Cryptoasset market analysts have called attention to a historical trend in bitcoin’s price action, that could potentially signal coming changes in its direction – namely, a possible end to the bear market.
The key indicator being observed is mining difficulty, specifically the direction of the difficulty changes – getting less or more difficult. Mining bitcoin is currently becoming less difficult, which is a phenomenon rarely observed seen only for 13% of the bitcoin network’s history, according to Element Group, a virtual asset analysis and consultancy service.
Element has researched and outlined the correlation between decreasing mining difficulty and bitcoin price movements, among other effects. What it found is that, the rare event of mining difficulty reduction often occurs toward the bottom of market cycles, when bitcoin sell pressure abates and prices find their lows.
According to Element, “Historical cycles suggest that we may need to experience 6 to 12 months of negative to flat difficulty growth for prices to bottom.”
Falling mining difficult invariably means that mining power (“hashrate” in mining jargon) is leaving the network, because the difficulty adjustment script which tries to keep Bitcoin mining time to ten minutes per block is noticing that blocks are taking more than ten minutes to be mined – because of less hashrate.
The reasons that miners would leave the network for are slightly less straightforward, although Element is of the opinion that lower bitcoin prices probably force the least efficient mining operations out of the game – lowering the network’s hashrate and subsequently its difficulty.
A higher concentration of bitcoin mining rewards and higher efficiency of those still mining, could translate to decreasing selling pressure on the part of remaining miners selling less bitcoin for operational costs.
That narrative would seem to accord with the data: the dramatic 2018 rise in hashrate, of at least 500%, seems to have levelled off somewhat, as seen in the above chart, at the same time bitcoin’s price plummeted and consolidated around the $6000 range, down from highs of over $19,000. More hashrate for less dollar returns could easily translate to more competition.
The levelling of hashrate could very well be miners exiting during hard times, and the network and mining power consolidating. Indeed, as CryptoGlobe recently reported, there have been reports that mining has perhaps become unprofitable for some, especially less experienced miners.
Max Kaiser, former Wall Street trader and television show host on the Russia Today network, has confidently claimed that “price follows hashrate” on the Bitcoin network. In this complex game of hashrate, difficulty and price, it is hard to say when the record-setting price stability of bitcoin will end.