Topic: [CHART] Correlation Between Bitcoin Price and Difficulty (Read 7488 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.

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.

i'm new to btc so i must think again about it. But i find a little flaw in this kind of reasoning: mininig is always profitable. If difficulty changes you will always keep a mark up for the traders who do not mine. so there will be always an incentive to mine and increase the overall difficulty giving momentum to the price.

I second the need for a log scale on the first graph. I also want to point out that the fact that price and difficulty are both rising exponentially does not indicate correlation.


I believe that your assumption that difficulty affects price is incorrect, and that your graphs do not support your assumption. Correlation is not causation. You can't assume that difficulty affect price just because there is a correlation.

Simple logic demonstrates that there is a loose correlation between price and difficulty, and that difficulty depends on price (and not the other way around). Simply stated, the total hash rate (and thus the difficulty) rises or falls depending on the profitability of mining. Miners (at least the rational ones) won't mine if it is not profitable. If the price falls, miners will stop mining and the difficulty will fall. If the price rises, miners will mine more and the difficulty will rise.

What complicates the correlation is the change in the efficiency of mining in terms of the cost. Because of advances in mining technology, the efficiency of mining has increased dramatically, and in waves. If you adjust for the change in efficiency I'm sure you will see a correlation.

I've thought about this also... I think the price of mining could be an anchor to the price of bitcoin.

Why would someone pay $10,000 or $20,000 for a single bitcoin if they can buy a mining rig for, say, $15,000 which will get them a bitcoin in, say 6 days. If a single bitcoin will really be worth $100,000 or so as some have claimed, wouldn't it be logical to think a mining rig for producing a bitcoin would have to be about the same price? And if that's true, how high would the difficulty be? How much power consumption are we talking about?

Am I missing something obvious?

Great suggestion Meanwhile, you can zoom in to the graph to see the data better.

That first graph would be better if you made it a log scale so that we can actually see the data from before February.

To better investigate the relationship between Bitcoin price and difficulty, I made the following interactive graph.

Live graph: http://bitcointrends.herokuapp.com/

https://s3.amazonaws.com/bitcointrends/graphcaptured.PNG
https://s3.amazonaws.com/bitcointrends/ratiograph.PNG

It seems there's a direct correlation (as expected) between Bitcoin price and difficulty. I assumed that difficulty is one of the
biggest factors that affects bitcoin's price, and the graphs seems to support this assumption. What's more interesting is the graph
that compares price and difficulty/price. Do you think it is reasonable to indicate whether bitcoin is overpriced from studying this graph?

Live graph: http://bitcointrends.herokuapp.com/