Topic: Before the next big rise, I just wanted to get my two cents in - page 2. (Read 6361 times)

Since I sort of started this argument, let me clarify that I wasn't suggesting price as the *only* factor in difficulty. However, we will not sustain the current difficulty if the price drops to $0.50 like it was early this year -- we might eventually reach this difficulty again if the price were that low, but it would take much longer than what we saw with the bubble.

Even in the absence of new users, the difficulty would tend to slightly increase on its own. As pointed out above, the impact of advancing technology means there will always be more hashes per second for the same investment in equipment and energy expenditure (until Moore's law breaks, if ever.)

Exactly!  And that's all I'm saying really.  The whole "price follows difficulty vs. difficulty follows price" arguments are silly, because IMHO they're both wrong.  You could argue back and forth which one holds a lesser degree of "wrongness" I guess, but at that point you're just arguing on the internet.

Organic growth.  Difficulty is certainly moved by price, but price is not the only factor.  Back then, each new user was significant with their CPU mining.

If difficulty is moved by price, then what caused difficulty to increase before there were Bitcoin exchanges?  

The point is that clearly, it is price that influences difficulty, and not the other way around.

In particular, the price has dropped from $30 to $3. I find it odd that anyone would try to suggest any other factor as having anywhere near the influence on the difficulty drop as price.

When the price-follows-difficulty versus difficulty-follows-price issue crops up, I'm not going to interject that difficulty follows hash rate, which technically follows price, new game releases, and weather. I'm going to state that the correct assertion is that difficulty follows price.

Doesn't that make sense?

I see in price (BTC value) in there.

So then difficulty is moved by price, rather than the other way around, yes?

Network hash rate follows the amount of processing power dedicated to mining, period.  Since the peak in June there have been a number of different factors which would cause people to stop mining and subsequently cause the hash rate to drop off:

1. New content releases in WoW
2. Diablo III beta opens
3. Exchange rate for Bitcoins dropping
4. Battlefield 3 & Modern Warfare 3
5. Peak of summer when electric bills are highest

The list goes on, but nobody can (with a straight face anyway) lay claim to any single one of those factors as being the one that causes the network hash rate to drop.

Mining profitability based on energy cost, hardware cost, advances in hardware/software, BTC value, ROI.

And what does network hash rate follow?

Difficulty follows network hash rate, not price.  And adjustments take place every 2016 blocks, not every 2 weeks.  I prefer precision to assumptions based on anecdotal evidence.

But for how long? Difficulty adjustments happen every 2 weeks, and people don't just start mining in a couple minutes on a whim. It takes a while for new miners to get through the pipeline. And even though a miner can turn off his rigs at will, the decision to do so (never mind getting rid of equipment) can also take a while, and isn't always immediate.

So a response to a price rise isn't instant... what we saw was the slower difficulty rise in response to the high prices override the (potentially pretty fast) difficulty drop in response to price drops.

In the end though, difficulty HAS come down, and is continuing to come down. There's just a lag between the price's affect on difficulty.

Not quite sure where this is going, but I'll try to address it.


Well, I guess I do, in a sense. I mean, someone may mine bitcoins at a cost of $4/btc when the Mt. Gox market shows $3/btc, but if they keep doing it, is it really fair to say they aren't profiting? They're doing it for some reason, whether for the anticipated future profit, or because for them personally the cost of going through Mt. Gox works out to over $4/btc (or is just impossible), or just for the personal enjoyment as a hobby, which is worth the extra $$$. I don't see the relevance, because if they continue to mine, even "unprofitably", then they don't affect difficulty anyway.

If they are not (present tense) mining, then they aren't miners... they are either buyers or someone sitting and watching from the benches, so they aren't relevant there either.

If they were mining, but stop and walk away due the price dropping relative to the difficulty, then their demand has been reduced, and they help lower difficulty, and lower price as well by allowing the coins they would have mined and kept to be available for others to buy.

If they were mining but stop and start buying, due to the price dropping relative to the difficulty, then they help lower difficulty, but do not impact the price. If they were mining 50 coins a month, but stop and instead have the same demand, and buy 50 coins a month at the current price, then the remaining supply of available bitcoins doesn't change, and the price stays the same.

At no point would the action of these "unprofitable" miners raise the price.



So you're saying that there are new people who want bitcoins. That would be increased demand then, wouldn't it?

Increased demand is what pushes up the price. ("I expect bitcoins to be $100 soon, or more if the dollar collapses! I want some!" so they buy more and take them off the market, reducing supply and driving the price upward.)

And this increased price--even anticipation of it--is what drives more people (sometimes those same people!) into mining, which drives up the difficulty.

That basic logic is problematic =)

When difficult is high and price is low, miners will stop mining, and the difficulty will fall.

Mining will always tend toward zero-profitability, and will never affect pricing in any significant way or for any lengthy time.

I think this has been proven to be not exactly accurate.  For instance as the exchange rate went from $30+ down to around $7 or 8, the difficulty did not drop at all.  In fact it kept on rising to ridonkulous levels.  That being said though, when we reached a point of diminishing returns, where people were barely breaking even, then yeah difficulty becomes more sensitive to the current fair market value.  Anything beyond that break-even point though, and the relationship between price and difficulty become even more distant.

There are two factors at play when considering the difficulty:
1) The miners that can mine at present prices not at a loss.
2) The miners that can't mine profitably at present prices.

Do you deny that #2 exist? If they do exist, what are they doing with their coin?

What kind of effect is that having on the supply?

#2 exist because there are investors (and will be more) out there that see that Bitcoin is secure, fast, and global and they are willing to hold that kind of a currency, even if it costs them more in fiat government money today, because they know the fiat government money isn't necessarily always going to be around. It's essentially a risk vs. reward decision. And I'm saying there are large financiers right now in global banks and political positions that have a lot of this fiat money that might throw $3 million into an FPGA array for no reason other than "risk".


No, I am confusing nothing, Bitcoin is global. World GDP is an "at minimum" of currency that has exchanged hands, if I used actual money exchanges instead of just GDP we'd pass $100 trillion USD quite quickly. But in the far future, if we assume Bitcoin is going to be around, more than 21 million Bitcoin will exchange hands per year.

Remember, I'm using all minimums here and I'm also only using 1%. IMHO, these are VERY conservative estimates.

Price drives difficulty; the reverse happening is merely an illusion.



The idea that the price automatically rises, at all, during a high-difficulty low-price situation, or falls during the reverse situation, is faulty.

As the price falls relative to difficulty (a "high-difficulty" situation) so that the price is too low for miners to profit, miners stop mining and the difficulty drops. If the price rises relative to difficulty so that mining is more profitable, more miners jump in and difficulty rises. Difficulty adjusts itself to price as miners leave/enter the business.

But note, as long as his demand for bitcoins remains the same, a miner won't impact the price at all by shutting off his rig and buying instead. Similarly, as long as his demand for bitcoins remains the same, a buyer won't impact the price at all by choosing instead to mine with enough power to satisfy his demand.

Since I decided to look it up, thought I'd drop a link in here: http://www.321gold.com/fed/greenspan/1966.html

I  saw the nodes declining.


It's hard for a new user to run a new client,
i know this because i've tried install new clients from the begining these days.

To say that difficulty "dictates" price is too strong.  I've always said that the relationship is a two-way causality.

Its just basic logic that when difficulty is high and price is low, if someone wants bitcoins they will buy them (and push up the price).  Conversely, if difficulty is low and price is high, mining them is cheaper.  I charted this oscillation (see my sig).

The correlation, however, is quite loose.  That's why price skyrocketed far beyond difficulty, and then plummeted far below the cost of difficulty (electricity + equipment).  I expected the correlation to be tighter (that difficulty would support a higher price floor), but price has turned out to be too volatile. 

I have to accept that of the two, price has been the primary driver.  I hope I don't have to wait until 2013 for more evidence of the flip side.



It would be nice and rational if the correlation was tighter, because then speculators would more readily accept difficulty as a "fundamental" measure of the bitcoin economy.  But the market is not necessarily rational.  And getting its participants to collude is not easy (especially if you aren't extremely well-capitalized), even if it is for the greater good.