Topic: Why don`t prices follow difficulty change? (Read 4979 times)

Using the coins to buy a game is the same as selling the coins for the 'value' of the game.

The demand for coins comes from the merchant who holds the coins.

The length of time that a merchant holds the coins before "cashing" them in is what boosts demand.  This length of time is can be considerable if the price is stable or increasing.  

The key to establishing a stable price for bitcoins will be to enable short selling.  Short selling keeps the maximum number of "coins" in circulation by allowing those who hold coins to lend them at interest.  Ultimately this will lead to a reduction in volatility which has the effect of increasing the value of the coins by reducing transaction risk.

With 31% swings in the exchange rate over the past 48 hours, the volatility makes it hard for businesses to establish prices.  Either the price their services at the low exchange rate and then get "priced out" when the price goes up, or the price it at the current exchange rate and then get under paid when the price falls.  

Here's how I look at it.  Difficulty (or mining activity) follows price (that's been well discussed many times in the past).  But difficulty does give you a sense of how many people are interested in (demand) bitcoins.  A lot of miners are mining with the objective to accumulate bitcoins and not simply sell them and take profit.  Such people represent a portion of overall demand for bitcoins.  So as difficulty rises, you could conclude that the interest (and hence demand) for bitcoins is rising.  If everyone mining was selling everything they mined, then difficulty would not be a good indicator of demand for bitcoins.

It makes perfect sense. When you buy, it's a representation of increased demand from you and when you sell, it's a representation of decreased demand. The amount of time you are willing to withhold the coins from the market is absolutely crucial. If you spend them immideately the net result from you is pretty much zero. You have simply shifted ownership of the coins from one person to another.

I guess all coins are held by someone at every moment in time.  So held is not the best description.

A transaction is the "shortest period of time" during which someone must be "invested" in order to leverage bitcoins as an anonymous money transfer system.   (6 blocks to buy, 6 blocks to trade, 6 blocks to sell).

Assume all 23M coins are owned by "MarketMaker" who is the buyer/seller of last resort.  If there is only 1 transaction at a time valued at $100, then the market maker would sell all 23M for $100, earn interest for 2 hours, then buy it back for $99 in anticipation for the next transaction.  The value he provided was an secure/anonymous accounting mechanism.   Why wouldn't he only sell 100 BTC for $100?  Because the buyer would know that there was no incentive for the "MarketMaker" to buy back the coins because he still has 22.99M coins, enough for the MarketMaker to sell the next 100 coins for much less than the first 100 coins thus leaving very little market for the original buyer.  If MarketMaker could be trusted not to "flood the market" then MarketMaker could maintain a buy/sell spread of 1% and have a nice little business going.  All other $/BTC exchanges would fall within that 1% range as people try to reduce the margins of the MarketMaker.

If there was not a belief the market maker would buy back the coins, then no one would buy them to begin with.

So, the minimum value of the coins is equal to the total market value of all 'in progress' buy-trade-sell transactions at any given moment / total bit coins mined.

Anyone holding coins longer than the minimum transaction time is a speculator who assumes that there will be more in-progress transactions in the future.  In this case, the speculator is competing with the MarketMaker. In reality all speculators combined *are* the market makers.  They buy and sell to facilitate anonymous trade.  They are competing against one another to sell at the highest price (market or above market) and buy at the lowest price (currently mining).

Speculators reduce the stock available for buy-trade-sell transactions while they hold coins off the market and therefore change the "transaction volume"/"available btc" to cause a price increase.   

I suspect that if you look at today's transaction volume (real trade using bitcoin) that you would find the coins way over priced.  On the other hand, if you factor in the present value of future bitcoin economy growth you can see a much larger value.



 

Don't understand this formula of yours. It seems to always equal 0.

Some work on this can be found here.

HELD would have to include coins 'lost' to date also ... time held on those is large (i.e. infinite), so probably need to be omitted from the calc. ... otherwise good idea, would be a useful measure, average time held.

I meant to say that greed is not a factor (everything is speculation)

Willingness to hold BTC for only 1 minute would represent low demand and the expectation that the value will be falling quickly.  At this point BTC only has value as an immediate exchange mechanism to most users.  Few would put their life savings into it.  Some would speculate with their high risk "investment" money.

The supply of BTC at any given second is a simple equation...

TOTAL BTC - TOTAL HELD.

So even if a merchant/customer only holds the coins for long enough to buy them, exchange them, and sell them you are talking those coins being out of supply for 2 hours by the time 18 blocks confirm the purchase, trade, and sale of the coins.  Now you can calculate the number of 'anonymous' or 'cash like' transactions the market needs. 

This establishes the baseline "value" of the coins.  The longer people hold coins the less supply available to those who need coins to perform a transaction.

A reasonable means of identifying the demand may be to monitor the total time since each coin was last spent.  The longer this time, the higher the demand.

Looks like this is the scenario that is going to happen.  The price of BTC will continue to drop to the price of electricity.  At that point the government will buy mining equipment, while miners will be unloading their equipment, and basically sell it all.  The government will buy more, and eventually the day of the miner is done.  The government will just let the BTC crash upon itself.  Presently the price of electricity to mine a BTC is about $0.49.  As more and more government miners are set up.  Then they will control maybe 90% of the network.  Then they will start trading BTC back and forth between themselves, such that the transactions fees and electricity are more costs than the value of the BTC.  Nobody is going to want to download 100 GB, and no miner is going to take a loss on running their equipment.

Ok! that's it for me!
The price just dropped to 5.9! Going to sell my BTC that i bought at 7.9 and going to stop mining with my hd6950 because it's no longer profitable.
I'm only making 1.45 BTC per day, and at 6< it's goodbye time!
Guess the prices are going downhill from here.

This does not follow.  Nor is it true.  Speculation is betting that something will be more valuable at a future time (or less if you short).  It's a huge factor.

This also doesn't make sense.  Not necessarily.  Someone buying Bitcoins just to use them immediately (perhaps a game only takes them as payment) would be demand.

Speculation is motivated by greed and thus is not a factor in the equation.
Demand is the willingness to hold a BTC for a period of time. 
The longer the period the higher the demand.

For BTC to be useful there must be a belief that the price will not fluctuate too much between the time a good/service is purchased and when that BTC is ultimately sold for dollars to pay bills and realize a profit.  This belief increases with time and volume on the markets thus over time BTC naturally becomes more valuable to people wanting to start a business based upon them.  This increases demand for the coins.

Eventually this deflationary trend (increase in value of BTC) drives demand for BTC as a form of savings.

If there were no risks to using bitcoins:  (Government, Technical, hacking, solar flairs, EMP, Bitcoin 2.0, Banker Buyout) then the value of bitcoins for doing business transactions would be much higher than it is currently. 

So any formula needs to estimate risk and rate of failure.  I think it is safe to assume that over time risk of failure falls.  Once governments officially acknowledge and legitimize bitcoins then the risk falls close to 0 and the value will grow dramatically. 

There is no way to put a number to this risk other than price discovery via markets.  Too bad there is no way to short bitcoins because that would limit the volatility and increase value.

Mt. Gox could implement a means to "lend/borrow coins" and then hold margin requirements with automatic covering as the price increases.  So suppose I had $100 deposited with Mt.Gox I could borrow $50 worth of bitcoins and sell them.  When the cost to cover the short rose to $75 Mt. Gox would automatically cover and return them to the lender.   If the lender got to set the margin requirement / interest rate then that would effectively establish interest rates equal to the opportunity cost of holding $100 in escrow. 

I'm glad someone picked up on that.

Ah, I get it. If it wasn't speculation we would now for sure. So since it is speculation we must not know and this must be the variable portion.

I have no idea how you could have possibly made such an equation or thought it was actually useful in any way, but if that's all it takes, congrats to get 1 BTC.

Well, first you assume a spherical Bitcoin trader...


price  =  demand + speculation + difficulty
              --------------------------------------------
               greed + competition + supply


Then you can make up some reasonable figures to plug in...

price = steady

difficulty = +50%
demand = +5% (growth of economy)
speculation = X (ie. we don't know)

competition = +20% (influx of new miners)
supply = +5% (increases at constant rate)
greed = +5% (slight increase)

And then solving for X gives you...

X = -25%

A reasonable explanation for steady price in the face of rising difficulty -- 25% less speculation?

Very good analogy.  Too many people hold labor theory of value.  If something is hard to do, then it must be valuable!

While initially it made some sort of sense that price should follow Difficulty increases, it was to simple of a correlation for one to believe. As in all financial industries, it is a formula that is illusive. One must take into account Demand (a human element), THashes/s (competition), Greed (people cashing out), Speculation (Gamblers), and Fundamentals (the math on various elements).

  If anyone can come up with a formula to properly show a correlation of those elements, let me know. I'll put a 1 BTC bounty on it.

The best one can do and it works but does not put it in a time frame is Supply/Demand. There is currently a high Ask:Bid Ratio. It hovers around 5 (pretty high). But in general as this ratio goes up, prices stabilize and then come down and vice versa.

If you are a Day Trader use the same AB Ratio but at different price bands, asks under 7 : bids over 6, asks under 7.5 : bids over 5.5, to ride the waves and reap the spreads and small upticks. Currently there is support for the price rising to over 7 between a set price band but overall the price is set to decline. And that is the news from CNBTC

People don't pay a lot of money for crabs because people risk their lives to fish for them.
Crab fisherman risk their lives because people will pay a lot of money for crabs.

Mining costs are a sunk cost when it comes time to sell BTC. Therefore, price drives difficulty.