Topic: [CHART] Correlation Between Bitcoin Price and Difficulty (Read 7502 times)

Yes high difficulty is no guarantee of anything. BTC can crash at any moment.

BUT BTC's ability to rise is severely hindered while mining is super profitable. Once the profitability gap closes, it has the chance to start rising again.

Because bitcoin is still quite top heavy with lots of coins in few hands high difficulty is no guarantee of high prices.. in panic situations people will sell stock at a loss to avoid further losses.  There's no guarantee that won't happen here. Actually a plunge to $400 would be healthy and shake out the weak hands while introducing potential new investors such as myself. Not buying and holding at 800.. there are numerous alt coins I'd rather hold at this point. Bitcoin is the default coin that people who trade alt currencies ultimately hold when selling at the moment however.  Exchanges like cryptsy don't let you sell into "USD" yet.

Listen here boys and girls:

Mining Profitable most certainly has an effect on the price of BTC.

If there's 100 miners getting 3600 coins a day and I'm interested in getting some btc but I have to pay $800 a piece for them OR I could buy a miner for $2000 and earn $4000 worth of BTC over the next couple months. What would be the smart play? Obv I'm going to spend my money on miners, not bitcoin. SO my money DID NOT funnel into bitcoin. Money funneling into BTC is what makes it rise.

Then the next scenario is mining is tapped out and there is 1 million people mining and you want some BTC and could pay $800 a piece for them OR buy a miner for $2000 but you will only earn $1000 of that back in the next 6 months and then the electricity will cost more to run it then you earn. What would be the smart play? Obv I'm going to buy bitcoin on an exchange.

So does it not make sense that mining profitability would have a direct influence on the price of BTC?

The less profitable BTC is to mine, the better it's chances are to rise.

If BTC is super profitable to mine, it will stop going up until it makes more sense to buy BTC then buy a miner. Many of these miners are also purchased with BTC who's producers then sell the btc on the market which also adds more downward pressure.

Looks like price is going up after the difficulty went up.

And I am sure you will say it's just an anomaly. A fluctuation to other factors.

Well I bet if you pull a 5 year chart with 10 day bars of price and draw a trend line, and then do the same with difficulty, they will look something like this:   /

I guess you missed the point.  I created the exact situation that is happening in reality. (Also, I don't remember dividing anything by one.)

That magical being is called Moore's law, and its current nickname is ASIC. 

Look what happened in the period when difficulty went from 0.6 million to 2.3 million: price fell from $1200 to $800.   Should we conclude that increasing difficulty actually causes the price to fall?

Or should we say that the situation that the miners' costs of creating one bitcoin are 10% of one bitcoin, so difficulty should go up?  It will go up because new mining hardware will be created and turned on.  When the price fell from 1200 to 800, it just means cost went up from 10 to 15%, so, still more hardware can be, and will be, added.

I can safely predict that difficulty will continue to rise until the mining cost (running costs) get to 50%, and at that point it can still rise, but not much.


So, you say that difficulty causes price.  We know that in the next 10 days difficulty will go up, perhaps 30%.  Based on this, and your model, where will the price go? 

price is set by the marginal supply and demand.  mined coins are the only source of new coins, and determine the marginal supply cost.

It's no a rule. "A difficulty drop" is the same news like "mtgox is planning to add litecoins" or "china banned bitcoins".

No it isn't. He did the same thing as taking bunch of numbers dividing them by one and saying, "see nothing happened".  You guys forget that there is a market for bitcoin beyond only those who mine.  Miners control difficulty first and then price and non-miners control price first and then difficulty.

What would happen if Bill Gates wanted to invest in BTC with $12 billion dollars.  He will drive the price up which will in turn bring in new and more miners resulting in mor hashing power. What if he decides to sell BTC short $12billion worth? Price will drop and miners will stop mining because it would be cheaper to buy the BTC thus creating less hashing power and then a lower difficulty.

On the flip side at some point the costs of one BTC has to equal power, time, equip., Internet, trans fees, conversion fees plus the time value that money to mine just 1 BTC.

Who knows? This is like debating TA vs. fundamentals for stocks. Very interesting. I am not even sure I remember what I was arguing for or against because it seems it could be both.

Are you speculating, or do you have evidence to back up this claim?

Also, the long fall in price from 5 to 2.5 coincided with a steady increase in difficulty and the huge drop from 50 to 10 coincided with a huge rise in difficulty. I think there is really no correlation at all.

Take a look at last litecoin difficulty drop:



The price correlates with difficulty because people think that price correlates with difficulty. :)

All it takes is one person who says "I altered my investment strategy due to changes in difficulty," whether that means the person bought in, withdrew, bought/sold a miner, etc., and you can establish that difficulty effects causal changes on price. 

I am one of those people, therefore difficulty affects price.

I think it's actually a great example.

It's strange how it seems that the majority of bitcoiners either don't understand what difficulty readjustment actually does, or just really, really want it to work in a way that means a huge valuation of the bitcoins they currently have.

The supply of bitcoin is constant. The difficulty readjustment keeps it so.

It's also interesting how so many people keep talking about stingy miners' practice of "hoarding coins" somehow infers that an indirect change in supply automatically drives the price of bitcoin up. There still has to be a demand for bitcoin, and the buy side of the exchange has to continue to pump in more fresh cash to drive the price up. Sure, when miners are selling like crazy it puts downward pressure on bitcoin - that much is true. But the opposite does not automatically drive the price up.

This is a terrible example.

Hashing and difficulty are directly related. Increase hashing means increase in difficulty no matter what.

If somebody somehow right now changed difficulty to 1, it would take some time for the difficulty to get back to what it is now.  We would probably have a storm of new block and orphaned blocks, first adjustment would probably happen in the first millisecond.  And since adjustment is limited to a factor of 4, next diff. would be 4, then 16, and so on, back to 2 billion.  You would have quite a large amount of extra mined block awards, but sooner or later, difficulty would get back to where it is today.  Price would probably fall due to the extra supply.

What did you think this example would show?

If you get rid of difficulty adjustments, you would have something similar, but not quite like Bitcoin.  Depending on your fixed difficulty, all 21 million bitcoins would be mined quickly, if diff. was low.  Then we would see how the network would work with just transaction fees and no block awards.  This would be pretty interesting to see.

I can give you a direct example of how difficulty does not cause price.

People mine with GPUs and price of Bitcoin is $30.  Suddenly a magical being switches everyone GPU that was used for mining into an ASIC card, that has the same power usage, just 100 times more hashing power.  This magical being also switches the difficulty to be 100 times bigger on the exact last block where difficulty usually adjusts, so no 2016 block adjustment period is observed.

Miners who were not paying attention for the next couple of months would not see any difference, their costs are still the same, their share, and thus the number of Bitcoins is still the same.  Nothing changed for them.   Exchanges would not see any difference, still the same number of coins is being produced each two weeks, so supply from miners would be the same.  People who trade Bitcoins and did not pay attention (and did not look at the difficulty numbers) would also see nothing has changed.

So, we would see the difficulty increase 100 times, yet no 100 tomes increase or decrease in price.  Tell me again why should difficulty changes cause changes in the price?

OK, some people may think, like you, that increase in difficulty should increase the price, and if enough people think that, the price will indeed rise with the difficulty.  But this is all in the perceptions, and hard to model.  The price will rise, even if enough people think that it will rise, no need to involve difficulty at all.

As for it being a part of Bitcoin that gives it value:  every part of Bitcoin works together, you can't take out anything and still have it work.  Difficulty is definitely not *the key* part that gives it value, I would say the key part is how it all works without central authority, all all parts together enable that property. 

I have a feeling that you are actually thinking of hashing when you say that it is the key part.  But, again, even hashing is just a way to get unchangeable history, and sure this is a key part of Bitcoin, but, again, all other parts work together, you can't just name one part and say that it is the part that gives bitcoin value.

You don't think that enabling price is affecting it?

That was the first half of the argument.  The second half is basically saying you either have to assert price affects difficulty and vice-versa, or that neither affects the other because users directly cause both.  Difficulty and price aren't people that can go off and act on their own; users make that happen.  Users are influenced by both difficulty and price and effect changes in each.

None of what you wrote made any attempt to explain how difficulty affects price.  Honestly, none of it made any sense, either.

Literally two posts before you, I gave an explanation that isn't among the two you listed.


Difficulty is more than just a number, it's a part of the very mechanism that allows bitcoins any value at all.   How can you suggest difficulty may not affect price when the existence of price or value at all is dependent upon the mining process which is governed, in part, by the difficulty algorithm?  This isn't Ripple.

Also, price isn't just determined by buyers and sellers; it's also determined by non-buyers and non-sellers, or non-players.  How many people do you think are out there that, if placed in a scenario with a profitable set of circumstances, would rather mine digital currency for profit rather than playing the markets?  I bet there are tons...millions.  How many of these people do you think are on the fringe of digital currencies, both tempted and hesitant to become users?  Probably a small fraction out of those millions, but that fraction is likely to grow over time.  But what if the difference that determines whether these would-be, could-be miners become market players at all is the difficulty as a psychological barrier to entry?

Just look, for example, at some of the comments from new users on this forum who state that they feel the price of a bitcoin is too high to invest, even though they could purchase fractions of BTC if they wanted to -- this is an example of a psychological barrier to entry, one that leaves an impression that bitcoins are less attainable than they once were, and so could be less attainable still in the future.  Difficulty can have similar impressions (e.g. I can't compete with the big miners; a high and increasing difficulty suggests more miners are entering the market, thus leaving a smaller remainder of potential miners, etc.).  So, difficulty affects --> users perceptions affect --> price.  And of course, price affects --> users perceptions affect --> difficulty.  Users are the dynamic middle-men in the relationship, and users causally affect both price and difficulty.

Edit:  Because users are in the middle, price can also affect price, and difficulty can affect difficulty.

Then in this case, it is not really the difficulty that causes the price, but miners collusion that keeps it up.  That collusion is in practice, impossible to enforce, so, not likely to happen. 

Most miners will not mine at a loss, at least not for long.


This is also not a strong rule.  People will both mine and buy, and turning your mining off will not cause you to buy instead. 

It is not safe to say that. The only mechanisms that I have seen thus far that attempt to explain how difficulty affects price are these:

1. If the difficulty rises, then miners will continue to mine at a loss, but hold their coins until they can sell at a profit, thus causing the price to rise due to lower supply.

I agree that this effect is possible, but even if 100% of the miners follow this rule (which I doubt is the case), newly mined coins are only a small part of the market and this will have only a small effect on the market at most.

2. If the difficulty rises and miners can't mine at a profit, then they will buy instead and and the increased demand will cause the price to rise.

I agree that this can also happen, but in this case, the cause is not the rise in difficulty. The increase in demand is due to more people wanting bitcoins, whether they mine them or not. The rising difficulty is due to more demand for bitcoins and not vice-versa.