The difficulty of mining a block of Bitcoin dropped substantially near the end of 2018, and, according to analysis, may indicate the start of a long bull run. After each substantial difficulty drop, the price began an extended positive cycle. The information was charted on Twitter by user PlanB.
The cause of the difficulty decrease after all time high (ATH) prices is related to the nature of the network itself. Bitcoin mining is designed to be self-regulating.
Bitcoin blocks are scheduled to be mined on a regular time table, with 2016 blocks being created every two weeks exactly. When the block generation time takes longer than two weeks, the difficulty adjusts down, and when it takes less than two weeks, it adjusts up.
During long bull runs, the amount of activity on the network increases dramatically. This causes block generation times to shorten, thus causing increasing difficulty adjustments.
When the market peaks, and activity on the network decreases, the time to generate blocks increases, and sets off a cycle of downward difficulty adjustments. When this cycle reaches a climax, the difficulty drops drastically, making block generation dramatically faster.
This difficulty action signals the start of the next bull run cycle, and it occurred at the end of 2018. Prices have increased by orders of magnitude during previous cycles.
While the percentage of growth has reduced during each cycle, the price of Bitcoin at the start of this cycle is higher as well. This means that a percentage change upward would result in dramatic price increases over the next cycle path. If the chart is correct, the next bull run would peak around 100x the starting price of $3,100.
Chicken or Egg?
While the analysis is important, the link between price and difficulty may be more correlative than causative. If price is the leading indicator, and block difficulty simply follows, the connection may be just correlative.
This would mean that the difficulty chart is simply tracking the market cycles that have occurred. If this is the case, it would offer no real predictive help for future cycle changes.
Whether a predictive indicator or just an interesting observation, investors can gain important information about where the market is going. The chart is available for investors who would like to keep tabs on the difficulty adjustments.
Think the market is moving toward another ATH, based on difficulty adjustment, or does the difficulty chart simply show the price changes that occur? Let us know in the comments below!