Topic: Difficulty and BTC value (Read 3960 times)

Everyone says that miners contribute 'such a small amount of btc' that it doesn't affect btc prices but I'm a miner - and I notice patterns. I tend to sell my btc (hey gotta pay electric bills!) on the third tues or wed of each month. That's the only time I sell... It's when I am able to the most (on average) for the entire month.

As asic tech becomes more available we are going to see the price crash - no sane miner is going to sit on BTC made in a short period of time when he can sell it and recoup it's purchase cost. Since difficulty is a reactive process... we'll see ~2 weeks of coins entering the wallets of miners in a shorter timeframe. This will have a negative effect on price. But only in the short term. Once the miner has 'ROI' he'll revert to only selling the coins he needs to pay electric and saving the rest... or spending them to buy goods and services in the bitcoin economy.

That being said: If miners have an effect on price... then I wouldn't expect it to vanish ever. This is what we mean when we talk about 'adoption' there must at some point be enough transaction fees to replace and exceed the block reward (it may not happen during this block reward, but I'd expect it at after the halving and before the next one). If this doesn't happen then bitcoin will fail. Miners secure the network and if the economic incentive to do so vanishes so will most of the miners - reducing the security of the network and eventually leading to the failure of bitcoin. I would expect it to grow over time as velocity increases and more and more transaction fees are packed into each block.

~

As for adoption, I think we're in solid with the black market and organized crime... at this point all we need is porn to adopt it as a primary payment method and that will be all it takes. IMO grow the mainstream as much as we're able - but don't forget that porn should be the market we chase. It's been responsible for the so many technical advances and tends to carry them from 'geeky' to 'mainstream' in a very short time period.

I'm not so certain. At the moment I think it has quite a strong influence on the current price though its influence will eventaully go by definition.

It then depends on how well BTC has been able to convince the mainstream to accept its prescence. Personally I think its a no-brainer for acceptance as long as it doesn't have too great a volatiity, can't be cracked and can't be manipulated too easily (though we're all quite happy to accept a currency which can be at the moment viz USD, GBP etc).

There are so many arguments in favour of BTC, it would be a shame to find it doesn't gain ground in the mainstream.

I don't think anyone questions that price influences difficulty. That is almost a given. The question is whether difficulty influences price, which doesn't make sense to some (like me) but does to others.



This is what I believe is the main misunderstanding of bitcoin. Certainly when people hear that their computer can become a magical money printing machine, it sparks some serious interest in bitcoin, but mining is not the driving factor behind the adoption, use and general success of bitcoin. In some ways it's a detrimental factor (it introduces continuous inflation which investors must see as an acceptable loss).

Most of the value of bitcoin comes not from miners (typically they are only a sapping force eating away at its value) but from speculators. Is bitcoin worth the 1Billion USD that it is currently valued at? Probably not. But it is buoyed by those who want to get in at the ground floor, for something they believe will one day grow to something far more valuable than its current worth. Some are emboldened by increased adoption amongst merchants, or news reports of the success of bitcoin in some area, others hope to cash in on the soon to be demise by selling into hype, etc.

But mining by and large is its own separate entity, not completely divorced from bitcoin world, but certainly operating at an arms length.

Its that that I find interesting to speculate on. What will happen to BTC value when its no longer viable to mine without having an ASIC Thasher ?

Interest in the whole concept will wain because at the moment anyone can grab BTC for free (so to speak) but from a few months time all cpu, gpu and low hash ASIC mining rigs will be worthless. Will BTC plummet, or will it be worth more because of the limited availability (like gold). I suspect forums like this will also wain. It'll be interesting to see what happens.

My intuition says that there is a relationship, althought difficulty is just one of the aspects that could determine price and the opposite. Many other variables are involved.

Price could affect difficulty in this way:
1. Price raises
2. People gets interested in mining as it could be more profitable
3. Higher mining rate -> Higher difficulty
(opposite if price goes down)

Crazy to me that this thread keeps coming up.

If you think that somehow difficulty influences the price, then you must be buying bitcoins like crazy right now given that difficulty is nearly guaranteed to to explode by the end of the year.

In the long term the Bitcoin price could be the most important factor affecting difficulty levels, as with higher Bitcoin prices greater resources are used for mining Bitcoins, pushing up hash rates and then difficulty levels.

In the medium term those ASIC bulk chip sales from Avalon will be the main consideration. The extra estimated 84 TH/s, at around $2.8 million in chip value, could have an enormous impact on mining output and difficulty levels thereafter, expected at end July 2013. ASICminer and products from other producers will also feature.

In calculating return on investment miners have to consider firstly the Bitcoin price and secondly the technology improvements allowing a faster hashrate per KW/h. It is hard to predict either future Bitcoin prices or technology improvements though in the medium term technology advancements are mostly visible.  In the longer term an adaption of Moore's law could apply to mining, if you consider the upgrade path we have seen for mining from Central processor, Graphics Processor, FPGA then ASIC etc.

I have plotted the following graph for a two year period comparing difficulty and Bitcoin price.


For most uses the graphical plot is quite satisfactory to judge the correlation by eye.

Whether there is evidence of the causal relationship for a econometrics statistician to prove a hypothesis on past data is relatively easy to establish by simply plugging the data into a advanced financial econometrics software program which gives you the probability of relationships and other measures such as the error variables, lag and noise.  I was about to do this when I discovered that while I have accurate Bitcoin price data, the data for past daily difficulty levels I had gathered, while fine for examining graphical correlation, that it may not be 100% accurate for other uses due to time Unix period between measures not being exactly 24 hours i,e, +{Time}/60/60/24+25569.

I sourced the data here:  blockexplorer.com/q/nethash

If anyone can point me to a source of 100% accurate daily historic data for difficulty levels from day one of Bitcoin to the present it would be very helpful indeed.

Basically, the higher the difficulty, the higher the baseline for the price. Just my wild guess, not verified. If you are interested in difficulty, also you can check out this website to see how others' guess about future difficulty. http://btcfarseer.com

To use correlation in a profitable manner you don't need to prove causation and don't need to have a clue what the reason behind the correlation is. Just as long as the correlation can be walked forward, that's all that's needed.

That leads me to the next question. It will only be a matter of months before mining with everyday kit becomes a waste of time. Only those with kit in the tens of Gh's will get anything out of it. So what d'you think will happen then to the value of BTC ? And what will happen when they've all been mined ? Will the concept be dead by then ?

like any commodity, there is more to the price than just supply and demand. there is a psycological factor as well. One could argue that the charts showing a correlation are showing a coincidence. One could argue that because people believe that price rises with difficulty it will because the sellers will demand it and the buyers will follow. One can only argue increased or decreased demand because difficulty is adjusted to insure a stable supply.

Is there a correlation? there appears to be but not for any reason that anyone can actually prove.

The value of anything is only what someone else is willing to pay for it, not what the holder declares it to be.

Historically, difficulty and exchange rate have shown correlation. However, correlation != causation.

One could argue that increase in difficulty helps drive increase in value, but difficulty is only one of the many factors that must be considered.

For the past, present and near future, the most important factor, besides difficulty, that affects BTC exchange rate is speculation of its future value. These two factors, are the major drivers of exchange rate. Alas, while difficulty is a concrete measurement, speculation of future value is not so easily measured.

+1

It seems Mr. Gornick's post with the charts prove there is a relationship.  But what the true nature of that relationship is?  Only historical analysis will reveal.

I have no means to prove or disprove either position.
Have a good weekend,
Sam

+1

We agree to disagree on a few points I suppose.  I will rephrase my argument by saying "there is no causal relationship'.  I actually still believe there is no relationship, period. 

I don't think it has been proven that there is; nothing in this thread or otherwise is convincing.  Having said that, I have not proven, without any doubt, that there isn't, either.

There is, obviously, a relationship between price and difficulty.

The exact nature of that relationship can't be absolutely known and constantly it changes.

That is what the statistical analysis after the fact is for, to determine what those relationships are.  Maybe an equation can be developed to help determine future changes.  But that equation will never be 100% accurate because there will always be new variables that will change the outcome.

Your first observation  is accurate, for the moment.

Your middle argument has no objective proof.

Your last statement sounds very reasonable.

Sam

so.. the highest % difficulty increases on record (the last several weeks,) have done nothing to price.

This is not enough to abandon the argument?  How long are we going to have rising difficulty and falling or stagnate price (the last month) before someone is going to admit there is no relationship between the two.

Lets move away from mathematics for a moment and speak intellectually.  What would cause the two to be correlated?  Interest in the coin as currency?  That is about the only decent argument I can think of.

THis argument is only important in so much as we can use it to predict future outcomes anyway.  I'll go on record as saying there will be no price rise for the coming difficulty wave.  Price will cause more capital to be spent to attain mining hardware *only* if there is return on capital available or predicted as a result.  If price rises after difficulty has moved up 10x while price stayed at the level it was at the entire time, it will not necessarily result in any further difficulty increases.

We could definately have rising price after a huge sell-off that would not cause difficulty to increase, in other words.

I think pure speculation is far more responsible for current price than most want to believe. 

Thanks Stephen. Some interesting links.

Equations and Statistic's are two different things.

"E=MC Squared" is an equation.

The statistical average of the energy released in a nuclear detonation is going to be something different because there are an infinite number of variables which no equation can duplicate exactly.
Sam

It is as simple as maths and economy.
Price rises when Demand rises.
Price goes lower and lower when Demand goes lower and lower.
It is really simple.
So, we expect to see a lower Demand because of the difficulty now with the asic. So, we will have lower prices.
(People will start to sell their bitcoins because they will stop playing this game e.t.c).
So, i think, the end is coming pretty soon

There certainly is correlation:


 - https://docs.google.com/a/digicoast.com/spreadsheet/oimg?key=0AmcTCtjBoRWUdHVRMHpqWUJValI1RlZiaEtCT1RrQmc&oid=10&zx=cdrtjfh4wgfg
 - https://docs.google.com/a/digicoast.com/spreadsheet/ccc?key=0AmcTCtjBoRWUdHVRMHpqWUJValI1RlZiaEtCT1RrQmc (underlying data)

Clearly, difficulty does tend to rise when the exchange rate rises, difficulty drops are correlated as well though less so.

But the relationship is that difficulty follows price, and not the other way around.
 - http://blog.brocktice.com/2011/05/25/the-relationship-between-bitcoin-price-and-difficulty/

Understood and if you've looked at the stats then that's fine. I didn't know if they were related or not. If they're not, then they're not. Thanks.

but thats not true... difficulty does not change the rate at which coins are mined.  Difficulty is adjusted based on hashrate (computational power of the network) so that the exact same number of coins are mined per hour.

So, only in between a difficulty adjustment is there any potential difference in the rate of mined coins, and it will have a direct effect on the next difficulty increase, so its only very temporary, if at all.

Difficulty is adjusted *SO THAT* the rate of coins entering the economy over time doesn't change.

So I go back to the statement that difficulty and price are nowhere near related.  If they are related, show me the equation.. I've looked at this and tried, there is no statistical correlation.

I think people want to believe there is, but the fact is there isn't.  And yes, that basically means that difficulty will continue to exponentially increase, and that also means that mining profits approach zero over any decently long time frame, if price doesn't rise.  Price *could* rise because of economic variables, but its not going to rise because of difficulty increases.  There is no causal relationship there.

"its crazy to think there is"

Beg to differ. Its a reasonable question to ask, particularly if you're a mathematician, as I tend to be.

Difficulty changes the rate at which coins are mined and therefor has a distinct effect on their supply. Supply and demand each affect the value. That's maths. QED

I'll go with the yes as well.

So,
Yes,
Sam

absolutely not.. its crazy to think there is.. no statistical regression shows it, and the rumor that was circulating here about its truth was based on something spiritual, because it certainly wasn't mathematical.

In other words, if you want to base a theory on faith, feel free.. I'll stick with mathematics.

i think that first reply was pulling your chain...but hey i could be wrong...I don't think the diff. rate and btc value have anything to do with each other...market is based off of supply n demand i think...i'm no expert and don't claim to know alot but that is just my opinion so take it for what its worth

LOL

And ? What is it, or aren't you telling and expect me to find out for myself ? (Or do you consider it a top secret notion which will give the keeper of the secret a big advantage ?)

Yes.

Does anyone know if there is a relationship between the two statistically ?