How Difficult Can One Bitcoin Be?
The ‘ribbon’ consists of several simple moving averages of mining difficulty, on timescales from 9 to 200 days. As difficulty generally goes up, the 9-day moving average will tend to be higher than the 200-day moving average.
However, when the ribbon compresses or flips, this signals a slowdown in difficulty increase or even a decrease in difficulty. These are the best times to buy bitcoin, which would seem like a nice simple indicator to use. But why should it be so?
Introducing the Bitcoin Difficulty Ribbon. When the ribbon compresses, or flips negative, these are the best time to buy in and get exposure to Bitcoin. The ribbon consists of simple moving averages on mining difficulty so we can easily see the rate of change in difficulty. pic.twitter.com/6kBz4sLG1d
— Willy Woo (@woonomic) August 1, 2019
The Theory Behind The Metric
The visualization of mining difficulty examines the effect of mining on bitcoin’s price. Of the new coins being mined, some are sold off to cover miners production costs. This produces a downward pressure on bitcoin price.
Weaker miners must sell more of their mined coins in order to remain operational until this becomes unsustainable. At this point, the weak miners give up, reducing the overall hashing power and potentially causing a difficulty drop.
Only stronger miners are left, who don’t need to sell as many coins to cover costs, leaving room for more bullish price action.