Giga) in April 2015 to 0.0488 trillion (48.8 Giga) in May 2015. Bitcoin’s decline after the December 2013 high of USD 1,153 reached around USD 200 in April and May 2015.
The cryptocurrency traded sideways for a couple of months before beginning an upward climb in October 2015. That behavior could be explained by the monthly declines in difficulty caused by miner capitulation.
It should be noted that mining difficulty is adjusted every two weeks approximately, in line with the amount of the computational power (hash rate) used for mining. The latter depends on mining profitability, which is greatly influenced by price.
A monthly decrease in mining difficulty is the result of a fall in the hash rate due to small and marginal miners that close operations during sustained massive sales in the market and reduce mining profitability.
Furthermore, miners usually sell their coins at the market price to recover from mining losses, while closing operations, thus accentuating the massive sale. Only when these miners’ supply is absorbed do selling pressures weaken and the cryptocurrency finds a floor.
Meanwhile, remaining miners tend to hold their coins and sell them later to make profits when prices increase, further decreasing the supply in the short term and increasing the price of the cryptocurrency, according to Alex Benfield from Digital Assets Data.
Besides, mining difficulty decreases occur a few months before reward halvings – a process aimed at coping with inflation by reducing the rewards per mined block by half every four years.
The miners that sustained the bearish market may have predicted a rise in prices on the reward halving and thus held their coins, creating a supply shortage in the short term and boosting prices.
History Repeats Itself
Bitcoin’s drop of 17.48% in November last year was caused by miner capitulation, according to market analyst Willy Woo.
This argument may have some merit as Bitcoin fell from USD 13,800 in June to USD 7,500 in September. Such a price drop may have affected weak miners, forcing capitulation.
Besides, the latest downward difficulty adjustment occurred five months before the reward halving. Therefore, big miners could create a supply shortage in the short term, leading to increases in price.
Generally speaking, there is a strong reason to believe that Bitcoin reached the floor in December with the downward difficulty adjustment and could regain its balance in the coming months.
By Alexander Salazar