The most recent 2% increase in difficulty adjustments on the Bitcoin network could be definitely be seen as a negative, but a quick review of the historical chart reveals that difficulty drops followed by increases have traditionally been bullish.
The mining difficulty of Bitcoin adjusts every 2016 blocks — roughly every two weeks. If the number of blocks mined during that period is less than expected, the difficulty decreases, and conversely more blocks mined leads to an increase in difficulty.
When prices decrease sharply, smaller miners tend to drop out of the market in an event called capitulation. To compensate, miners begin dumping their BTC to cover costs, further flooding the market with supply and resulting in greater price slashes.
However, as smaller miners capitulate, the difficulty continues to drop until the market stabilizes. Historically, once difficulty increases again, the market finds a bottom, and the price begins to rebound.
Bitcoin Mining Difficulty Quandry
As the chart above indicates, the difficulty has increased by 2%, a signal that suggests miners have stopped exiting the market. The previous drops in difficulty could well have been capitulation, but it may be too early to confirm.
With the increase in difficulty, the chart shows that the price generally follows in a positive trend. Points of inflection like these in the historical chart have always resulted in dramatically bullish runs.
In fact, the previous three longer bull runs have followed such changes. As the miners re-enter the market and the price stabilizes, the hashrate increases and prices begin to surge.
Just a Blip?
Others, though, see the difficulty changes as a simple outlier. Rather than seeing a re-entry point for smaller Bitcoin miners, and a bottom in the market, they see a blip on the overall chart.
These detractors suggest that the drop in price reflects the substantial miner capitulation. This process has not stopped until the price rebounds for the first time.
Until the price swings back to the positive, smaller miners must remain on the sidelines, unable to afford to run out-of-date machines. Once the price increases, they are able to re-enter.
While this scenario may be the case playing out now, the only marker available for miner activity is difficulty and hashrate. The first indicator of mining motions into the market is the difficulty adjustment. While this is no guarantee, astute observers will be able to determine what will come next based on hashrate adjustments moving forward.
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