On-chain analysis to help gauge market conditions

On-Chain Analyst Introduces Difficulty Ribbon Metric

On-chain analyst and partner at Adaptive Fund Willy Woo has introduced a new metric to help traders gauge bitcoin market conditions. Called the Difficulty Ribbon, the metric consists of eight different simple moving averages of the difficulty level of mining on the Bitcoin network.

The metric is based on the link between changes in the difficulty level of Bitcoin mining and the selling pressure provided by miners in the market. When the ribbon compresses or moves negative (lagging drops in the actual difficulty level), it represents inefficient miners leaving the Bitcoin network. 

These inefficient miners represent a large source of selling pressure in the market as they are required to sell large amounts of their block rewards to meet production costs. With these miners halting operations, the network is left with more efficient miners who sell less of their block rewards. 

When the ribbon compresses or turns negative, it indicates there will be less selling pressure from inefficient miners moving forward leaving only more efficient miners operating at higher margins. These higher-margin miners are expected to sell less of their block rewards on the market. Willy Woo notes that this phenomenon is typically observed at the end of a bear market.

“Typically we see this at the end of bear cycles, after miners capitulate, the lack of miner selling pressure allows the price to stabilise and then climb; the classic accumulation bottom.”

Willy Woo, source: Twitter

Source: Twitter