Willy Woo’s new metric shows when smaller miners are ‘capitulating’, typically in bear markets and after halvings.
Willy Woo is well known for developing chain-based indicators for Bitcoin, including NVT. Now he has released another: the Bitcoin Difficulty Ribbon.
You can read a full explanation here, but essentially the ribbon is a collection of moving averages that track Bitcoin Difficulty. Showing shorter-term and longer-term moving averages on the same chart gives a sense of the ‘flow’ of Difficulty, as more miners come on board or, at times, are forced out of business. The result is a kind of twisting ribbon effect, which tightens (or turns downwards) when miners are feeling the pinch, and fans out when times are better.
Small and large miners
This is important, because not all miners are the same. Smaller miners are typically worse-placed to weather falling bitcoin prices, while large miners have both more cost-effective set-ups and greater resources to survive a crunch. The least efficient miners need to sell most of their coins to stay afloat, and are vulnerable to a supply shock (halving) or bear market.
The ribbon shows the rate of change of Difficulty. It’s very clear what happens and when. During major bear markets, the ribbon compresses because smaller miners are going out of business and hashrate is falling, leaving stronger miners who have more of a cushion against such a squeeze. That means more coins going to miners who don’t need to sell as many – so they accumulate, new supply falls, and the cycle starts again with more bullish action.
What’s really interesting is that we can see miners capitulating in both bear markets and just after halvings. Obviously, dropping supply by 50% is enough to put many miners out of business. If miners are selling most of their coins to pay for electricity and can’t hold on until price catches up, they will fold. That has happened after both halvings to date, and we can expect it to happen again next year.
Woo uses this chart to make a comparison between the current bull market and 2012’s bull market. ‘Notice how the 2019 the 2012 bull market have the same structure, we saw severe mining capitulation (i.e. the ribbon flipped negative), the resulting vacuum in selling pressure lead to a shorter accumulation band before price breakout. Thus this bull market resembles 2012 more than 2016 structurally.’
The next halvening, in May 2020, may offer a strong buying opportunity. For now, the ribbon shows the bull run is just getting started.
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