July 21, 2024


According to an indicator called Production Cost Floor, the $17,000 level should serve Bitcoin as support in the event of a price breakdown. Moreover, historical data shows that the BTC price has almost never fallen below this indicator.

In today’s analysis, BeInCrypto looks at the historical performance of this indicator and parallels it with the bottom of the previous 2018-2019 bear market.

In addition, we compare it with another on-chain indicator of miners’ activity called the Difficulty Ribbon Compression, which has just broken out from the overbought area. Usually, but not always, this event was a signal of an upcoming bounce of the Bitcoin price.

Bitcoin Production Cost Floor at $17,000

Charles Edwards is a cryptocurrency market analyst and founder of the Capriole Investments fund. He uses the Twitter account @caprioleio, which currently has more than 80,000 followers. He 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 price of BTC based on the activity of the computing power of the Bitcoin network.

In his Monday tweet, the analyst pointed to another indicator of mining activity. He called it the Production Cost Floor for Bitcoin. The idea behind the indicator is that Bitcoin is undervalued if its price approaches or falls below this level (red line).

In the comment, he added that currently, the indicator has reached levels near $17,000. Moreover, he stressed that the indicator is currently rising. This increases the level of the minimum price, below which the cost of approving new blocks and producing BTC coins is unprofitable.

Source: Twitter

Looking at the price action in the context of this indicator, we see that since 2017 the price has almost never fallen below the Production Cost Floor. The only notable exception to this is the March 2020 crash as a result of the COVID-19 pandemic. However, 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 2018-19 bear market bottom (blue area). 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 exits the oversold area

There are other indicators of miners that provide a rather complementary take. We are talking about the so-called Difficulty Ribbon Compression. This indicator is relevant in the context of Edwards’ analysis since his famous Hash Ribbons are also based on miner parameter bands. The difference is that the former is based on mining difficulty ribbons, while the latter is based on hash rate ribbons.

Thus, Difficulty Ribbon Compression is an indicator that 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 bottom of the BTC price or the period before the start of the bull market (blue areas). However, a notable exception is the 2020-21 rally peak with the historical ATH at $64,850 (red area). At that time, the indicator stayed in the overbought area almost all the time – both when Bitcoin was surging parabolically and when it corrected in May 2021.

Chart by Glassnode

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 several-month bull market in BTC.

However, 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). Thus, if Difficulty Ribbon Compression increases decisively in the coming weeks, this could initiate a rally in the Bitcoin price.

Chart by Glassnode

For BeInCrypto latest Bitcoin (BTC) analysis and crypto market analysis, click here.


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