Bitcoin Price Breaks Two-Day Slide; Mining Difficulty Plummets

Bitcoin’s price bounced back on Tuesday, regaining a crucial support level following a two-day slide that was driven by technical repositioning. The leading digital currency is caught in a cycle of dumps and consolidation, signaling continued uncertainty over the short term.

BTC/USD Update

The bitcoin price notched a session high of 4,075.90 on Bitfinex, recovering from a two-day slide that drove values back down to the $3,700 region. At the time of writing, BTC/USD was valued at $4,068, having gained 4.3% over the previous day.

Aggregate data courtesy of CoinMarketCap show an average bitcoin price of $4,032 at the time of writing. Trade volumes in the last 24 hours reached $5.4 billion, with derivatives platform BitMEX processing a growing share of the transactions. This suggests short selling was a major factor in the recent downtrend.

Bitcoin’s trajectory can be summed up accurately by a recent Twitter post courtesy of Hsaka, a popular digital currency analyst:

“Dump, consolidation, dump. One of the most frequently occurring patterns on the corn, generally has three legs to it. Targeting the next blue level on a clean break of the swing low.”

For the latest reversal to be legitimate, bitcoin must continue to hold above $4,000 and generate enough momentum to test last week’s highs of around $4,500. The amount of volume in the market suggests this is possible, though the overarching presence of short-sellers is an indication that traders are keen on dumping short-term rallies for quick profits.

Mining Difficulty Adjusts for Price Drop

Bitcoin’s year-long bear market has put considerable pressure on miners, whose profit margins have been eroded by perpetually lower prices. According to recent data, hundreds of thousands of miners were put out of commission temporarily by the recent price collapse. However, their fortunes may be changing now that declining hash rates have triggered an automatic drop in bitcoin mining difficulty.

According to new data by Blockchain.com, bitcoin’s mining difficulty has adjusted lower amid the downtrend. In less than two months, mining difficulty has declined by nearly 16%. Looking back over the years, there doesn’t seem to be many comparable drops in mining difficulty, based on the following chart:

The recent drop in mining difficulty is the second largest in bitcoin’s history, according to Fernando Ulrich, chief analyst at XDEX. For the biggest drop, we have to go all the way back to Nov. 1, 2011 when bitcoin mining difficulty fell 18%.

It is generally believed that $6,000 is the minimum price threshold bitcoin must achieve for miners to maintain their profitability. Bitcoin spent the majority of the year well north of that level, including an extended period of relative price stability during the third quarter.

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.

Author:
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