Bitcoin Forum

is there a relationship between difficulty and price per bitcoin?

if the difficulty increases 10x by the end of the year, does that mean the price will increase 10x as well?

No.  Price drives difficulty.  If nothing else changes and price rises 10x we would expect eventually enough new hashing power to come online chasing that massive profitability that difficulty rises 10x and same relationship if price falls 90%.

However difficulty is also driven by efficiency/technology which is what we are seeing now.  Essentially ASICs are creating a new normal where the revenue in USD per GH/s is going to drop by 95% or more.

DeathAndTaxes has it right.

Difficulty does not drive price, but price can drive difficulty because it can make mining more or less profitable.

The rise in difficulty we are seeing now is not because of rising price but because of new, cheaper mining technology (ASICs).

No. If the price crashes, expect a slower difficulty increase, or even a difficulty drop if the crash is deep enough.

On the contrary, if price skyrockets expect difficulty to skyrocket too.

Anyhow, it's true that difficulty and price are very tightly linked, and sometimes is difficult to say who is driving... But 99% of the times you won't be mistaken if you believe that is price driving difficulty, and not the other way around.

In terms of mining the only thing that should affect the price is when the block value halves every 4 years.

Although its expected it essentially halves the miners reward so in order to maintain profits they would all raise their sell prices.

Difficulty only shouldn't affect the overall price as overall the same number of coins will be entering the market each day, it would just be distributed across the mining pool differently.
You could argue that an individual miner might get less if he didn't increase his mining power but that would have to happen across the board to have a price impact.

Previously, more precisely in the GPU dominant era of mining, We knew that the price will probably not go down the threshold where the miners would sell on a loss of the mining cost. The increase of difficulty was interpreted as an increase of the difficulty for fraud for an attacker of the network whether it was 51% attack, Government intervention, etc. However it is very different now in the ASIC era, at least for now. The most important aspect was the growth of the hash while still relatively decentralised. So in my opinion unless ASICS are available to most miners or all of them in general, There is no reason to think that "10x difficulty = 10x price"

This idea that price won't go down due to cost of mining is just foolish.  There is plenty of times when the price of Bitcoin crashed to below the production cost.   Price drives difficulty,  difficulty never has and never will drive price.

If the price falls below marginal cost of production.  Miners still stop mining and then difficulty will decline which lowers the marginal cost of production for the remaining miners.  When price rises the profit margin of miners is higher and more hashing power comes online.  Some of that is new hardware and some of it is existing rigs being turned back on because they are profitable.  That process happens continually and there is a time lag but price has always driven difficulty not the other way round.

Agree

Difficulty drives price in that it is an upper buffer for price.


If the difficulty was the same tomorrow and the price skyrockets to $10,000/BTC you would be faced with a decision.

Do I go out and buy $2,000 worth of hardware which would get me around 10-20 BTC over the life of the hardware (at current difficulty), or put $2,000 into buying .2 BTC right now.

You would likely go out and buy the hardware instead of trading bitcoins at the exchange.

But most people would do this so difficulty would then skyrocket to eventually meet the price.

But with so many people moving from trading to mining, the price would likely come down to the point where people would be more willing to trade than to mine.

So there is at least some correlation, they are not decoupled.

Difficulty will either bubble, and crash back down or yes price eventually will have to increase. Just like with the block halving everyone said price would go up because of lack in supply. But the supply didn't really change, we had 10,000,000 coins one day and 10,003,600 the next. Difficulty will eventually drive price and few people know this, yet old timers continue to lie about it. Price was driven up with gpu miners and it will also eventually be driven up again by asic miners. But it may be months or a year to take effect as people are looking for quick payoffs

edit: on second thought maybe forget everything I just said because I want to be a millionaire in a few years and I don't want you cutting into any of my profits  ;D

difficulty is increasing as more miners enter the market to catch up to the current rise price in order to float around the breakeven point of being in profit

it currently costs 300k per day (from 200k 1 month ago) to mine and 350k per day in dollar value is being generated by mining
if the price of bitcoin remains the same the mining costs will continue to increase till 350k and float about there and 'lag' whenever the price moves in either direction

that's really a naive way of looking at things (thats by the way not uncommon at these forums)

just because the price of bitcoin occured during the cpu to gpu shift doesn't mean there's any correlation between them, especially considering the time frames do not match but do actually match when popularity rises

Price is a key factor affecting difficulty. Difficulty is not a key factor affecting price.

If price is the key factor affecting difficulty, could a cartel of miner be tempted to sell big amount of their coins before a difficulty shift in order to temporarily lower the price, hence lowering their mining cost?

You mean: dumping coins to cause a price drop, which causes a difficulty drop? No, it doesn't work that way. The lag between 'price drop' and 'difficulty drop' would be measured in weeks/months; it is a gradual shift, not abrupt.

Also, keep in mind that this "price affects difficulty" relationship assumes price/difficulty is at equilibrium. Today, the price/difficulty is *not* at equilibrium. Difficulty is rising quickly even though price is remaining relatively constant. Why? Because we are in a period of transition to a new, much more efficient, type of mining hardware. It will take some time (a year?) to reach a new equilibrium point. Until then, changes in price will not affect difficulty that much because until profitability becomes 'marginal'.

Every time new hardware is developed for mining (the transition from cpu to gpu; from gpu to fpga; from fpga to asic) we go through a period of re-balancing to reach a new equilibrium. This change is slow, as it takes time for enough new hardware to come online and reduce profitability to the point where marginal miners are either no longer adding hardware, or are actually getting out of mining. Right now we are at the beginning of one such transition.

What do you guys think will happen to diff in the next couple months?

It's going to get nasty.  A few steady 3 million jumps each adjustment I would think.

Unless there is a big crash in Btc price, it will go up for sure.

Difficulty is going to go up regardless of price in the next period of ASIC introduction. Why? Because its just to easy and profitable for ASICs to push GPU's out of the market and take the lions share. However this does not necessarily increase price because the amount of miners should stay the same (thus the liquidity of supply should also remain the same).
Two things to keep an eye out for and that Im really excited to find out

% increase of difficulty of BTC vs LTC

% increase of price of BTC vs LTC

In other words which currency will get stronger from ASIC introduction?

Yes, we can just keep mass manufacturing mining hardware and Bitcoin price will go up, forever!  /sarc

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