Even Bitcoin Miners Have Thrown In The Towel. That’s… Great News?

Even Bitcoin Miners Have Thrown In The Towel. That’s… Great News?
Jonathan Hobbs

over 1 year ago4 mins

  • Bitcoin’s recent drop in hash rate suggests many miners “capitulated” and turned off their machines.

  • Miners are usually more resilient than your average bitcoin investor, so when they stop mining it’s a true sign of market fear.

  • The hash ribbons indicator has worked well in the past, but the price needs to recover a bit more before the signal flashes its final confirmation.

Bitcoin’s recent drop in hash rate suggests many miners “capitulated” and turned off their machines.

Miners are usually more resilient than your average bitcoin investor, so when they stop mining it’s a true sign of market fear.

The hash ribbons indicator has worked well in the past, but the price needs to recover a bit more before the signal flashes its final confirmation.

Bitcoin miners are stubborn folk, essential to the blockchain and difficult to spook. But another 37% drop in bitcoin’s price in June seemed to do just that, with more and more of them switching off their machines. You’d be forgiven, then, for thinking that was yet another nail in the coffin of the OG crypto. Not quite: one reliable indicator actually suggests it could be a promising sign for things to come.

What exactly is this indicator?

It’s known as the hash ribbons indicator, and it comes courtesy of crypto guru Charles Edwards.

The first thing to know about the hash ribbons indicator is that it’s based on the bitcoin hash rate – that is, the total computing power used by the mining network. When more miners are in competition with one another, the hash rate rises – and vice versa.

The hash rate had been trending up steadily for much of the past year, even as the price of the cryptocurrency fell. But this came at the expense of miners’ profitability, and there was only so long they were going to tolerate the dropoff. With bitcoin’s price (black line below) continuing to fall, miners finally started throwing in the towel. That caused the hash rate (blue line) to slow down and flatten out.

Bitcoin hash rate and bitcoin price. Data sourced from Glassnode.
Bitcoin hash rate and bitcoin price. Data sourced from Glassnode.

When that slowdown in the hash rate happened, the first of the three signals in the hash ribbons indicator started to flash.

What are the three signals of the indicator?

The miner capitulation signal. Here, the hash rate starts to tail off as more and more miners stop mining. This happens when the 30-day moving average of the hash rate crosses below the 60-day moving average. In other words, when the hash rate starts falling faster.

The end of miner capitulation signal. This is when the hash rate recovers and starts to tick back up again. It appears when the 30-day moving average of the hash rate crosses back above the 60-day moving average.

The bitcoin buy signal. This only flashes if the 10-day moving average of bitcoin’s price is above its 20-day moving average. At that point, buying momentum turns positive too. Note that in some cases, the 10-day moving average is already above the 20-day moving average when the second signal fires. In that scenario, both signals flash simultaneously, making it a buy.

Here’s the signal in action after the Covid drop in 2020. You’ll notice that each signal flashes a different color in the circles along the bottom: gray when miners capitulate, bright green when that capitulation ends, and blue when there’s a buy signal.

Example of the bitcoin hash ribbons indicator 2020. Chart drawn with TradingView.
Example of the bitcoin hash ribbons indicator 2020. Chart drawn with TradingView.

How has the indicator performed in the past?

The buy signal has only flashed 13 times since 2012, and it's almost always been a great time to buy into bitcoin whenever it’s happened. Case in point: the signal would’ve got you into bitcoin near the bottom of the 2015 and 2018 bear markets, as well as only about a month into the Covid crash.

Past example of the bitcoin hash ribbons indicator. Chart drawn with TradingView.
Past example of the bitcoin hash ribbons indicator. Chart drawn with TradingView.

Its success rate actually makes a lot of sense. Consider that peak market fear can be a great time to buy an asset, and that the dropoff in the hash rate as miners pack up their machines is the first sign of that fear. But consider too that bitcoin can still fall significantly when investors are jumpy. So while the dropoff in the hash rate is a good first sign, it’s risky to start buying in there and then.

Instead, it’s the combination of an end to capitulation and the shift in buyer momentum that lets you know that investor sentiment is turning round. That’s a lot safer than YOLOing straight into the dip.

So what’s the signal saying about bitcoin now?

Bitcoin miners were in the capitulation phase after bitcoin dipped back below $30,000 in June, but that came to an end today: the signal just flashed bright green.

Bitcoin hash ribbons indicator. Chart drawn with TradingView.
Bitcoin hash ribbons indicator. Chart drawn with TradingView.

From here, the 10-day moving average of bitcoin’s price just needs to get back above its 20-day moving average, and that’ll be our final buy signal. That could happen if its price keeps climbing, or if it continues to slowly grind away in the $20,000 region.

So you’ll want to keep an eye on the indicator yourself, and you can do just that for free on TradingView. Just open up a bitcoin chart and search “hash ribbons” in the “indicators” section, like so:

How to get the hash ribbons indicator in TradingView.
How to get the hash ribbons indicator in TradingView.

As for when the buy signal will arrive, it’s hard to know for sure: it’s taken several weeks for the indicator to turn blue in the past. Keep in mind too that the buy signal hasn’t flashed at all after the second signal on a couple of occasions. Back then, the miner capitulation phase started all over again before the bitcoin price regained momentum. And even after the buy signal has flashed in the past, bitcoin’s price has dipped temporarily before taking off.

Still, this is a long-term signal for major bitcoin rallies – not a short-term one for traders looking to make a quick buck. So if you’re patient, history suggests you could be handsomely rewarded.

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