When’s the Best Time to Buy Bitcoin? The Difficulty Ribbon
With the price of bitcoin being US$10,362 at time of writing, the case for buying bitcoin grows stronger the longer it hovers around the US$10K mark — that’s the punchline today.
Last month, an intriguing chart started doing the rounds and it is well worth a look:
The idea behind the chart is simple — it matches up the difficulty of mining BTC (left) with the bitcoin price (right).
Bitcoin difficulty ribbon explains mining dynamics and best time to buy Bitcoin
As the ribbon widens, this is when mining bitcoin gets harder.
The result of this is that it flushes out the hands of weaker miners who sell their bitcoin to remain operational.
Bitcoin bear markets cause weaker miners to fold while hashing power and network difficulty decrease — leading to ribbon compression.
If you had bought each time the ribbon compressed, you would be up significantly on your initial investment.
And the ribbon is now compressing!
It’s a sort of Darwinian ‘survival of the fittest’ explanation of how the bitcoin price works.
And while the increasing centralisation of mining pools is certainly a concern, this chart is a great way to think about the best time to buy bitcoin as an investment.
Bitcoin trading versus bitcoin Investment
Note the distinction between investing in bitcoin and trading bitcoin.
Let’s have quick look at the recent history of the BTC price chart to illustrate this point:
We’ll keep this simple, because all the BTC technical analysis can become a bit overwhelming and/or silly sometimes.
Indeed, high-frequency crypto traders and bots thrive off technical indicators!
That being said, from the start of June, there are three main things to see here:
- Three decreasing tops
- Support around $9K
- A narrowing range
This could be referred to as a consolidation pattern, as the BTC price gyrates between $13K and $9K in an increasingly narrow range.
Since about mid-August, it’s largely moved sideways.
You could also refer to it as equilibrium.
Either way, the point is that bitcoin could be approaching another major move — with some form of regulatory news being the catalyst.
And this potential upwards move would then be sustained by the Darwinian dynamics of bitcoin mining as illustrated by the difficulty ribbon.
So you could have traded BTC since June and done well.
But in terms of an investment, where the horizon is longer, it pays to understand the fundamentals of the bitcoin market.
If the difficulty ribbon points to anything, it is that now is a good time to consider a BTC investment.
For Money Morning