Bitcoin Bottom at $6,500? Mining Difficulty as a Price Indicator
Bitcoin is gaining momentum. The downgrading of the Mining-Difficulty, which signals a lower Bitcoin supply, serves as an indicator for an upwards trend.
Bitcoin is back above $8,900 this morning and after the 8-month low in December, the leading digital currency has recovered rapidly. According to analysts, the December rate of $6,500 marked the bottom of the bearish cycle and the next few weeks are going to see an upward trend.
Part of the recent momentum is due to the conflict between the US and Iran, which has driven investors into crypto assets. Apart from this temporary effect, analysts also see Bitcoin in a medium to long-term growth trajectory, referring to the reduction of the Mining Difficulty in December 2019 as a leading indicator.
Lower Mining Difficulty indicates less active miners
The “Mining-Difficulty” describes how “difficult” it is for a Miner to create new Bitcoins. When the Difficulty is downgraded, mining has become easier. The difficulty is adjusted every two weeks, depending on how much energy the network consumes.
Energy consumption is primarily dependent on the Bitcoin price, because the higher the price, the more miners try to bring new Bitcoins to market – and more miners consume more energy. If the price is lower, fewer miners are active in the market so the mining difficulty will be lower.
Mining Difficulty reduction signals price bottom
The downgrading of the Mining Difficulty points to the end of a bear market, according to analysts. If the price of Bitcoin falls, some miners will have to close their mining farms. With fewer miners in the market, Bitcoin supply is reduced, and prices stabilize.
In the past, lower Mining Difficulty has often been a reliable indicator of crypto price stabilization after a bear market. For example, the months after the sell-off in December 2017 saw a downward price spiral that lasted until December 2018. Then the price stabilized at around $3,100. In the same month, the Mining Difficulty was corrected downwards. Likewise, after the peak in December 2013 at $1,153, Bitcoin lost in value and bottomed at $200 in April 2015. The Mining Difficulty was downgraded at the same time.
Upward trend likely in the next weeks
In Q4 2019, Bitcoin collapsed from $13,800 to $7,500. As a result, many mining farms had to cease operations. In December 2019, when Bitcoin dropped to $6,500, the Difficulty was corrected downwards for the first time in 12 months.
Therefore, analysts believe the price of $6,500 marked a bottom and expect an upward trend in the coming months. Additionally, the Bitcoin halving in May will further reduce the additional supply of Bitcoins and contribute to the momentum.
If Difficulty again proves to be a reliable forecasting tool, then Bitcoin prices should indeed continue to rise in the coming months. However, there is no guarantee because other events may also have a strong influence on the Bitcoin price, for example, political, regulatory or financial markets developments.