The difficulty of mining bitcoin has declined by a record 28 percent — but will this help the price with bitcoin recover? || Moh Maya World

The difficulty of mining bitcoin has declined by a record 28 percent — but will this help the price with bitcoin recover?

The ratio of Bitcoin price to hash rate presents bulls with a long wait, as the hash rate is still migrating.

 

Bitcoin (BTC) has recorded its biggest mining difficulty drop of nearly 28% on July 3, but one model suggests that the BTC price will not bottom until October.

In a series of tweets on July 2, investment manager Timothy Peterson flagged the relationship between Bitcoin price and hash rate as arguable evidence that the dip is not over.

Hash rate model: Long road ahead to Bitcoin bottom

Bitcoin mining difficulty dropped by an estimated 27.94% on Saturday at block height 689,472, the biggest in its history. 

As Cointelegraph previously explained, the drop is in response to the ongoing miner migration out of China and the subsequent loss of hash rate.

For miners still at work, the decrease will be something of a profit boost — difficulty automatically accounts for changes in hash rate, making it more attractive to mine when it drops. 

Miners influx are not expected to return to their craft completely for several months. In that time, the difficulty will likely increase again as the hash rate goes up — more competition and more power competing for the same set reward.

It is a classic mantra among Bitcoiners that “price follows hash rate” — but if that is true, one model charting the phenomenon is painting a sobering picture of future price behavior.

Peterson noted that the relationship between price and hash rate is “useful” when it comes to marking macro price tops.

An accompanying chart shows spikes in 2013 and 2017, corresponding to tops that held for an entire four-year halving cycle. 

2021 looks similar, but since the May capitulation, the relationship has been trending towards 1 — the point at which the Bitcoin price should have fully “corrected.”

“Based on the current trend in P(h), this bubble would finish collapsing by 31 October,” Peterson summarized. 

“The ratio includes any combination of a higher hash rate and lower price. So increasing hash rate and stable price also resolves the bubble.”

 

In other words, the return of miners is likely to prevent further price dip episodes of the magnitude seen recently, but bulls may still need to wait longer than desirable to see higher levels return.

An important caveat came from Peterson, who cautioned that there are “many things wrong” with such a simple model and that he himself does not use it.

July 03, 2021