Trends in bitcoin mining difficulty can be used to gain valuable insights into the future price of bitcoin. Miners are critical to the functioning of the bitcoin network and their rational economic decisions in response to price changes offers insights into buying opportunities for bitcoin. One such metric used to identify the bottom of a BTC price cycle is the “Bitcoin Mining Difficulty Ribbon.” The difficulty ribbon simply tracks various moving averages of mining difficulty (9D, 14D, 25D, 40D, 60D, 90D, 128D and 200D). To learn more about how bitcoin mining works, you can revisit one of our earlier posts.
Miners get rewarded in bitcoin for performing computational work to secure the chain. As miners need to meet their fiat expenses for electricity and other operational overheads, some of their mining reward is sold on the exchanges, creating a constant selling pressure for BTC. Depending on the operational efficiencies and advantages of various miners, some miners sell a lower percentage of their rewards to fund mining expenses while some miners sell a higher percentage. When the price of BTC drops significantly, a fraction of miners with higher proportion of expenses will find mining unprofitable and are forced out of the mining business until the difficulty adjustment factor lowers the difficulty of mining on the bitcoin network. When the exodus of miners is significant, the selling pressure on BTC is reduced as the miners who had been selling a higher proportion of their mining reward are put out of business. This decrease in selling pressure stabilizes the price of BTC and could be a good point of entry for long-term investors. The decrease in selling pressure from miners can be visualized by the shrink in the size of the difficulty ribbon as seen below.
For example, when the ribbon squeeze happened in Q1 2012 and Q2 and Q3 2015, the indicator accurately predicted the bitcoin price flattening. Based on previous trends, the latest ribbon squeeze happened a couple of months ago, highlighting that the price of bitcoin likely bottomed out in Q2 2019.