Topic: [CHART] Correlation Between Bitcoin Price and Difficulty - page 2. (Read 7463 times)

If difficulty were 1, it would mean something like 7.143 MH/s are mining bitcoins.  I would assume this would mean price would fall since only one person would be mining at that point. I don't think you can separate difficulty from the picture for any thought experiment.  Difficulty to me is used as a field leveling mechanism. It's so no one person can monopolize. They would have to keep adding more equipment, power cost, time, and labor to get the same amount of BTC as before.

I think it is safe to say difficulty determines price and price determines difficulty. I think the argument is whether or when are they leading indicators or lagging indicators. What do I know though?

Okay, let's set BTC difficulty = 1 and see what happens to the price.

If someone makes the argument that difficulty doesn't (or hardly) affect price, then we should be able to set the difficulty to whatever we want and it won't make much of any difference whatsoever.

Here's a knockdown, simple argument for difficulty affects price -- get rid of the difficulty adjustment algorithm altogether and watch what happens to the price.  If price isn't affected by difficulty, then it should be able to sustain itself in the total absence of difficulty adjustments.

If you aren't a miner but invest in BTC and don't care about difficulty, then you might want to reconsider your investment strategy.  Non-miners should absolutely care about difficulty, for many reasons (e.g. Network security, indicators of community interest and market sentiment, etc.).

The argument that price causes difficulty is a simple one:  Look, price went up, mining is profitable now, let's mine.

I don't know of such a simple argument for the other direction, that is also not an argument for "price increase causes more price increases".



(Your example actually shows decreasing supply, but that's close enough.) 

Also, this argument can also be used in the case of "price is skyrocketing, I better hold onto my coins", which becomes self referential argument, and is the main reason why bubbles form, and also why investment scams and ponzi schemes exist.

So I can't really say that this backward looking (difficulty causes price), or self-referential logic (price causes price) doesn't work.  It works for some time, until it stops working.

The problem is you spent BTC to buy the mining equipment. If you would have spent $700, you would have made a profit. Now, is BTC all they would accept? I don't know. I was not involved.

It's kind of but not really like saying you sold 1000 shares of AAPL at $70 each in 2006 to buy a new BMW when you only have to sell 127 shares today at $550 each to buy a new BMW. Should you have held on to those share? Yes, you could by 7.8 BMW's with your thousand shares today.  In your case you sold stock to buy stock. This will always lose as long as prices continue to rise. If price went down, you would be right. Although with BTC you have difficulty increasing causing people to spend more $ to get the same amount of BTC. This is why I think the price will continue to rise.  With more and more business' accepting BTC, it's not going away soon and most people will only be able to buy bits of the coin than boat loads of money on mining equip. up front.

Only miners care about difficulty, so if you are a miner then you might care, but nobody else does. Besides, difficulty does not affect the total number of bitcoins or the number of new bitcoins, so there is no reason why it would affect the perception of rarity or value.

Difficulty may have some small effect on the market supply because miners may react as group in response to the difficulty. However, contrast the number of new bitcoins to the volumes on exchanges and you will see that miners must only be a small portion of the market.

Are people really still suggesting that price affects difficulty but not vice versa?  It's pretty absurd -- difficulty affects our perceptions about how rare or valuable a coin is.  All it takes is one case of somebody saying something like "difficulty is skyrocketing, I better hold onto my coins" to demonstrate that difficulty affects price (in this case, by increasing demand).

A decrease in quantity of BTC you would likely be rewarded? ]That's the only thing that matters if you're mining...along with your costs, which you can't pay in bitcoin. You have to pay it in dollars. So then the price down due to mining costs that mestar points out put an even greater downward pressure on the exchange rate of bitcoin.

You make it sound like a decrease in your mining output is not a big deal. So, what then? The miners just keep mining and say, "Oh well, my output is now significantly less"? You first.

Miners will cut losses, more and more awareness will spread about the unlikelihood of mining profitability at current difficulties/current cost(s) of mining, and the cycle may or may not continue.

New, fresh buyers will pump higher and higher amounts of cash into the bid price on the exchanges long term only if they believe that bitcoin is a good store of value. Not with regards to the network hashrate.

A perspective to add to the difficulty:price debate: exchanging currency for bitcoin in an exchange that waits a significant amount of time to allow that transaction to be proven in the registrar is significantly less expensive than instantly purchasing them instantly off of Ebay, for example.  I have not checked on the success or exact rate difference of these auctions, but the price differential between an instant (assumed more risky) exchange and an exchange that that has a much higher liklihood of being proven in the registrar was telling me there is still a major demand for BTC even at much higher prices.

Also to consider:  If a greater total hash rate (greater difficultly) does directly increase the value of a bitcoin, mining returns would only decrease in quantity of BTC you would likely be rewarded.   I feel as though a greater total hash rate WILL improve the exchange rate of national currencies to bitcoin, in favor of the bitcoin.  However, I also feel it will promote the micronization of bitcoin denominations.  This in turn,  I theorize,  will increase proliferation and accessibility of the currency;  which could serve to increase the intrinsic value of what bitcoin stands for.  This means more transactions in the registrar that need confirming... I would keep going but it's all theory and I think you can see my point by now.

I guess I should clarify this.

I pre-ordered from BFL and we all remember that debacle. Unless a unit is -IN STOCK, ASSEMBLED, READY TO SHIP TODAY- then it probably isn't worth it from a breakeven BTC standpoint. I spent 65 BTC on miners that would never mine 65 BTC. We can postulate that if they were in stock at the time that -maybe- they would have made close to 65BTC, but the nature of mining is diminishing returns at its finest. Every difficulty change yields less and less. If you have any question about this just fire up the genesis block; insert some conservative figures for shits and giggles and you'll still never see a positive BTC return. With all the new mining manufacturers and die shrinking we are probably facing another 1000x difficulty increase very soon. I will absolutely -never- pre-order a miner ever again, and if I happen to have spare cash I will just buy BTC instead from now on. YMMV but that's just my two satoshis.

But others will, so, who cares what that bugger's cost was.   Market determines price, cost is irrelevant.

However, once market has set a price, the cost will tend to go somewhere close but still below that price.  So, price causes difficulty. 

But, this also confuses many people into thinking that difficulty causes price, and markets being what they are, that thinking can actually cause the price to rise, when people think it should rise because of the difficulty rising, even if difficulty increase is caused by other reasons like change in mining tech.  Therefore, bubbles. 

There is an another mechanism, although a slow one, that regulates this positive feedback loop, see here:
https://bitcointalksearch.org/topic/miners-running-costs-must-pass-trough-exchanges-this-limits-the-bitcoin-price-414657

Ok, why did you not buy the miner for $700 and mine a whole bunch of bitcoins which would be worth quite a bit today? At the end of the day, I think and I hope BTC will continue to rise in value.

That's the point people are missing. Also the flipside which is if it costs some bugger $1000 to mine a coin, he ain't gonna sell it for $100 either.

I spent $65,000 (65 BTC) for a 60 GH/s single upgrade.
Technically back in September I only spent $700 based on the exchange rate, but you see the problem here right?

Mining is definitely not profitable.

People always say this but never provide the numbers to back it up. Please show me how profitable it really is. How much did you pay for your equipment (in bitcoins)? What is your hash rate? How much have you mined so far?

I mine....and I have grown to the point that I can't believe this is happening. Its quite profitable.

yes but if difficulty goes down following the price, at wathever price, mining restarts because it always brings profits fore someone (in terms of bitocoins) and we are back to 2011 then the process follows the very same pattern with miners investing their good dollars to buy power to mine useless coins just because some of them mines better than others.

The amount of newly mined bitcoins is a very small fraction of the total supply (3600 mined per day vs 187,000 traded per day), so it can't have any significant effect on price.

If you think that mining bitcoins is a cheaper way to get them, then I'll bet that you haven't looked at what's available and done the math. While it may be possible to buy mining equipment that will generate a profit, most people do not or can not.

It doesn't matter. If it costs $1000 to buy a bitcoin, but $1100 to mine it, then there is no incentive to mine. Why would someone pay $1100 to mine a bitcoin if they could just buy it for $1000? If the price goes down, miners stop mining, so the difficulty goes down. If the price goes up, then miners mine more because it is more profitable, so the difficulty goes up.

Here is a simple example of how to lose money by mining:

Let's suppose that you have a graphics card with a hash rate of 300 MH/s and a power consumption of 100 watts, and electricity costs $0.10 kWH and 1 BTC is worth $1000.

At the current difficulty, your card will mine $0.20 per day. It will consume 2.4 kWH, which will cost $0.24. If you mine with this video card, you will lose 4 cents per day.

"Not so!", the newbie cries out, "What if the price of BTC goes up?"

Alright, at the current difficulty, your card will mine 0.0002 BTC per day. It will consume 2.4 kWH, which will cost 0.00024. If you mine with this video card, you will lose 0.00004 BTC per day. You are better off buying it than mining it.