Topic: Why difficulty DOES affect price - page 2. (Read 3523 times)
yes, supply affects demand. this is a known economic principle. I honestly don't know why the economics forum even exists when less than 1% of the posters have a grasp of the basics.
Many people here claim that price affects difficulty, not the other way around. I would argue that each affects the other, though price is still the stronger influence.
As an investor, any sensible person would look at all possible ways to invest in bitcoins. Investing in mining equipment can be considered an indirect investment into bitcoins. At a low difficulty/price ratio (what we experienced a month ago), it makes more sense to invest in mining equipment because the payback period is so fast. At a high difficulty/price ratio (what we are experiencing now), it makes more sense to invest in bitcoins directly.
It boils down to this:
As the difficulty increases, more potential investors will invest into bitcoins directly instead of mining, thus increasing the price.
Also as the difficulty increases, miners will begin to sell their mining equipment, usually in exchange for bitcoins. This increase in demand for bitcoins helps drive the price up further.
Therefore, difficulty drives price, though not with as much influence as much as price drives difficulty.
I believe the rush about a month ago from $1.XX to $8.00 was a slight bubble, driven by speculation. The following decline in value was due to more investors investing in mining equipment than bitcoins directly, compared with historical values. They did this because the profitability of mining was so high. Now, as the difficulty level is catching up, and investors realize that profitability in mining may not remain for much longer, they have switched back to investing in bitcoins directly, driving the price back up.
Who cares?
Any investor should care. If difficulty drives price, even to a small extent, then price can be predicted, on average, to go up as difficulty goes up.
Thoughts? Comments?
As an investor, any sensible person would look at all possible ways to invest in bitcoins. Investing in mining equipment can be considered an indirect investment into bitcoins. At a low difficulty/price ratio (what we experienced a month ago), it makes more sense to invest in mining equipment because the payback period is so fast. At a high difficulty/price ratio (what we are experiencing now), it makes more sense to invest in bitcoins directly.
It boils down to this:
As the difficulty increases, more potential investors will invest into bitcoins directly instead of mining, thus increasing the price.
Also as the difficulty increases, miners will begin to sell their mining equipment, usually in exchange for bitcoins. This increase in demand for bitcoins helps drive the price up further.
Therefore, difficulty drives price, though not with as much influence as much as price drives difficulty.
I believe the rush about a month ago from $1.XX to $8.00 was a slight bubble, driven by speculation. The following decline in value was due to more investors investing in mining equipment than bitcoins directly, compared with historical values. They did this because the profitability of mining was so high. Now, as the difficulty level is catching up, and investors realize that profitability in mining may not remain for much longer, they have switched back to investing in bitcoins directly, driving the price back up.
Who cares?
Any investor should care. If difficulty drives price, even to a small extent, then price can be predicted, on average, to go up as difficulty goes up.
Thoughts? Comments?
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