Hash ribbons combine the hash rate and difficulty of Bitcoin to identify when miners are capitulating, and hence highlight optimal times to buy bitcoin.
Introduced by Charles Edwards, hash ribbons builds on his previous work on using Bitcoin’s hash rate to find bottoms in the price based on the capitulation of miners.
What are Hash Ribbons?
In short, the hash ribbon is made up of simple moving averages for the hash rate and difficulty. The hash rate is quicker to respond, as it is calculated daily, while difficulty is slower moving, as it is adjusted every 2,106 blocks (which amounts to approximately two weeks). As a result, difficulty lags hash rate. Instead of using two moving averages of the price of bitcoin, these two fundamentals of bitcoin are used to produce a similar strategy.
When the moving averages of the hash rate and difficulty cross over, it indicates that miners are capitulating. The crossover in the hashrate happens first, as outlined above. A 1-month and 2-month moving average of hashrate can be used and the best time to buy according to Edwards is when the 1-month hashrate moves above the 2-month hashrate.
This signal has been observed just nine times in bitcoin’s entire history but each time was profitable and mostly had limited drawdowns ranging between 3-15% (bar one observation where the drawdown was 45%). The average gain exceeded 5000%.
Extending this further, if an investor buys during miner capitulation when the 1-month hashrate crosses above the 2-month hashrate moving average and once price momentum turns positive (defined by the 10-day moving average of the price crossing over the 20-day moving average), the results are even better. The drawdowns range between 3 and 16% and the average gain is comparable to just using the hashrate ribbons.
How to Use Hash Ribbons
You can add Hash Ribbons to TradingView charts.
As the chart below shows, there was a crossover in January 2019 which gave a buy signal and a B is denoted for each crossover. As the chart shows, these crossovers don’t occur that regularly.
Edwards notes that a hash ribbon crossover has occurred after each of the two previous block reward halvings for Bitcoin. Since the next block reward halving is in May 2020, we could see another hash ribbon crossover sometime in mid-2020 which would provide a long-term buy signal.