Hash Ribbons & Bitcoin Bottoms

When miners give up, it is possibly the most powerful Bitcoin buy signal ever.

Charles Edwards
Oct 30, 2019 · 4 min read
Image for post
Image for post
A Capitulated Bitcoin Miner

In August, I wrote an article on using Bitcoin’s Hash Rate to find major Bitcoin price bottoms based on miner capitulation (you can find it here). Just days before, WillyWoo published an indicator using Bitcoin’s Difficulty to achieve a similar result (here).

In this article, I apply a “ribbon” crossover approach to both Bitcoin’s Difficulty and Hash Rates, using the same moving average parameters for both sets of data. As might be expected, Hash Rate provides a leading indicator over Difficulty at identifying capitulation.

Further, using “Hash Ribbons” to identify bottoms for purchasing Bitcoin yields phenomenal results.

Bitcoin Difficulty & Hash Rate

Bitcoin’s Difficulty is adjusted every 2016 blocks, or roughly every 2 weeks.

On the other hand, Bitcoin’s effective Hash Rate is calculated daily based on the actual number of blocks found by miners each day. Because of this, Difficulty effectively lags the Hash Rate by up to two weeks. Therefore, Difficulty is a somewhat lagging indicator for miner capitulation.

On the below chart, when the ribbons (the green and blue simple moving average lines of Difficulty and Hash Rate) cross each other, miners are “capitulating”. We can also see that there is roughly a two-week lag from when Hash Rate identifies miner capitulation to when Difficulty identities capitulation. The simple moving average (SMA) periods chosen are not overly important, and the same effect can be identifying using different periods.

Image for post
Image for post
Difficulty Ribbons Identify Miner Capitulation 2 Weeks After Hash Rate Ribbons
[Blue: Difficulty Moving Averages
Green: Hash Rate Moving Averages]

However, minor capitulation periods can last for weeks. As a result, the lag between Difficulty and Hash Rates doesn’t have a huge impact on the long-term Bitcoin investor.

The Hash Ribbon Indicator

Because of the effect of negative sentiment and price action during deep bear markets and times of miner capitulation, the best time to buy Bitcoin is typically somewhere in the middle of the “miner capitulation” period. But of course, this cannot be known until after the fact.

A simple 1- and 2-month simple moving average of Bitcoin’s Hash Rate can be used to identify market bottoms, miner capitulation and — even better — great times to buy Bitcoin.

When the 1-month SMA of Hash Rate crosses over the 2-month SMA of Hash Rate, the worst of the miner capitulation is typically over, and the recovery has begun. Buying at these points of time yields incredible results as shown below.

Image for post
Image for post
Table 1 — Returns from Buying at Miner Capitulation

Of the 9 historic buy signals, the average gain to the next market cycle peak (historically less than 3 years away) is over 5000%.

Returns are even greater than shown here for positions held forever.

What is interesting is the downdraw through all time. The average maximum downdraw for each of these entries is just 11%.

These results are achieved without considering any other indicators, metrics or intelligence. Just two simple moving averages on Bitcoin’s Hash Rate.

There is one “bad” purchase. On January 2015 (red text in above table), where a maximum downdraw of 42% occured. Note that this is still considerably less than half of Bitcoin’s numerous 80%+ drawdowns). Nonetheless, the majority of such drawdowns can be eliminated by simply adding a price action indicator. Such an indicator could include the famous Bitcoin 10- and 20-day SMA cross over, as made popular by Mr. Anderson, for example.

Purchasing during miner capitulation, as the Hash Rates start to “recover” and only once price momentum has gone positive (using the 10–20 SMA cross) yields the results below (termed the “Hash Ribbon” indicator).

Image for post
Image for post
Table 2 — Returns of the Hash Ribbon Indicator

As shown, the maximum downdraw is reduced significantly without a reduction in returns. The difference between Table 1 and 2 is made possible with the simple addition of waiting for positive price momentum before purchasing Bitcoin on the recovery of Hash Rates.

Image for post
Image for post
The Hash Ribbon Indicator

You can track a live version of this indicator on TradingView here.

What next?

Miner Capitulation doesn’t happen often, on average just once a year. But it has occurred following each of the last two halvenings. Suggesting we may see yet another wonderful buying opportunity again in mid-2020.

Takeaways

  1. Hash Rate leads Difficulty in identifying Bitcoin Miner Capitulation
  2. Buying during Miner Capitulation, when the Hash Rate starts to recover, is a wonderful strategy
  3. Going one step further, the majority of all draw downs can be eliminated from this strategy by waiting until the 10-day price SMA is above the 20 day price SMA
  4. Next time you see the Hash Ribbon buy signal, you would be wise to pay attention

Capriole

www.capriole.io

Charles Edwards

Written by

Digital asset management | Deep Value investing & autonomous algo-trading. Follow me on Twitter: @caprioleio

Capriole

Capriole

www.capriole.io | Digital Asset Management | Deep value investing and cryptocurrency quant trading.

Charles Edwards

Written by

Digital asset management | Deep Value investing & autonomous algo-trading. Follow me on Twitter: @caprioleio

Capriole

Capriole

www.capriole.io | Digital Asset Management | Deep value investing and cryptocurrency quant trading.

Medium is an open platform where 170 million readers come to find insightful and dynamic thinking. Here, expert and undiscovered voices alike dive into the heart of any topic and bring new ideas to the surface. Learn more

Follow the writers, publications, and topics that matter to you, and you’ll see them on your homepage and in your inbox. Explore

If you have a story to tell, knowledge to share, or a perspective to offer — welcome home. It’s easy and free to post your thinking on any topic. Write on Medium

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store