Bitcoin Forum

Is it safe to say that when difficulty either drops or basically remains the same (as opposed to increasing by a large margin every adjustment) that the BTC value has peaked, at least for a time? 

Obviously, this won't occur next adjustment, given current stats, but if say, a month from now difficulty actually drops during an adjustment, do you think it would set off a panic and people would start trying to sell?

Can you show me how difficulty affects price?

No it is not safe to say this.  Please explain why you think it might be.

Supply and demand.  Difficulty limits supply, if it drops it actually means your supply (mining income) is going up, relative to the number of miners involved.  Each miner gets more BTC, if they sell their excess it's a glut in supply.

Currently, difficulty increasing each adjustment means supply is decreasing, which causes prices to rise.


I realize it's a lot more complex than I have made it out to be, but independent of other variables it seems that a difficulty decrease would just be the first warning sign that value may be dropping.

False.

Edit: (This can be true to some extent, but only as a result of lag. The difficulty will adjust every 2016 blocks to try to allow 6 blocks found per hour. The network can outpace it.)

Difficulty simply regulates the rate of supply. The hardcoded limit is static and will not change.

I understand what you are saying.  The overall supply is the same.  But supply of 50 bitcoins going to 10 miners is very different from 50 bitcoins going to 1000 miners.  If difficulty goes down it means there are fewer miners, as such supply of bitcoins going to each miner goes up.  The supply per miner is directly affected by difficulty, and it's really more important than global supply in this case.

I understand what you are saying.  The overall supply is the same.  But supply of 50 bitcoins going to 10 miners is very different from 50 bitcoins going to 1000 miners.  If difficulty goes down it means there are fewer miners, as such supply of bitcoins going to each miner goes up.  The supply per miner is directly affected by difficulty, and it's really more important than global supply in this case.
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Why does it matter if it goes to 10 miners or 1000 miners?  Why is that more important?

If difficulty drops, more miners jump back into the game.  Difficulty goes back up, marginal miners drop back out.  It's a s self balancing market.

The overall dispersion of bitcoins doesn't matter unless you are positing that localized concentrations mean immediate trading pressures. For some of these bitcoins, they will be spent, saved, etc.. Doesn't guarantee they will be put into the market and traded.

Are you saying the new miners won't sell their Bitcoins but the old miners did?

Could go either way, I'll admit.  But part of me thinks that miners make up a certain percentage of the bitcoin community.  If say, 25% of the miners quit, resulting in a difficulty drop, that could be an indicator that 25% of the bitcoin community as a whole lost interest, which also means fewer buyrs and speculators.

The other aspect is personal needs, expectations, and diminishing returns.  If you are mining 10 BTC a week and making a profit, and suddenly difficulty drops such that you are now mining 20 BTC a week, you have a few possibilities.  You can try to keep selling at the same value and make double your profit, but you know all you competitors (other miners) also have a sudden doubling of bitcoin income, so you might want to reduce your price a bit, since if you made a profit before you could now sell for half the price and make that same profit.  Where you might not be willing to sell so cheap in the previous week.

Ok, now we are getting somewhere.  If people lose interest, that's a bad thing.  However, a miner losing interest is not really *that* important, since a lot are just mining for easy money.  It wouldn't concern me much.

If I double how many BTC I get, my competitors may get 2x as much too, but it also means I have half as many competitors.

Why do you think sellers get to decide prices, but not buyers?  A seller can only sell for what people are willing to pay for them.  Sellers cannot just demand whatever price they want.

Part of the problem with difficulty growth at the moment is a lack of availability on the top end AMD GPUs. I'm not sure if miners bought the majority of those high end cards or if they were just the straw that broke the camels back. Either way the lack of any for purchase is slowing network power growth.

I can't really come up with a good argument against that.  It makes sense to me that if the same number of buyers want to buy the same amount of BTC it wouldn't change the market much.

However, I think there are some miners who are "holding out" some BTC as a future investment.  You mine 10, sell 8, keep 2 just in case BTC reaches crazy levels at some point.  Suddenly you are mining twice as much for the exact same investment, your potential profit is DOUBLE, now you might want to just sell all your BTC each week, since you don't know how long you will be able to get double the profit- since difficulty might go back up.  I guess what I am saying is that if the profit was doubled for a time, some miners who were just mining to collect bitcoins might be encourage to start selling, and the number of BTC for sale would go up.

Oh no!  Don't tell me people are hoarding graphics cards now...that'll send the graphics card economy into a deflationary death spiral straight to hell.  ;)

Hahaha, well played sir.  ;D

I think difficulty is at least somewhat of an indicator of demand for bitcoins (because miners do not sell everything they mine).  However, there are plenty of other factors affecting difficulty (ie. graphics card supply as mentioned) that would confound such a simple analysis as "difficulty going down is an indication of demand for bitcoin is going down."  I would also suspect that infrastructure available to people for mining could also be constraining growth (I live on the hairy edge of tripped circuit breakers myself).  It's summer on the northern hemisphere (where most miners are located), so cooling becomes a bigger problem.  And, it's entirely possible that people could conclude that they are better off investing in bitcoins directly or that investing in bitcoin related business is more profitable than mining, but their interest in bitcoin is unaffected.  

All of this means that while I think difficulty partially reflects bitcoin demand, making predictions about the future value of bitcoins based on mining difficulty is problematic.  It's more likely that the temporary leveling off in price at around $8-$9 caused a slight moderation in difficulty growth with a bit of time lag...I wouldn't be surprised if this recent run up to $18 triggers another wave of difficulty growth (assuming people can obtain graphics cards).  

Here is the correlation between difficulty and price.  They have been VERY closely correlated historically.  People who say they are not related are misinformed
https://i.imgur.com/e2j3y.png

Why would they decide to sell them all?  Why not just keep the extra ones?  If you need to sell 2 to recover costs, and can save the rests, having fewer miners would have *fewer* on the general market since now instead of 80% being held, 90% are.

That's not what he asked you to show.  He asked you to show how difficulty affects price.  We have long known of the corrolary between price and difficulty, but difficulty changes lag price.  It's impossible for the effect to come first, so logically, price affects difficulty.  It's also sensible, since as the price rises, mining becomes relatively more profitable and more people compete.

Why not?  Theory is, if you are willing to sell x% of your generated coins for x profit, when you are making x2 profit wouldn't you want to sell a bit more?

Think of it as a sliding scale.

On one end the profit is negative or 0- and no miner would want to sell any coins.  In the middle the profit is some amount, $3 per BTC for example, where most miners are willing to sell some coins but might not want to sell all coins.  My argument is if you take a miner who is willing to sell x BTC for some profit, and offer him double that profit, he is going to want to sell more than x.  More profit is a direct incentive to sell more.

It's all just a theory, I fully admit I have no hard data or facts to back this up. It is just a theory that sounded reasonable when I thought it through in my mind and I wanted to share.

But people walking outside with umbrella is highly correlated with rain, therefore umbrellas cause rain!

This makes no sense.  You can assume all day long, and there are lots of assumptions.

Why are you assuming that a miner would want to only keep a fixed number of coins?  Why not just sell them all?  Or why not sell what he has to to pay costs and keep the rest?

Your argument appears to be this:

I am a typical miner.

#1 If I get 20 BTC, I will sell 18 at $20 and keep 2.
#2 If I get 40 BTC, I will sell 38 at $20 and keep 2.

Why is the ratio of how many coins I keep changing in that direction?  If the price is going up and I'm a miner, I'm selling as few as possible.  If the price is going down, I'll sell all of them.  If the price is staying steady, it doesn't really matter what I do.

I am making the assumption the exact opposite as you.  Most miners fall into two camps.  The hoarders and the sellers.  The hoarders will sell as few as possible needed to meet expenses.  The sellers will sell all off regardless.

The sellers don't matter if they stay in.  They are selling 100% no matter what.  So if they get more or fewer coins, it really doesn't matter, as long as the ratio of sellers:hoarders is the same.

The hoarders matter because they would sell a fixed number of coins to cover expenses and keep the rest.  If they can get 2x as many coins, they'll still sell the same number of coins, and then board the rest.  But this greatly shifts the number of coins mined towards more hoarding, not more selling.

The only way this falls apart is if a decrease in difficulty is because hoarders are driven out at a faster rate than sellers.  Is there any reason to think this is true?  The sellers are more likely to drop out IMO.  This is because they are in it for the $$, and they will mine if they make money, and stop if they don't.  A hoarder will accumulate because they actually believe in Bitcoin.  So you'll see more shift toward hoarders in the most likely difficulty drop scenario, which means even fewer coins are put on the market.

I agree with this statement. Those who state that difficulty drives price are mistaking increased demand for decreased supply. A higher difficulty indicates more miners which indicates higher demand. The overall supply remains the same. Price drives demand for "cheap" bitcoins. As mining is perceived (erroneously, IMO) to be a cheap way to obtain bitcoins, price then drives difficulty up.

Just my 2uBTC