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IS THE BITCOIN PRICE BOTTOM IN? HERE’S WHAT HASH RIBBONS TELL US

The bitcoin price tends to be cyclical, and we’re all trying to time the bottom.
Can hash ribbons be the metric that predicts it?
 * Author:
   Namcios
 * Publish date:
   Jul 13, 2022



The bitcoin price tends to be cyclical, and we’re all trying to time the bottom.
Can hash ribbons be the metric that predicts it?

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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?

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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.



With that in mind, investors, traders and analysts have attempted to utilize
different techniques to spot the bottom in price, including technical analysis
(TA), sentiment, hash rate and even search popularity on Google. And this
article will explore a more novel price indicator that relies on Bitcoin’s hash
rate and its network of miners, known as hash ribbons.

This indicator could be valuable because it has proven reliable in spotting
opportunistic entry points in bitcoin in the past from a risk/reward
perspective, enabling investors to enter the market and buy low, before fear of
missing out (FOMO) sets in. Though whether 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 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.







CAN HASH RIBBONS PREDICT BITCOIN PRICE BOTTOMS?

Hash ribbons, publicly available on TradingView, is an indicator made up of two
simple moving averages (SMAs) of Bitcoin’s hash rate: the 30-day and the 60-day
SMA. A downward cross of the short-term MA on the long-term MA marks the
beginning of a capitulation period, whereas an upward cross spots its end.

Edwards argues that buying bitcoin at the end of a miner capitulation period
produces outsized returns for investors as the worst is believed to be over and
the market is beginning a recovery.

“To date, I believe it’s the best publicly-available, long-term buy signal, but
the reader should make that assessment,” he said.

In 2020, the hash ribbons 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, those buys generated returns of about 567.76%, 255.73% and 194.11%,
respectively.

The hash ribbons indicator flagged three buying opportunities in Bitcoin during
2020, all of which produced outsized returns in just one year. Image source:
TradingView.

Last year, however, the indicator didn’t fare so well. An investor following
hash ribbons for bitcoin allocations would’ve bought BTC at around $44,612.94 on
August 7, only to see that investment lose over half its value until the present
day as the P2P currency trades below $20,000.






However, that’s after bitcoin rallied to a new all-time high price of $69,000 in
November, at which point that investor would be 54.66% in the green in only
three months. Still, it’s quite hard — if not impossible — to accurately spot a
top.

Buying when Hash ribbons last signaled an opportunity would’ve yielded negative
results of 55.53% to date, after being over 54% in the green at the all-time
high of $69,000. Image source: TradingView.

Edwards explained to Bitcoin Magazine that the hash ribbons strategy is
concerned only about flagging attractive entry points, and the decision of when
to sell and close the position remains a burden the investor themself must
endure.

In the 2018 to 2019 bear market, the hash ribbons indicator flashed a buy signal
on January 10, 2019. Bitcoin closed at $3,627.51 that day — only 16% higher than
that cycle’s low of $3,122.28 seen on December 15, 2018.

This year, miner capitulation helped spot another opportunistic decline in
price.

“Recently we saw strong evidence for a major miner capitulation in June as
proven by the $30,000 to $20,000 price drop following the hash ribbon
capitulation signal, the subsequent 30% drawdown in miner treasuries and the $4
billion of miner loan stress news in June 2022,” Edwards told Bitcoin Magazine.






Image source: TradingView.

Indeed, hash ribbons flagged the beginning of a miner capitulation on June 9,
indicating that further stress could come to the market. In the following nine
days, bitcoin dropped below the 2017 high, nearing $17,500 on June 18.

As it would be discovered in July’s public filings and production updates
releases, 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.



Thiel continued to explain that a miner knows specific information such as what
their operating cost is, what the cost to mine one bitcoin is, and what the
bitcoin price is. They then leverage that information to decide a course of
action, including to either liquidate their position and their bitcoin holdings,
or even cease operations if it reaches a point where it’s too unprofitable.





“So when a miner starts selling their bitcoin holdings, they’re at a point where
that’s their best alternative, and so you would assume that would indicate a
bottom,” Thiel said.

However, the chief executive highlighted that the extent to which miner
capitulation influences the market will diminish with time. Why? Whereas years
ago miners were the biggest institutional bitcoin holders, now their position
sizes are being outgrown by those of companies such as 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!”


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