Bitcoin Price Analysis: Hash Rate and Central Banks Point to Sustained Recovery

Bitcoin (BTC) succumbed to a fresh wave of selling Tuesday, undermining the latest effort by the bulls to push prices toward new yearly highs. Beyond immediate price action, the Bitcoin network’s recovering hash rate suggests that a firm recovery was underway.

BTC/USD Update

The bitcoin price dipped below $4,000 on Tuesday, dragging the cryptocurrency’s market capitalization back below $70 billion. At the time of writing, BTC/USD was down 1.9% at $3,944.00, according to CoinMarketCap. That’s the lowest level in eleven days.

On most individual exchanges, bitcoin’s exchange rate was seen hovering in the $3,880-$3,890 range. Bitcoin has seen a sharp drop in momentum, based on the daily relative strength index (RSI). Price action is also weakening but remains supported by the 50-day moving average.

Short-term, the BTC/USD exchange rate faces immediate resistance at $4,000, a key psychological level. This is followed by $4,200, which represents the high from December. The bulls have failed to overcome this level during the last three major rally attempts going all the way back to December.

Bitcoin reported daily trade volumes of $10.8 billion, according to CoinMarketCap. Its dominance rate improved to 50.9% as altcoins and tokens declined sharply.

Bitcoin Hash Rate Resumes Climb

The Bitcoin network’s hash rate has been rising gradually since the year began, moving in lockstep with mining difficulty, which has been adjusting higher since the most recent leg of the bear market. By Monday, bitcoin’s mining difficulty had reached the highest level since December 1. The following chart from Blockchain.com shows the extent of the climb in mining difficulty since December.

At the same time, the network’s hash rate spiked earlier this month to its highest level of the year. It has since moderated somewhat but remains well above the bear-market low in December. As of Monday, bitcoin’s hash rate stood at 46,933,021 TH/s. It peaked at 52,493,405 TH/s on December 18.

Bitcoin’s mining difficulty plunged in November and December as the network’s hash rate dropped. As Hacked reported at the time, declining hash rates triggered an automatic drop in bitcoin mining difficulty. When mining difficulty rises, it means miners are deploying more hash power into the network. This relationship is largely based on how well bitcoin’s price is performing and how confident miners feel about the market’s trajectory.

With hash rate and mining difficulty taken into consideration, bitcoin’s outlook appears to be improving. And despite all the speculation that cryptocurrency exchanges are faking volumes, market activity is clearly on the rise. This extends far beyond the virtual exchange market and into derivatives that are accessed primarily by institutions. Bloomberg estimates that “private bilateral contracts” on bitcoin average anywhere between $125 million and $500 million per month. The bulk of the activity has occurred in the last six or seven months.

Central Banks: The Unlikely Catalyst

A recent article by Forbes brought attention to central banks in fueling the next leg of bitcoin’s recovery. Citing recent comments by Garrick Hileman, a blockchain researcher at the London School of Economics, the article suggested that bitcoin’s status as ‘digital gold’ could lead central banks to adopt the asset.

“The main use for bitcoin today is as digital gold,” Hileman, told AltFi’s Crypto For Earthlings podcast. “The question is though, who will be buying digital gold? If central banks start to accumulate bitcoin, that could be hugely impactful on bitcoin’s price.”

Hileman added that regulatory developments have “helped legitimize bitcoin” rather than stall its adoption. Although China has introduced a blanket ban on bitcoin trading, holding the digital asset is not seen as a crime. Meanwhile, U.S. regulators have definitively ruled out bitcoin as a security, easing some concerns that it may be treated as such.

Central banks, once on the path of monetary tightening, have been forced to take a step back in recent months. An ongoing U.S.-China trade war, slowing global growth and political chaos in the form of Brexit have weighed heavily on national and regional economies. The International Monetary Fund, World Bank and Organization of Economic Cooperation and Development have all downgraded their forecasts on global economic growth.

As Hacked recently reported, economic headwinds have also reached U.S. shores and have been amplified in the bond markets. On Friday, the spread between the 3-month Treasury bill and 10-year note inverted for the first time since 2007. Economists usually take this to mean that a recession is on the way.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

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Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi

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