Bitcoin’s difficulty ribbon compression indicator, an indicator that takes advantage of its difficulty ribbon indicator to measure market capitulation, has just started “pumping,” which historically has meant the price of BTC is about to move up.
As YouTuber The Moon pointed out, the indicator has started pumping for the first time during this bull cycle, as it stayed within values between 0.01 and 0.05 throughout it, representing periods in which it was time to buy.
Historically, the indicator breaking above these values indicated a significant BTC price increase. The three most notable dips below them occurred in January 2013, August 2015, and April 2019, ahead of some notable bull runs.
While there were a few short-lived periods where the indicator went over 0.05, it’s currently well above 0.1. The indicator’s rise comes as BTC keeps trading sideways between the $35,000 and $30,000 marks, according to CryptoCompare.
The bitcoin difficulty ribbon, which the ribbon compression indicator is based on, creates a band of moving averages of Bitcoin’s mining difficulty based on the estimated number of hashes to mine a block. It essentially looks at the impact of mining on BTC’s price.
According to on-chain analyst Willy Woo, at the end of bear cycles the “weakest miners sell more of their coins to remain operational.” When that becomes unsustainable, they “capitulate, hashing power and network difficulty” drops, leading to a ribbon compression. The ribbon compression indicator uses a normalized standard deviation to quantify the values of the difficulty ribbon.
The figure may, however, be misleading. Another key indicator, the Puell Multiple, has recently flashed a buy signal, but its creator warned investors that it may be a misleading signal, as it’s based on BTC’s issuance and the cryptocurrency’s hashrate was heavily affected by China’s crackdown on cryptocurrency mining last month.
Bitcoin’s hashrate plunged after authorities from China’s Sichuan province ordered a state-owned power grid to cut the energy of 26 cryptocurrency mining farms in the region. Major cryptocurrency mining pools including Antpool, BTC.com, and Poolin were hit by the other.
The move came shortly after the Xinjiang government directed power plants in the Zhundong Economic Technological Development Zone to shut down their mining facilities earlier this month. Both Xinjiang and Sichuan have historically been major bitcoin mining hubs in China due to their abundant fossil fuel and hydroelectric energy.
The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.
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