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Key Indicator Bottoms for Cryptocurrencies


Cryptocurrencies have plummeted in 2022.

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Bitcoin could be ready for a breakout if recent technical signals are to be believed.

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

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

Miners validate transactions on the bitcoin network using highly specialized and power-intensive computers to solve complex mathematical puzzles. They are rewarded with bitcoins for their efforts. As more bitcoins are mined, it becomes more difficult to solve these puzzles.

During a market crash, a drop in the price of bitcoin can cause many miners to continue operating unprofitable. Then they sell some bitcoins to stay alive. But they also shut down their mining rigs to save money.

That happened during the latest market drop and can be demonstrated by the “hash rate”, a measure of the computing power used to mine bitcoin. Are from mid-May, when the market really started to sell off, the 30-day average hash rate (monthly average) has dropped by more than 7% and at one point it has dropped 10%. That signals that miners are shutting down their machines.

Hash rates, studied in a variety of ways, are used by cryptocurrency investors to try to figure out when the market might bottom, because of the speculation and shake-up of miners. usually related to the end of the bitcoin cycle.

Matthew Kimmell, digital asset analyst at CoinShares, told CNBC via email: “Historically, capital investment in the mining market tends to correspond strongly with the overall market bottom. .

Hash rate and buy signal

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

When the 30-day moving average for the hash rate falls below the 60-day moving average, this is called a bearish line and signals that miners are closing in. Usually the sale is tied to these events. As more miners are taken out of the market, the difficulty in mining bitcoin will decrease as there is less competition.

Due to reduced competition, more miners may re-enter the market and a recovery may occur.

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

But using Edwards’ method, when the 30-day moving average for the hash rate breaks back above the 60-day moving average, the worst of the miner’s speculation tends to end.

According to Edwards, when this happens with bitcoin’s 10-day moving average price above the 20-day moving average, this is where the “buy signal” flashes.

He said those crosses happen on a Saturday.

In the past, buying bitcoin at these times would have been highly profitable depending on how long you held the cryptocurrency, according to Edwards.

For example, buying bitcoin on the August 2016 buy signal would give an investor over 3,000% return if held at the December 2018 high, which was when bitcoin hit a new all-time high.

More recently, buying in the recent August 2021 buy signal, would yield more than 50% returns if bitcoin were to sell at the November 2021 record high.

“I created Hash Ribbons in 2019 as a way to determine when major Bitcoin mining investments occurred, because as the recovery continues from these events, they often mark highs,” Edwards said. big bottom of Bitcoin price.” “Historically, these have been great times to allocate to Bitcoin, with incredible returns.”

Kimmell from CoinShares says that the logic behind the buy signal is that if the bitcoin price “tends to stably break through the hash rate before a period of high price increases, the rate of increase tends to” as marked by a moving average. 30 days for hash rate pass. above the 60-day moving average, it “could mean the bitcoin price has started to recover.”

“I don’t think this index should be relied on solely for making investment decisions, but can certainly be useful when combined with a different set of indicators and qualitative evidence,” he added.

Near bottom?

CoinShares has come up with a chart to show the correlation between hash rate and bitcoin price. And it’s divided into regions where there’s a “gold rush” when the price of bitcoin rises, and the subsequent fall in inventories, and the shaking of miners when the price drops.

In a chart provided to CNBC, CoinShares suggests that the market is currently in a period of shake-up that often occurs before rebalancing and a bull run. Right now, according to the chart, the bitcoin price line is below the hash rate.

The graph shows the movement of the bitcoin hash rate relative to the bitcoin price at different stages in the cycle.

CoinShares

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

“It is impossible to say if we have reached full investment, however there is evidence that we are at the stage of the mining cycle where speculation is most common. Second, if previous cycles carry predictive power, then yes, bitcoin price steadily surpasses hashrate will Kimmell say.

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

“I think we have seen signs of widespread speculation due to the events that have taken place in the previous months. Therefore, there is a possibility that we could have the beginnings of a bottom formation. Normally bitcoin is consolidating. within an overall range indicating accumulation, that’s what Ayyar told CNBC via text.

Bitcoin has been trading in a tight range around $18,000 to $25,000 since mid-June.

However, there are risks that these indicators are no longer as positive as they used to be due to the broader macroeconomic environment.

The current global economy is in a very different state than previous crypto cycles. Inflation is rampant and interest rates are rising globally, aspects like never before.

Risk assets like US stocks and especially Nasdaq, which is closely correlated with bitcoin, have seen a massive sell-off this year.

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

“The main risks are still the economy and inflation, but even then we are closer to the top of inflation than not, and so this also shows that for risk assets, we are is closer to the bottom than it is not.”



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