Major Impending Negative BTC Difficulty Adjustment Could Be Bullish

Mining May 01, 2021

Recently, there's been a ton of fuss about Bitcoin's hashrate.

In specific, many observers have noticed that the effective hashrate on Bitcoin has dropped significantly at certain points during this 'epoch' (i.e., 2016-block period that will be used to calculate the difficulty for the next 2016 blocks).

State of Affairs Currently For Bitcoin

Below is a chart from Bitaps showing the metrics for the Bitcoin network as well as the expected changes that will take place in the next few hours (exact timing is unknown, this is just an estimate based on the network's pace of churning in blocks):

https://bitaps.com/

As we can see, Bitaps is forecasting that the difficulty adjustment rate will drop by 13.72% (which is really significant).

Let's go ahead and take a look at the various % changes in difficulty over the past few difficulty adjustment periods:

From the above chart, there are only a few instances in which the difficulty for Bitcoin has adjusted by as much as what we're expecting in the next few hours.

Those times are (in no particular order):

  1. November 3rd, 2020 (-16.05%)
  2. June 4th, 2020 (-9.29%)
  3. May 19th, 2020 (-6%)
  4. March 25th, 2020 (-15.95%)

There was no similar difficulty drop at any point in 2019.

We have to draw back to 2018 to find another comparable difficulty drop and that came in November & December '18 during the overall market capitulation.

If we continue to roll back the calendar past this point, we won't find a comparable drop in the difficulty adjustment over a span of years.

In fact, it isn't until the beginning of 2013 / end of 2012, that we see another such drop.

Looking backwards from there, we only find one other cluster of large negative difficulty adjustments, which occurred in the Fall of 2011.

Below is an Aggregate Total of All of the Negative Drops in Difficulty >10%

  1. December 3rd, 2018 (-15.13%)
  2. March 25th, 2020 (-15.95%)
  3. November 3rd, 2020 (-16.05%)
  4. December 26th, 2012 (-11.59%)
  5. October 30th, 2011 (-18.03%)
  6. October 13th, 2011 (-13.09%)

Surprisingly, this would only mark the seventh time in Bitcoin's history that the difficulty has dropped by >10%.

To put that in perspective, there have been >318 different difficulty adjustment periods to date (the first 19-20 DAA periods, the network didn't have enough hashrate to raise it above the minimum difficulty).

Thus, less than 2% of all total difficulty adjustment periods have had a negative adjustment that exceeds 10%.

Tracking Price Action Following All Negative Difficulty Adjustments >10%

Obviously, the most fruitful calculation we want to make here is one that will tell us how Bitcoin's price action has reacted after each substantial difficulty drop (>10%).

October 13th, 2011

In the chart above, we can see that the price depreciated buy 50% following the drop in difficulty. Which isn't good for bulls.

It is worth noting that the financial metrics for Bitcoin at this point in time were unrecognizably different from what can be observed today.

October 30th, 2011

Shortly after the first major drop in difficulty, there was yet another one that occurred on October 30th, 2011.

This was followed by a -43.20% drop in Bitcoin's price.

Again, this occurred almost a decade ago (literally), so we're not going to put a ton of weight on these earlier results - but they are worth mentioning as food for thought within the greater context of what's going on.

December 26th, 2012

Contrary to what we saw with the price action following the first two major drops in difficulty, December 26th, 2012, went on a crazy bullish streak, appreciating by +1634%.

Once again, we must take these results with a grain of salt since the ecosystem for Bitcoin was wholly different than what we see now.

December 3rd, 2018

Now, we're at a point where we need to place significant weight on the price action that follows the negative difficulty adjustment.

Let's take a look at December 3rd, 2018, where the difficulty adjusted downward by -15.13%.

Summary of the Price Action / Scenario

For those that weren't around (or don't remember), December 3rd, 2018 occurred mere days away from the 'bottom' of the last bear market.

The chart below shows just how close Bitcoin's price was to that bottom on December 3rd, 2018:

Which means...technically, apart from the 12 days of continued dumping (as part of the overall sell-off during the market's capitulation), Bitcoin has never taken a trip back down to this price.

March 25th, 2020

This particular situation is interesting - because the drop in difficulty followed an understandable massive decrease in the hashrate as COVID19 panic gripped the markets throughout the month of March.

To a certain extent, there was uncertainty about the existential fate of mankind itself (keywords: to a certain extent), so there's a chance that some of the decline in hashrate may have been due to miners prioritizing safety and their own personal lives at the time.

Regardless, we can see that, apart from a miner dip that occurred shortly after the difficulty adjusted, the price appreciated significantly afterward (+48.84%).

This slight dip is shown below:

Confusion Over CoinTelegraph's Counter Narrative

At the time (March 25th, 2020), CoinTelegraph published an article declaring that a sudden dip in the difficulty would precipitate a sell-off (which makes no sense, logically, but we'll get to that later).

Why Today’s 16% Fall in BTC Mining Difficulty May Cause the Price to Plunge
Bitcoin mining’s difficulty has just dropped by almost 16% — and it may be an ominous sign for the coin’s price

The article, 'Why Today's 16% Fall in BTC Mining Difficulty May Cause the Price to Plunge', declares that Bitcoin's steep drop in difficulty (~16%) would inevitably precipitate a steep drop in the price because, "The last time a downward adjustment took place, the Bitcoin price plummeted more than 50%."

The article then bring up the fact that previous time Bitcoin's difficulty had adjusted downward (February 25th, 2020), the price had depreciated significantly.

source: https://btc.com/stats/diff

The chart above shows us that the drop in difficulty on February 25th, 2020 was a mere -0.38% (which is effectively 'no change', all things considered).

Article Does Not Consider the Surrounding Circumstances For Some Reason

For those that remember, the entire world was melting down around March 2020.

The U.S. stock markets posted some of the worst returns of all time (beating some days of the 'Great Depression', which was scary as hell for all people at that time period).

As we'll see in the chart published below, three of the top 13 worst daily performances of all time occurred last March 2020.

Stock Market Worst Days (Percentage-Wise)

When considering the fact that the 1987 losses were primarily due to algorithmic bots going haywire vs. genuine bearish market sentiment, there is a lot of strength behind the argument that we lived through the worst day in stock market history in March 2020.

Keep in mind, this list ranks the worst performances by total percentage the market has shed vs. raw points.

Stock Market Worst Days (Points)

When looking at the largest daily point drops in stock market history, it drills the point even further home that February / March 2020 were unprecedented in terms of how bearish they were.

  • The list above shows us that the top three daily point losses for the stock market all occurred within a one-week span last March.
  • Overall, 6/7 of the worst daily point losses of all time all occurred within a three week span during that month.
  • Overall, between February 24th - April 1st, 2020, the stock market experienced 9 out of 12 of its worst daily point losses ever. In fact, the carnage was so bad last March that the stock market had technically entered into a "bear market" (analysts still consider that brief, yet scary dip to be a legitimate bear market / recession).

November 3rd, 2020

This chart shows us what happened the last time there was a major drop in the difficulty for Bitcoin (-16%+).

Curiously, this also happened to be the second largest difficulty drop in Bitcoin's history.

To say that the price action was bullish following this decrease in the total mining difficulty would be an absolute understatement.

In the two months that followed, Bitcoin's price appreciated by ~200%+, which is really significant. For reference, the price of Bitcoin was floating between $13.5k-14k at that point in time (it hadn't even broke its ATH from 2017 yet at that point).

Forecasting What May Happen This Time

With the substantially decreased difficulty, it is highly likely that miners are going to start packing in to mine Bitcoin en masse.,

This increase in competition + the substantially decreased difficulty will make it substantially more difficult to obtain Bitcoin directly (i.e., without buying it from someone or using a 3rd-party intermediate).

In flat economic terms, it can be said that it will become exponentially harder for any entity to obtain more Bitcoin for the next two weeks (this should bring the overall difficulty up much higher after this upcoming epoch is finished.

Bitcoin Price Expectations

This should go without saying, but we expect that Bitcoin's price action will be extremely bullish in the near future (partially as a result of this major drop in difficulty).

Librehash will make sure to update users when the actual adjustment occurs. Remember, the price impact may not be immediate! (although it could be since that's what happened the last time the difficulty adjusted downward).

Tags

cryptomedication

Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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