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- The drop in bitcoin mining difficulty may be a sign of a strong selloff.
- Price should tumble as weak miners panic sell their BTC holdings.
- The drop would be an opportune time to buy the number one cryptocurrency.
In the last few days, bitcoin has been hounded by fear, uncertainty and doubt (FUD) over miner capitulation. The FUD is largely fueled by the sudden drop in mining difficulty as well as bitcoin’s bearish price action. The number one cryptocurrency has failed to sustain its bullish momentum as it dropped from $10,000 to $8,000 in less than a month.
Cryptocurrency analyst Cole Garner thinks that the FUD surrounding miner capitulation is warranted. On Tuesday, he shared a chart on Twitter that suggests a decline in hashrate. The reversal tells us that miners are shutting off their rigs.
Mr. Garner believes this is bad news for bitcoin. However, a crypto exchange executive believes that a small miner exit is bullish for the cryptocurrency.
Small Miner Capitulation Often Lead to Strong Selloffs
If miners capitulate, the very likely scenario is that they dump their BTC gradually at first. This would add selling pressure to the market. If sellers overpower buyers, weak miners might panic dump all of their bitcoin holdings.
Clement Thibault, an analyst at financial markets platform Investing.com, echoes this view. He told CCN,
Miners’ actions are following the price. Bitcoin is a battle of efficiency; the more efficient miners survive.
In other words, the existence of small mining operations is largely dependent on the price of bitcoin. If the cryptocurrency dumps, it forces inefficient miners to sell their BTC holdings. The selling drives down the price which compels other small miners to sell. It can be a vicious cycle.
The selloff might discourage investors from entering the market. However, Andy Cheung, the head of operations at OKEx, sees the capitulation as a good time to buy bitcoin.
Andy Cheung: Small Miner Exit ‘Can Be the Most Opportune Time to Buy Bitcoin’
Buying when there’s blood on the street can be a daunting task. Mr. Cheung is adamant that a drop in bitcoin price due to small miner squeeze will likely inspire a strong response from the bulls. He told CCN,
We are aware of the correlation between Bitcoin price action and mining difficulty. In the past, lack of miner selling pressure stabilized the price of Bitcoin and even caused bullish price action.
The OKEx executive added,
In 2012 and once again in 2019, there are indications that suggest that bull market divergents were caused by severe mining capitulation, where vacuums in selling pressure launched the market into price breakouts. That said, two capitulation phases have occurred over the last 12 months.
Cheung referred me to the December 2018 mining difficulty drop. The capitulation of miners marked the bottom of the 2018 bear market. We are seeing another drop in mining difficulty and the OKEx executive predicts the same outcome.
So, while we have seen more active sellers of late compared to buyers, if smaller miners are once again squeezed out, we could see a bullish flag and a reversal above $9,000 levels and [bitcoin] could even test new highs for the year.
It appears that miner capitulation signals the end of a downtrend or a retracement, which actually makes sense. Once small miners dump all of their coins, selling pressure will be relieved. At the same time, the selling would have driven BTC to an attractive price level. This would inspire bulls to bargain hunt which could then jumpstart a bullish trend.
In the end, the small miner squeeze favors HODLers.
Disclaimer: The above should not be considered trading advice from CCN. The writer owns bitcoin and other cryptocurrencies. He holds investment positions in the coins but does not engage in short-term or day-trading.