Hash Band Finds Bitcoin Price Bottom – Bitcoin Magazine
The question of whether the bottom of the bitcoin price is behind us is on the minds of many investors who are ready for the challenge: Buy the dip or wait for a bigger one?
Financial predictions are rarely 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 adoption cycle, many still try to time bitcoin peaks and troughs when making allocation decisions.
With that in mind, investors, traders and analysts have tried to use different techniques to find the bottom in price, including technical analysis (TA), sentiment, hash rate and even search popularity on Google. And this article will explore a more recent price indicator that relies on Bitcoin’s hash rate and the network of miners, known as hash bands.
This indicator can be valuable because it has proven to be reliable in detecting opportunistic entry points in bitcoin in the past from a risk/reward perspective, allowing investors to enter the market and buy low before the fear of missing out of money (FOMO). this accurately predicts the bitcoin price or not is another question.
Miner capitulation as a bottom indicator
Charles Edwards, founder of quantitative asset management firm 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 to be driven out of the market, shown by a significant drop in Bitcoin’s hash rate, further market pressure occurs as miners’ profit margins are squeezed. It also took intense market pressure to cause that capitulation in the first place, as miners are seen as highly resilient players in the ecosystem.
“Given the scale of supply controlled by miners, and the general level of high efficiency in their operations, it has often happened when miners sell the worst,” Edwards explained. “As a result, price and hash rate recoveries from this miner capitulation have historically marked major price bottoms.”
Edwards defines miner capitulation as a measured decline in Bitcoin’s overall hashrate, on the order of 10% to 40% decline. To better spot such an event, the quantum analyst developed an indicator: hash bands.
Can Hash Bands Predict Bitcoin Price Bottoms?
Hash Bands, publicly available on TradingView, is an indicator that consists of two simple moving averages (SMAs) of Bitcoin’s hash rate: the 30-day and 60-day SMA. A downward cross of the short-term MA on the long-term MA marks the beginning of a capitulation period, while an upward cross detects its end.
Edwards argues that buying bitcoin at the end of a capitulation period for miners provides outsized returns for investors, as the worst is believed to be over and the market is starting to improve.
“To date, I believe it is the best publicly available, long-term buy signal, but the reader should make that judgment,” he said.
In 2020, the hash band indicator flashed a buy signal on three occasions: April 24 ($7,505.53), July 12 ($9,306.17) and December 2 ($19,226.55). After one year, these purchases yielded returns of 567.76%, 255.73% and 194.11% respectively.
Last year, however, things did not go so well with the indicator. An investor following hash bands for bitcoin allocations would have bought BTC for around $44,612.94 on August 7, only to see the investment lose over half of its value to date as the P2P currency trades below $20,000.
However, that’s after bitcoin rose to a new all-time high price of $69,000 in November, when the investor would be 54.66% in the green in just three months. Nevertheless, it is quite difficult – if not impossible – to detect a peak accurately.
Edwards explained to Bitcoin Magazine that the hash band strategy is only concerned with flagging attractive entry points, and the decision of when to sell and close the position is still a burden for the investor to bear.
In the 2018 to 2019 bear market, the hash band indicator flashed a buy signal on January 10, 2019. Bitcoin closed at $3,627.51 that day — just 16% higher than that cycle’s low of $3,122.28 set on December 15, 2018.
This year, miner capitulation helped spot another opportunistic price drop.
“Recently, we saw strong evidence of a larger miner capitulation in June as evidenced by the $30,000 to $20,000 price drop following the hashband capitulation signal, the subsequent 30% move in miner taxes, and the June 2022 $4 billion miner loan stress news, Edwards told Bitcoin Magazine .
In fact, hashish bands marked the beginning of a miner capitulation on June 9, indicating that further stress could be coming to the market. Over the next nine days, bitcoin fell below its 2017 high, approaching $17,500 on June 18.
As would be discovered in July’s public filings and production updates, 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 relevance of miner capitulation diminishing every year?
Fred Thiel, 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 inside the industry have better information than those on the outside.
“Usually in economic or financial markets, when the person with the best information trades, that’s an indicator of the safest place in the market,” he said.
Thiel went on to explain that a miner knows specific information such as what their operating costs are, what the cost of mining a bitcoin is, and what the bitcoin price is. They then leverage this information to determine a course of action, including either liquidating their position and their bitcoin holdings, or even ceasing operations if it reaches a point where it is too unprofitable.
“So when a miner starts selling their bitcoin holdings, they’re at a point where that’s their best option, and so you would assume that would indicate a bottom,” Thiel said.
However, the CEO emphasized that the extent to which miner capitulation affects the market will diminish over time. Why? While miners were the largest institutional bitcoin holders years ago, their position sizes are now outnumbered by companies such as MicroStrategy, Tesla and Block.
“So where before miners were a very good indicator of the bottom, today I think they’re a good indicator of when the market has hit a point where the pain point is really high,” Thiel explained. “And if miners are selling bitcoin it’s because they either don’t have an alternative, so they’re forced sellers, just like people who get margin calls, or they’re selling because they’re getting desperate, if you will.”
Edwards acknowledges this point as well, but does not dismiss the validity of looking at miners’ capitulation to detect attractive bitcoin prices.
“I think the power of hash bands is waning over time, in an incremental fashion every four years with the Bitcoin halving cycle,” the analyst told Bitcoin Magazine. “We’ve seen the entry of institutions and banks into Bitcoin over the last 18 months.”
“The current configuration of hash bands is likely to become noticeably less useful next cycle, and perhaps useless in the following cycle,” Edwards added. “Nevertheless, hashish bands have been good this cycle so far, and the current cycle still has two years left to run. Capriole Investments actively watches hashish bands and uses it as an input to our investment strategy.”
Has Bitcoin Bottomed?
Although hashbands are flagging that a miner capitulation event has been underway for over a month now, it has yet to flag a buy signal for bitcoin – which begs the question: Is the bitcoin bottom behind us, or could there be more moves?
Edwards told Bitcoin Magazine that miners’ capitulation periods usually last from a week to two months, indicating that either the bottom already happened on June 18 or that it could happen in the near future.
“We are running multiple strategies internally at Capriole to help get a confluence of signals and approaches,” Edwards said. “Some strategies are currently suggesting that we have bottomed, others are suggesting that a bottom is forming and still others are saying that we are in contraction and that a bottom has not yet been confirmed.”
Given the difficulty of seeing a bitcoin price bottom, at a minimum, investors can leverage hash bands to detect miner capitulation periods – where dollar cost averaging can become an effective long-term strategy. Alternatively, risk-averse investors who believe in the reasoning behind hash bands can wait for the indicator’s buy signal, as it could see the beginning of a recovery.
In any case, Edwards believes the time is right to allocate bitcoin.
“My overall 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 quantitatively model, the current cycle downturn and the timing within the current four-year cycle, meaning that bitcoin typically bottoms out in the exact six-to-12 month halving cycle time window we currently have. i. Not financial advice of course! »