Bitcoin’s mining difficulty has consolidated significantly since lows at the end of 2018 that mirrored levels from summer 2018. The difficulty adjustment has remained stable for more than one month, leveling out following an uptick on February 10th.
The stabilization of Bitcoin’s difficulty adjustment also correlates with a consistent hash rate over the same period and relatively reduced volatility in the legacy cryptocurrency’s market price over the last 3 months. However, Bitcoin’s price recently surpassed $4,000 amid strong trading volumes.
Waiting on Miners
An increasing Bitcoin hash rate and difficulty adjustment indicate that more miners are migrating to the chain. Following the adverse price movements towards the end of 2018, many independent miners were forced to shut down their operations or face running at a loss for extended periods.
The network’s hash rate has rebounded from December 2018 lows and leveled out for the previous month. The difficulty has remained consistent for the longest period in the last year, likely revealing that miners who can either operate at a minimal loss or with razor-thin margins still have their rigs on.
Speculation on Bitcoin’s potential breakout from its more than year-long bear market has covered everything from the introduction of physically-delivered Bitcoin futures (i.e., Bakkt) to the adoption of the Lightning Network. However, Bitcoin’s mining market remains a crucial indicator for gauging the health of the network and any consequential price movements.
There is a strong correlation between the network’s long-term hash rate growth and its meteoric price rise, and surges in the hash rate/difficulty often coincide with price upswings. More hash power reveals that more miners are capable of operating with profits and are looking to capitalize on margins they observe with lower difficulty and lesser competition.
The stabilization of the network’s difficulty appears to be robust, but any transition into an extended bull run in the spot price is likely to be fueled by spikes in other areas of network activity or outside events.
Transaction Volume and Active Addresses
The number of active addresses on Bitcoin has long had strong parity with Bitcoin’s market price. However, Coindesk recently highlighted how the active addresses have diverged from the price, with active addresses outpacing the price.
Many of Bitcoin’s network metrics do not accurately paint the full picture, which has historically made consistently predicting price movements with any accuracy effectively impossible. Evaluating important network metrics like adjusted transaction volume (ATV), active addresses, hash rate/difficulty, and exchange trading volumes as a whole can often generate a clearer picture, but can become convoluted when they do not correlate.
For example, Bitcoin’s ATV, which is designed to filter out transaction noise and hone in on economic transactions, has been declining since the beginning of 2019, while the hash rate and difficulty have been increasing. Discerning which fuels the other is an arduous task, but traditionally, market sentiment has shown that price swings driven by rampant speculation (i.e., end of 2017) typically provides ammunition for a longer-term ascension in the hash rate and difficulty adjustment — which tends to react to price movements with a delay.
Bitcoin’s current bear market has been among the longest in its decade-long history. The hash rate and difficulty are stabilizing, but it remains to be seen whether or not the price can break out of its extended downturn and subsequent consolidation.