The question of whether the bitcoin price bottom is behind us is on the minds of many investors who are poised with the challenge: buy the dip or wait for a bigger one?
Financial predictions are seldom accurate, and that reality echoes in the bitcoin market as well. But since BTC trading typically follows four-year cycles of bull and bear markets, as the peer-to-peer currency navigates its way through its adoption cycle, many still try to time bitcoin tops and bottoms when making allocation decisions.
Capriole Investments, told Bitcoin Magazine that, in his view, the bitcoin price and hash rate are correlated in a reflexive cause and effect relationship.
“Hash-rate drops and subsequent recoveries have marked most, if not all, major bitcoin bottoms,” he said.
The thought process is simple: When some miners start being driven out of the market, shown by a significant drop in Bitcoin’s hash rate, further market pressure ensues as miner profit margins are squeezed. Also, intense market pressure was needed to cause that capitulation in the first place, as miners are seen as very resilient players in the ecosystem.
“Given the magnitude of the supply controlled by miners, and the general level of high efficiency in their businesses, when miners are selling the worst has often occurred,” Edwards explained. “As a result, price and hash rate recovery out of this miner capitulation has historically marked major price bottoms.”
Edwards defines miner capitulation as a measured decline in Bitcoin’s total hash rate, in the order of a 10% to 40% decline. To better spot such an event, the quant analyst developed an indicator: hash ribbons.
many public bitcoin miners sold thousands of bitcoin in June. To date, only Marathon Digital and HUT 8 have continued to deposit monthly mined BTC into custody.
Is The Relevancy Of Miner Capitulation Decreasing Each Year?
Fred Thiel, the CEO of Nasdaq-listed bitcoin miner Marathon Digital, told Bitcoin Magazine that strategies based on miner capitulation periods assume what has been a good rule of thumb in general markets: that those deep within the industry have better information than those on the outside.
“Typically in economic markets or financial markets, when the person with the best information acts, it’s an indicator of the surest place in the market,” he said.
MicroStrategy, Tesla and Block.
“So where before miners were a really good indicator of the bottom, I think today they’re a good indicator of when the market has hit a point where the pain point’s real high,” Thiel explained. “And if miners are selling bitcoin it’s because either they don’t have an alternative, so they’re forced sellers, just like people that get margin calls, or they’re selling because they’re getting desperate, if you would.”
Edwards acknowledges this point as well, but doesn’t dismiss the validity of looking at miners’ capitulation to spot attractive bitcoin prices.
“I think the power of hash ribbons diminishes with time, in a step-change fashion every four years with the Bitcoin halving cycle,” the analyst told Bitcoin Magazine. “We have seen the entry of institutions and banks into Bitcoin over the last 18 months.”
“The current configuration of hash ribbons will probably become noticeably less useful next cycle, and perhaps unusable in the following cycle,” Edwards added. “Nonetheless, hash ribbons has been great this cycle so far, and the current cycle still has two years left to run. Capriole Investments is actively watching hash ribbons and using it as an input into our investment strategy.”
Is The Bitcoin Bottom In?
Even though hash ribbons is flagging a miner capitulation event has been underway for over a month now, it has not yet flagged a buy signal for bitcoin — which begs the question: Is the bitcoin bottom behind us or could there be more drawdowns?
Edwards told Bitcoin Magazine that, typically, miner capitulation periods last anywhere from one week to two months, indicating that either the bottom already happened on June 18 or that it could happen in the near future.
“We run several strategies internally at Capriole to help get a confluence of signals and approaches,” Edwards said. “Some strategies currently suggest we have bottomed, others suggest a bottom is forming and others still say we are in contraction and a bottom is not yet confirmed.”
Given the hardship of spotting a bitcoin price bottom, investors can at a minimum leverage hash ribbons to spot miner capitulation periods — in which dollar-cost averaging could turn into an effective strategy over a long period of time. Alternatively, risk-averse investors that believe in the reasoning behind hash ribbons can wait for the indicator’s buy signal, as it could spot the beginning of a recovery.
In any case, Edwards believes the time is prime for allocating to bitcoin.
“My general view is that the next six to 12 months will provide the best opportunity to get into bitcoin over the next five-plus years,” Edwards predicted. “This is based on the data we are quantitatively modeling, the current cycle downdraw, and timing within the current four-year cycle, that is, bitcoin usually bottoms in the exact six-to-12-month halving cycle time window we are currently in. Not financial advice of course!”