Topic: Is there evidence that there is a correlation between difficulty and price? (Read 2628 times)

Unlikely.  This may have been the case back in 2010 when one could still find blocks when CPU mining on common equipment.  (Those blocks weren't worth much, of course.)  Nowadays one need either very fast and expensive GPUs to get BTC at any reasonable speed and marginal profit, and investing in GPUs for mining now is guaranteed to be a loss.  Or one needs highly specialized equipment, which I doubt anyone will buy unless they have experience with Bitcoin already.  And Bitcoin has become very easy to buy.  It just doesn't make sense to invest in expensive specialized equipment with uncertain profit margin and mining for weeks for a few coins, when you can buy as many coins as you want today or tomorrow.  If you want to invest in BTC, you invest in BTC.  If you want to invest in mining, you invest in mining.

It's incredible. The fact it works is amazing in it self, and then you pile on the depth of design and we approach pure brilliance. 

Hmm, let's run this through a couple scenarios for this. (I'm just kludging them together, feel free to shoot at the principles, but the specifics are made up to create outsized issues that my brain can get a handle on)

Environment:
ASIC is out and humming, technology is stable and no preorders are on the horizon that will change things.
Bitcoin mining with current equipment over 12 months results in a ~100% profit according to common current projections.
50% of mining income is used to buy new hardware to keep up with other miners.

Event: Bitcoin loses 50% value
Result: Miners are in survival mode, those who cannot afford the outlay have to put equipment purchases on hold, and bleed devalued bitcoins paying for electricity. difficulty slows or drops as some gear is deemed too unprofitable to afford to run and is powered down.

Event: Bitcoin gains 100% value
Result: Miners are in bonanza mode, profit taking and large hardware purchases will be popular, difficulty will shoot up with this new gear until some equilibrium is reached.

Event: Protocol change renders 50% of mining equipment useless (I know it's out there, but I could not think of another big forcing)
Result: 50% of miners are dancing in the street as their BTC profits go up 100%, other 50% want to kill them. Some of the excess profits will go towards new hardware, as will some investment by the failed miners replacing obsolete hardware, some will drop out entirely. Price may be effected by 20-minute blocktimes for up to 2 weeks, but it would only qualify as a panic, not a factually based reaction. After the On the whole the same amount of BTC is generated, and sold to others who want to buy or are selling hardware.

Event: New Big Fish 1 and New Big Fish 2 start fighting over BitCoin, increasing difficulty by 100% over 3 months
Result: Massive increase in difficulty because of governments or megacorps doing speculative mining with millions of dollars in custom fabbed hardware. Tinfoil hats hold a party, others are annoyed that "The Man" is making his own bitcoins instead of buying ours. Value of Bitcoin shoots up due to difficulty conflict, but only because of the perceived legitimacy, not because the difficulty is high. Many miners shut down inefficient capacity, but some keep some running for ideological reasons.

That's my take on those 4 scenarios, in my scorebook it's pretty obvious that 1 and 2 would happen, and it demonstrates the implied causation between price and difficulty. 3 and 4 are a bit more of a stretch, but in each case I found that the root cause of the price and the difficulty change was largely the same, with the differences in all 4 scenarios being transitory until mining capacity matches price, not the other way around.

I think you are right that there is a short term force applied on the price if there is a large difficulty swing, but I think it's noise compared with the actual event, or the phase of the moon http://deepblue.lib.umich.edu/bitstream/2027.42/36301/2/b2092645.0001.001.pdf.

I think difficulty do affect price. People will try many difference approach to get BTC. If the difficulty is too high, then it is not very practical to setup mining rigs, those who want to invest in BTC will simply buy them, this will lift the price of BTC. So it is balanced by itself

It's kind of amazing how well designed bitcoin is though. The mining part of it being self-regulating is impressive imo.

Satoshi is a god damn genius.

Doubling, tripling or a a thousandfold increase in difficulty will have no effect on price.  Technology improvement or not.  Halving of difficulty will have no effect on the price.  There is simply no reason for mining difficulty to have any effect on the price.

Only if technology didn't improve, if ASIC is available in abundance, then difficulty can double quickly without seeing any movement in price.

cool!

OR we could assume that some newbies decided to mine instead of buy bitcoins and that's bad for price.

OR we could assume the new miners are botnets and/or gamers who just want to make a quick fiat buck and will sell all mining income and that's bad for price.

OR we can make the most sane assumption that the difficulty simply rises because mining profitability has risen (most likely due to a rise in exchange rate, but maybe also due to better technology being delivered or energy cost falling (yeah right))

You lost count that's 2 of 3 cases.

in both cases, desire is increasing

When I posted this I actually was asking for evidence of correlation between price and difficulty, in the quantitative sense. I have not followed the mining arms race specifically, and I thought that there was at least potential for the difficulty to have risen over time independent of current market price. Theoretically, as a speculative move, someone could both purchase bitcoins, and mine them at break even or loss in the short term because they believed the future price would justify the mining at a loss, and that directly purchasing bitcoins might drive the price too high in a thin market, and therefore both buying and mining might be rational. I can imagine this being the case in the early stages of bitcoin for example.

I realize now that the difficulty has followed the price fairly closely in an apparently somewhat efficient matter. And that the market of miners are more or less just following their personal break even points with regard to the price of bitcoin and their electricity price. 

So at this point I can see that price and difficulty are in fact highly correlated, and changes in difficulty are primarily caused by changes in price.

Or we can assume it's the same number of people wanting more bitcoins more badly or even just improved technology.

as difficulty rises, we can assume that the actual number of individuals mining is rising,
in other words,
the number of people wanting to acquire bitcoin is rising,
some of them could get impatient and acquire bitcoin faster ( by buying it )

difficulty follows price (all else being equal)... it's as simple as that. People thinking it's the other way around must think again.

No, miners still make the same in total.  And because the combined daily volume at the exchanges is several orders of magnitude higher than the daily volume of mined coins, I doubt mining has any noticeable effect on the price right now.  Half of the coins which will ever exist have been mined already, and many miners choose to keep their coins.

Also, as the difficulty goes up - miners make less - resulting in longer periods between selling. This can (and imo does) affect price. If you're close to the edge on your profitability you don't sell below a certain rate.

Exactly. No one said 1:1; they said a "correlation". Obviously there's *some* correlation, so the question is pretty silly as such. Is there a correlation between temperatures outside and the seasons of the year?

well it's not 1:1, but a rising price clearly means that you can expect to see rising difficulty soon after!