Bitcoin Production Cost Floor sits at $17,000 and could serve as support for BTC price in the event of a breakdown. Historical data shows that BTC price has only fallen once below this level.
BeInCrypto takes a looks at the Bitcoin Production Cost Floor indicator and its performance. The analysis also focuses on the 2018-2019 bear market and how Bitcoin price bottomed.
We also dig into the Difficulty Ribbon Compression, which recently exited the oversold area. Usually, but not always, this event signals an upcoming bounce in Bitcoin price.
Bitcoin Production Cost Floor at $17,000
Charles Edwards is a crypto market analyst and founder of Capriole Investments. He uses the Twitter account @caprioleio, which currently has more than 80,000 followers.
Edwards became famous through the creation of the Hash Ribbons indicator, which BeInCrypto recently wrote about. This indicator generates historically effective signals of a long-term bottom in the BTC price based on the activity of the computing power of the Bitcoin network.
On Monday, the renowned analyst pointed to another indicator that considers Bitcoin mining activity. Charles Edwards called it the Production Cost Floor. It refers to the costs that Bitcoin miners have to pay to generate a new BTC token.
Currently, the Production Cost Floor of Bitcoin hovers around $17,000. Edwards stressed that the indicator is currently rising, meaning that the cost of approving new blocks and producing BTC is rising.
If Bitcoin price were to fall below the Production Cost Floor of $17,000, it would become unprofitable for Bitcoin miners to mine new BTC.
Bitcoin price has almost never fallen below its Production Cost Floor since 2017. The only notable exception to this was during the March 2020 crash correlated with the COVID-19 pandemic. This was very quickly bailed out, and the BTC price returned above the production costs.
Edwards suggests that the current behavior of the Production Cost Floor resembles the 2018-2019 bear market. In both cases, the bottom of the index was to be reached as a result of the initial crash. Whereas the subsequent consolidation of the BTC price led to a slow rise in the Production Cost Floor.
BTC Difficulty Ribbon Compression
There are other indicators that gauge Bitcoin miner activity, providing a rather complementary take. The Difficulty Ribbon Compression is relevant in the context of Edwards’ analysis. It uses a normalized standard deviation to quantify difficulty band compression.
Historically, high compression zones – the low values in the green area – have been good buying opportunities. The compression threshold here is set at 0.05.
On the long-term chart, we see that, indeed, the Difficulty Ribbon Compression in the green area was usually a good indicator of the BTC price bottom. It also marked the period before the start of the bull market (blue areas).
A notable exception is the 2020-2021 rally, with the historical all-time high at $64,850 (red area). At that time, the indicator stayed in the oversold area when Bitcoin price was surging and when it retraced in May 2021.
A closer look at the last two years shows that the breakout of the Difficulty Ribbon Compression indicator from the green area was usually a good buy signal. In the last two cases (blue areas), when the indicator decisively returned to the neutral area, this was correlated with the beginning of a bull market in BTC price.
Still, when the indicator could no longer stay above the green area, it signaled the continuation of the BTC price correction and further declines (red areas). If the Difficulty Ribbon Compression increases decisively in the coming weeks, this could initiate a bull rally in the Bitcoin price.
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