The key value flashes at the bottom for the crypto

Bitcoin could be poised for big gains if recent technical signals are to be believed.

Investors have been looking for a bottom for bitcoin since the cryptocurrency lost more than 60% of its value from the all-time high of nearly $69,000 it hit in November. Almost $2 trillion has been wiped off the entire crypto market in recent months.

A measure of the activity of bitcoin miners can give investors a clue as to where the digital currency is headed next.

Miners validate transactions on the bitcoin network by using highly specialized and powerful computers to solve complex mathematical puzzles. They are rewarded in bitcoin for their effort. As more bitcoin is mined, solving these puzzles becomes more difficult.

During market downturns, a low bitcoin price can make it unprofitable for many miners to continue operations. They then sell some bitcoin to stay afloat. But they also shut down their mining rigs to save money.

It has happened in the last market downturn and can be demonstrated by the “hash rate”, a measure of computational power used to mine bitcoin. Since mid-May, when the market really started to sell off, the 30-day average hashrate (a monthly average) fell more than 7% and at one point saw a 10% decline. It signaled miners to turn off their machines.

Hash rate, studied in various ways, is used by crypto investors to try to figure out when the market may bottom, because capitulation and a shakeout of the miners is often associated with the late stage of a bitcoin cycle.

“Historically, capitulation in the mining market has tended to correspond strongly with the overall market bottom,” Matthew Kimmell, digital asset analyst at CoinShares, told CNBC via email.

Following this, Charles Edwards, founder of quantitative crypto fund Capriole Investments, came up with the idea of ​​”hash bands” in 2019 to identify buying opportunities for bitcoin.

When the 30-day moving average of the hash rate falls below the 60-day moving average, this is called a bearish cross, and signals that miners are shutting down machines. Usually, sales are 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 the reduced competition, more miners may re-enter the market and an improvement may occur.

“These ‘capitulations’ are painful events for miners in the ecosystem,” Edwards told CNBC.

However, using Edwards’ method, when the 30-day moving average of the hash rate crosses back above the 60-day moving average, the worst capitulation tends to be over.

When this happens along with the 10-day moving average price of bitcoin crossing the 20-day moving average price, this is when a “buy signal” flashes, according to Edwards.

He said those crossings happened on Saturday.

In the past, buying bitcoin at these points would have yielded strong returns depending on how long you held the cryptocurrency, according to Edwards.

For example, buying bitcoin at the buy signal in August 2016 would have given an investor more than 3,000% return if held until the top of December 2018, which was when bitcoin hit a new record high.

Recently, buying below the recent August 2021 buy signal would have returned more than 50% if bitcoin sold at the November 2021 all-time high.

“I created Hash Ribbons in 2019 as a way to identify when major Bitcoin mining capitulations had occurred, since when mining resumes from these events, they usually mark major Bitcoin price bottoms,” Edwards said. “Historically, these have been good times to allocate to Bitcoin, with incredible returns.”

Kimmell of CoinShares said the logic behind the buy signal is that if the bitcoin price “tends to steadily outperform the hashrate before a period of high price growth, then a trending decline in the hashrate,” characterized by the 30-day moving average of the hashrate crossing over the 60-day moving average, “could mean that the bitcoin price decline has already begun.”

“I think this metric should not only be relied upon to make an investment decision, but it can certainly be useful if combined with a variety of other metrics and qualitative evidence,” he added.

CoinShares has put together a graph to show the correlation between hash rate and bitcoin price. And it is divided into areas where there is a “gold rush” when bitcoin’s price rises, and a subsequent inventory flush and miners’ shakeout when the price falls.

In a chart provided to CNBC, CoinShares suggests that the market is currently in the shakeout period that usually precedes rebalancing and a price rally. Right now, according to the chart, the bitcoin price line is below the hash rate.

But this could signal that a bottom is near, according to Kimmell.

“It is impossible to say whether we have reached full capitulation, but there is evidence that we are in the phase of the mining cycle where capitulation most often occurs. Secondarily, if previous cycles have predictive power, then yes, the bitcoin price will consistently outpace the hash rate. probably precede a period of high price growth,” Kimmell said.

Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, has a similar view.

“I think we have seen broad signs of capitulation given the events of the previous months. Therefore, it is likely that we may have the beginnings of a bottom forming. Typically, bitcoin consolidates in an area for a whole that indicates accumulation, which is what we can look,” Ayyar 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 turn out to be as positive as they have been in the past due to the wider macroeconomic environment.

The current global economy is in a completely different state compared to previous cryptocurrency cycles. There is rampant inflation and rising interest rates globally, aspects that have not been present before.

Risk assets such as US stocks, and especially the Nasdaq, to ​​which bitcoin is closely correlated, have seen a big sell-off this year.

“Of course, all of this is still based on historical equity, and we’re in a different macro environment,” Ayyar said.

“The biggest risk is still the economy and inflation, but even then we are closer to an inflation peak than not, and so this also shows that on risk assets we are closer to a bottom than not.”