Topic: Value of BTC is NOT connected to Difficulty! (Read 1943 times)

Mining is not the primary method of acquiring Bitcoin, don't you know?

Further, the value of the mined Bitcoin can rise (or fall) unrelated to the Difficulty.

So I guess the discussion could be split in two: 1) those arguing from a miner perspective, and 2) those who are not.

Is this the "altcointalk.org forum"? Do alt coins even matter? Certainly not relevant to the discussion.

Regarding the OP, the value of Bitcoin has always been based on an economy of supply and demand.

What about the value of Altcoins and difficulty ?

I noticed that there is a strong relation between both, especially on new Altcoins.

that is correct, with rise in difficulty everybody will get less bitcoins, as new operators who entering mining will take their share. With running cost same and let say price of btc same, miner who got less btc will not be interested to sale at this rate and will wait till rate increase. To upgrade hardware miners no need to sale btc, but asic manufacturers will sale, but those are cleaver guys and they understand well, miners will buy asics when btc is higher.

it is interconnected process and it cant be otherwise. if bitcoins price on lower side miners will not sale and that will reduce amount of btc in circulation, resulting in price rise.

According to some previous analysis of blockchain 70% of mined coins never enter into circulation. If price of btc on lower side that can be 90% or higher. for example I sale 3% of mined coins, if btc price will get up to 120 I will sale more.

Difficulty rise and rate of btc both influencing mining in many ways.  So to say that diff and btc price not correlated not correct.

If difficulty is very high, then acquiring a bitcoin by mining is expensive. 

inexpensive to the end user... very expensive to develop

I used to think this but the truth is the market is a lot more thin than 10M bitcoins in circulation.  So miners dumping coins will have a significant impact.  If 1 month worth of coins were suddenly dumped, the price would go down to ~$60 according to the depth charts.  So that 30 days of mining rewards is enough to significantly drop the market

There's a logarithmic relationship between price and hash rate of the network, price drives hashrate (and NO the tail cannot wag the dog).  It's a bit unhinged right now as we go through a disruptive technology cycle that is going to 50x the pre-ASIC hashrate.  Once we complete the disruptive cycle you won't see massive growth in hashrate unless the price is going up (which means new participants are joining bitcoin, and a percentage of them mining). 

I believe the price is connected to the expense of the total hash rate. recently we had very inexpensive hash rate added to the network.

Because weather or not you say they're related, you're wrong... it's splitting hairs really. To call your opinion obvious makes me question your ability to think critically.

I think everyone (at least here on these forums) is well enough aware that the price isn't some sort of specific function of difficulty... they're independent systems, but they're extremely codependent correlated... The gold reference is a really good example that is often misconstrued.

There is only a fixed amount of gold on the planet (like BTC)
Mining techniques and technology limit the availability speed at which we acquire gold.

Bitcoin has some significant advantages over gold, as a form of currency, rather than stored value. While large mining farms can be hooked up, just like large real-life mines... nobody can (at this point anyway) lay claim to large veins of gold, and use fences/laws/guns to protect it while they take their sweet time digigng it up. To use a really shitty minecraft reference, it's no more or less likely that you or I find a block with the same tool... what matters is the tools.

People would not develop ASIC's if they didn't think they'd get a return on their development. The real geniuses here are the ones selling the asic's for prices that may and/or may not warrant an equal return in BTC... it keeps the idea of buying one tantalizing and so many of us are driven to take big risks for big rewards. To my knowledge, none of the ASIC companies have really revealed the costs involved (which are probably quite large, I am sure) so there is really no way for us to know (aside from speculate) about their profit margins... for all wee know every BFL rig could be turning a 500% profit margin over the R&D and production costs. If they slashed their prices in half, we too might see returns in bitcoin. On the flip side, slashed prices means that the demand for them would be higher, thus they would have to produce more, which would in turn lower their profit margins.

Why is all of this related to difficulty? Because the only reason people even fathomed developing ASIC's in the first place was in attempt to combat the rising difficulty. You can't apply conventional economics to a system that strives and is built from the ground up to be absolutely nothing like a conventional economy.... what's beautiful about the price/difficulty ratio is this:

Bitcoin price reacts to difficulty, and mining difficulty reacts to price.

Since they are both reactionary (for a lot of reasons I won't bore you with listing here) you can see that in the long term and independent of large central authorities (exchanges/online wallet services, which I hope eventually die off) it means the relative value of BTC to physical fiat will keep going up until we've reached near the end of our mining period.

welcome to bitcointalk where someone always has something to say back

interesting discussions

Why can't we all just agree on one thing for a change?

I didn't expect my topic to get this deep into discussion.  I was merely shouting the obvious.

Ultimately, I would argue that they are scare. We know exactly how many there will be.


How much would gold be worth if it was only used for the above, rather than as a store of wealth?

+1
Does anyone thing about what will happen when the price drops, and all the mining farms (asic or otherwise) have to shut down?

This assumes that most of the btc that is traded is being priced by miners generating new coins. The fact of the matter is that is not true. New coins are currently mined at a rate of 100,000 per month and that will eventually go down when the block reward is reduced. 100,000 coins per month is nothing compared to the 11+ million btc that is already in existence, so it is ridiculous to think that miners are the ones that can move the market to go up.

In fact, the relationship of difficulty to btc value is the opposite of what you are saying. As value of bitcoin increases (because of market factors), then difficulty will go up because mining will be more lucrative. When/if value of bitcoin decreases, difficulty will decrease because mining will be less desirable/profitable.

Increasing difficulty does not mean value will increase, but increasing value will certainly mean that difficulty will increase.

To say that difficulty has 0 impact on value is not correct.  Price is a function of supply vs demand.  If the difficulty rises, then mining has occurred at a faster rate than the target.  Therefore more coins than expected have been released onto the marketplace faster than intended.  This increase most likely resulted from new or existing miners having already spend to get new hashing capability.  The normal reaction to spending in order to invest in additional hashing capability is to want to make a return on that investment.  Therefore, one could conclude that after a significant hash rate jump, a few things might be true. 

a) lots of new hashing has just come on line, difficulty rises.
b) that new equipment was bought and paid for in the past
c) those machines were purchased with the intent of getting a return on investment
d) miners will wish to secure this investment asap after getting the machines which will cause them to mine faster than before and dump more coins than before faster
e) this will cause a short term decrease in price just as we are seeing now.
f) after this initial "investment" has been mostly paid back, miners then switch their strategy to holding.
g) this causes a longer term upswing in the price just as we saw after the GPU influx of 2 years ago.
e) normal already existing upward price pressure now becomes the driving force pushing price up as new adopters come online.
f) speculation starts to kick in causing the next bubble.
g) bubble ensues driving more technology into the market to create better ways to do hashing.  GOTO a

Helps is the key word. Gold is also pretty(jewelery), doesn't corrode, and conducts Electricity well (electronics).

Yes, but bitcoin is never more or less scarce. The same amount of bitcoins are mined every day no matter what.

I would think in the long run yes it will be connected. Difficulty changes are rather consistent while BTC value fluctuates. Both seem to be going up though. If the difficulty dropped to 1000 tomorrow and it was really easy to get a coin what do you think would happen to the value? It would go down I'd imagine.

In fact, I think the difficulty and the cap limit on Bitcoins is the main reason the value goes up at all. If the difficulty stayed the same and there were unlimited coins do you really think Bitcoin would have caught on as fast as it did?

Oh, ok.  Good to know.

The scarcity of gold helps to give it value.

that would be an ideal situation +1

I completely agree with you and it's so frustrating to get into this argument all the time here.

Everyone should have to take an intro economics class before they are allowed to post here, lol.

yeah gotta agree that a price rise indicates a possible rise in difficulty in the near future. . . thats probably where it ends IMHO.

Congnitive bias.

The market decides the value of BTC, not the miners themselves which is the only thing difficulty effects. The value of BTC does determine the ROI a miner can expect from their hardware investment, so it is in their interest to see BTCs buying power rise along with mining difficulty but the two are not tied together directly.

Well, I got into this argument with that exact stance a week or so ago.  The fact remains that there are some who really believe this.

I think the only thing we agreed on in the end was that BTC value predicts future diff increases (because of capital rushing in for promise of profit.)

I still believe value has nothing to do with diff, but some will argue vehemently against that premise.  Un fortunately, neither can be proven 100% correct, yet.

Why does everyone think/assume so?!  Do they think just because it's harder to "get" something, the value of it would be worth more?

I don't understand where people get the idea that difficulty and value is somehow affiliated with each other.  The recent decent/pattern in BTC value clearly shows that the above statement is not true.  So please, STOP thinking when the difficulty is in the 9 digit figures, you'd be rich because (pulling random number out of my ass) value will be at $1000/BTC.  It's just wishful thinking.  Please research the economy of Bitcoin and understand how difficulty and value really works.