Will mining difficulty drop further? 5 things to watch for Bitcoin this week

Bitcoin may have just experienced its biggest difficulty plunge ever, but estimates suggest the next one could exceed that drop as miners continue to struggle.

Bitcoin is starting the new week in familiar territory after a solid weekend of gains ended in a sell-off. So what’s in store?

Bitcoin is showing strength as it rebounds again near $36,000, but old resistance levels remain.

Conditions were complex, with the ongoing miner migration and associated price action surprising many, and Bitcoin’s most accurate forecasting tool observing a true test.

However, with fundamentals finally showing signs of recovery, bulls may finally have something to celebrate.

Cointelegraph sees five factors coming into play for BTC/USD this week.

Stock market records and oil fights

There was another eerie "Roaring Twenties"-style mood in major markets this week as the S&P 500 hit record highs for the seventh consecutive day.

Encouraging U.S. economic data coupled with continued intervention by the Federal Reserve have driven stock indexes higher in recent weeks.

"The market is priced to continue to construct a best-case scenario," Chris Iggo, chief investment officer of core investments at Netherlands-based AXA Investment Managers, concluded in a note cited by Bloomberg.

But an interesting twist is oil, currently at the center of another OPEC+ output spree, which is itself increasing but raising concerns about how much fuel will be available in August.

With the dollar stabilizing, it seems like the narrative for stocks is the likely driver going forward, and such a scenario has traditionally aided Bitcoin’s price action.

S&P 500 1-day data chart; Source: TradingView

Fundamentals are not out of the woods yet

Bitcoin may have seen its biggest difficulty drop ever this weekend, but even that may not be enough to stabilize the situation.

At 27.94%, Saturday’s drop easily exceeded any previous one, reflecting the impact of China’s mining policies on the Bitcoin network.

However, according to monitoring resource BTC.com, the next correction could see an even bigger drop.

Since difficulty adjustments can only be estimated before they actually occur, and since there can be a lot of variability in the difficulty period each two weeks, it’s hard to say how much this metric would need to drop to reflect the true state of the network.

Given the latest downward data, mining is now significantly more economically attractive for many current and potential participants. Therefore, over the next 13 days, more miners may start operating, increasing the hash rate and thus potentially alleviating the need for further difficulty reductions.

Hash rate activity in recent days suggests that the tide may have turned, with the hash rate surging to over 90 exahashes/s (EH/s), compared to last week’s low of 83 EH/s.

However, at the time of writing this article, the estimated next difficulty adjustment for Bitcoin is 28.68%.

“After yesterday’s record-breaking -27.9% difficulty adjustment, Bitcoin’s difficulty is now similar to levels seen following last year’s halving event,” prominent Twitter account Dilution-proof noted Sunday alongside an annotated difficulty chart.
"However, the 263% increase in the price of Bitcoin shows that Bitcoin mining has become very profitable for efficient miners."

Bitcoin difficulty 7-day moving average chart; Source: Blockchain

Bitcoin price fluctuates around $36,000

There is at least one good time for a difficulty drop — once it occurs, Bitcoin price action will rise and climb to the upper limit of its trading range.

BTC/USD saw little resistance throughout the weekend, rising by around 5% before retracing.

BTC/USD 1-hour candlestick chart (Bitstamp); Source: TradingView

So, what could further limit enthusiasm? For well-known analyst Rekt Capital, the now famous two moving averages (MAs) could be a sign of a bear market in the coming days.

As Cointelegraph reported, BTC/USD experienced a “death cross” event last month. This refers to the 50-day moving average crossing below the 200-day moving average, a situation that is traditionally considered a bearish signal.

In reality, the "death cross" doesn't always lead to falling prices, but its reputation has held strong this year.

Now, if Bitcoin reaches the MA (currently floating above the spot price), the current price strength may get a taste of reality.

“Once BTC is able to break above $36,000… the next major resistance will be the ~$38,000 area,” Rekt Capital explained on Sunday, adding a summary chart.
“Not only is this a range high for the macro consolidation range that Bitcoin is in right now… but the two BTC death cross EMAs (50 blue and 200 black) will also likely act as consolidation resistance there.”

BTC/USD annotated chart with "death cross"; Source: Rekt Capital/ Twitter

Additionally, trader Crypto Ed warned on Monday that weekend gains would ultimately be lost again.

“A full-blown correction is coming,” he said, arguing that the market needs a “proper retest” of lower levels to fuel a true bull rally.

BTC/USD corrected from highs of $35,900 and rebounded from $34,000, a level that is still holding at the time of writing.

Volume fails to support bull market

The weekend rally was suspicious to those who paid attention to a classic market characteristic: volume.

Despite the rapid gains, the volume supporting them remained low, so their reliability and ability to sustain themselves were questionable from the outset.

On Monday, on-chain monitoring service CryptoQuant noted that trading volumes were still declining, indicating a continued lack of interest from major potential buyers.

“Both inflows and outflows have dried up along with market volume. It appears that whales are keeping a low profile and not making much movement,” the company said in a blog post.

“Putting pressure on either side of the market is very likely to trigger a relatively large reaction in prices.”

Bitcoin transaction volume data chart; Source: CryptoQuant

However, on Saturday, statistician Willy Woo noticed a momentary rise in the number of Bitcoin entities holding large amounts of BTC — a classic sign of whale interest that also occurs after a difficulty cut.

As Cointelegraph has reported, other investors are also participating in the spare Bitcoin supply, particularly so-called “Rick Astley” types, or hodlers of last resort.

"Mr. Astley is saying 'the short sellers are going to get hammered,'" Woo commented, adding supporting data.

Investor confidence is slowly recovering

How bearish are the average Bitcoin market participant right now?

This question is traditionally answered by the Crypto Fear and Greed Index, and if its reading this week is to be believed, then things may not be that bad.

On Monday, the Fear & Greed Index reached its highest reading in nearly three weeks at 29/100. The last time this happened, BTC/USD was heading towards its June top, above $41,000.

Fear & Greed uses a basket of factors to provide sentiment estimates for the cryptocurrency market, helping to identify when an asset is overbought or oversold at a specific price.

Its bullish tops often reach 95/100 or more, leaving plenty of room for Bitcoin to grow before “extreme greed” sets in and triggers a rout.

The index hit a low of 10/100, or "extreme fear," on June 22 before rebounding.

Crypto Fear and Greed Index 1-month chart; Source: Alternative.me