The technical analysis of Bitcoin’s price attributes to its utility as an investment asset. Unlike most other assets, there is a lack of historical data or information to analyze the price of Bitcoin. However, On-chain metrics is an integral part of the analysis, which depicts the real supply and demand.
Vinny Lingham, crypto-analyst and entrepreneur had developed such a metrics in 2014. The idea was the judge the mining situation. Willy Woo, crypto and chart analyst, recently tweeted about the Moving Average of Mining Difficulty – the Difficulty Ribbon.
Moving Averages on price like the 50,100,200-Day are critical estimates to understand price action. Similarly, analysts have tried to estimate the mining situation in relation to the price.
As new mining hardware is released in the market, the older ones become unprofitable. These faster and energy-efficient machines start to outdo the older set-ups. Hence, the market is highly dynamic and needs careful economic cognizance.
Small and inefficient miners are currently at the brink of capitulation. Primarily because the mining rewards will be reduced by half in May 2020. While the miners have enjoyed handsome margins during the last couple of months, the break-even cost of mining is around $6000. However, this would change drastically after halving.
Miners capitulate during to situations – Bear markets and Halving. He noted,
Miners capitulate in bears, but also during block reward halvening events when suddenly only half the coins are mined for the same costs and the market price has yet to catch up to pay for it. See the compression after each halvening (marked as vertical lines) as miners die off.
Miner Capitulation leads to a robust bullish action as the difficulty decreases, leaving more for the rest of the miners. Moreover, the miners leaving the system are motivated to hold on to their assets.
The vertical red lines indicated the halving events in 2012 and 2016. This also explains why the bull market was seen mainly post the halving in 2017, among other things. The next halving will occur in 2020, which will possibly lead to the same situation.
Moreover, he also suggested that the current situation is similar to the 2012-2014 bull run when the price rose from <$10 to $1000 in 2 years.
As a final note, notice how the 2019 the 2012 bull market have the same structure, we saw severe mining capitulation (ribbon flipped negative) leading to a shorter accumulation band before price breakout. This bull market has resembles 2012 more than 2016 structurally.
While prior actions are not guaranteed imitation, but they form reliable indicators.
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