Markets Report: Bitcoin Returns to $13,500 after biggest difficulty drop since 2011

Bitcoin rose to circle $13,500 on November 3 after the biggest drop in fundamentals in nine years failed to dent enthusiasm.

Data from price trackers including CoinMarketCap showed BTC/USD unfazed by upheaval among miners, retaining $13,000 support.

Overnight on Monday, lows of $13,250 appeared before the pair regained higher levels which topped out at just below $13,600. 

Difficulty sees second biggest drop in history

Tuesday formed a significant day for Bitcoin in terms of both local and external factors. Aside from the U.S. presidential election and its associated market impact, Bitcoin saw its network difficulty decrease by the most since 2011.

Difficulty forms arguably the most important feature in Bitcoin’s self-regulating network. Higher difficulty means more computing power is required to validate blocks on the Bitcoin blockchain. Difficulty adjusts automatically every two weeks to take changes in miner participation into account.

So, as more miners participate, Bitcoin makes it harder to solve the mathematical problem required to mine a new block on its blockchain every 10 minutes. Decreases allow more miners to participate in validating transactions, as the cost likewise goes down. This in turn creates more competition, and difficulty subsequently rises. 

The net effect is that Bitcoin remains secure and stable regardless of circumstances weighing on various parts of its ecosystem. 

The latest 16% drop in difficulty is a reaction to increased electricity costs and associated exits among Chinese miners, a common phenomenon at the end of the wet season in China’s Sichuan province. 

The event, coming as BTC/USD gained in price to hit $14,000, sparked huge fee increases and increased block times—both of these should dissipate thanks to the difficulty adjustment.

“The drop in hash rate between difficulty adjustments resulted in block time slowing significantly, averaging over 13 minutes for most of November,” on-chain analytics firm Coin Metrics noted as part of a series of informational tweets on Tuesday.

“This resulted in the most recent difficulty period lasting 24,024 minutes (~16 days + 18 hrs), 19.2% longer than designed and the largest difficulty duration since 31-Oct-2011.”

DXY weakness and Bitcoin strength

Focusing on macro, Bitcoin was not alone in its renewed strength, with stocks rising as America went to the polls.

Forming a contrast was the U.S. dollar currency index (DXY), which measures USD strength against a basket of major trading partner currencies. Having reached highs of 94.23, DXY subsequently reversed below 93.6.

Bitcoin has traditionally shown inverse correlation with DXY, and decreases have come in tandem with BTC price strength. In recent weeks, however, the relationship has been notably less pronounced. 

“Get your popcorn ready; it’s Bitcoin VS the Fed in Q4. The upcoming election has widespread ramifications across the global economy (BTC not excluded),” CoinShares cryptoasset research analyst Ty Young forecast in a further series of tweets late last week.

Young noted that DXY weakness accompanied financial stimulus policies from Washington, with an 8% drop after the Cares Act in March this year and 15% after Barack Obama’s 2009 stimulus program.

“My analysis could be wrong with a Trump upset, a sell-off from fear of Biden’s tax plan, or no blue wave through the senate,” he summarized. 

“Short term volatility is a given… Out of SPY, Gold, and Bitcoin, I believe Bitcoin will perform best in Q4.”