Mining feedback loop.

[byronbb]

In somewhat of a confusing loop, the only real force on the bitcoin market-place, outside of evil speculation and drug addicted nerds, is the dynamic between mining and the price. A LOT of money is being pumped into buying mining rigs. With Avalon selling bulk chips and ASICMiner unloading tons of Block Eruptors and blade rigs, bitcoins are moving into the hands of a few, who, either need to convert those coins to fiat to pay their suppliers, or their suppliers need to do so (you can't buy carrots with bitcoins). Anyways, this could REALLY hammer the price in the next few months now that I think about it. There must be a point where miner suppliers holding coins as investment, are forced to sell to not lose money, I wonder what that is? Panic waterfall??

Past this influx of coins coming to market to be made fiat, comes the generation of new coins by these new miners themselves. They slowly regain their outlay until they breach an ROI breakeven. Weirdly, as the price depresses this timeline becomes longer but the difficulty gets higher. On the flip side, if you paid for your miner at $120 a coin and you see  the price dropping you should be buying coins to replace that which you paid for your miner to lower it's cost to you.

All in all, at the present moment, the mining-price dynamic probably has the greatest impact on the exchange rate in terms of money flow, and I welcome comments on this confusing subject.

[Cablez]

+1

Don't forget about KNC and Bitfury as well. All these sold out 'batches' are denominated in BTC but that won't get you wafer masks in Taiwan. May also help to explain why dumps happen in the middle of the US night.

[N12]

Some thoughts on that:

Tend to agree with Maged. Unless we get lots of fresh money quickly and can decimate the Bitcoins from the order book causing a positive feedback loop, we are in for a bleeding.

An important factor during times of historical bitcoin scarcity in the markets (BTC on MtGox's book at the peak has been decimated to an unbelievable 30k, and it is still low with barely 130k): Miners still have unbelievable profit margins, and most probably most choose and chose not to sell most of their profits and speculate instead. As the profit margins go down due to difficulty increase and price decrease, they are forced to sell their Bitcoins to cover their running costs, providing the market with a larger share of the 3600 daily Bitcoins. They will also begin to sell their accumulated coins to take profits if sentiment worsens. Now speculators not only have to compete with other speculators, but miners, and a negative feedback loop can emerge. People find themselves having vastly underestimated both the available and the newly added supply.

The time to buy Bitcoins could be when difficulty begins to deflate again. Admittedly, that could happen much further up if another media hype starts, but the chances in my eyes are relatively small.

Further factors making me more bearish in the mid term: Bitcoin exchanges are being eliminated and MtGox is returning to its monopoly status from years ago. Bitcoin still extremely centralized through mining pools (2 people conspiring can do a 51% attack, and actually have done so during the coin fork), block size limit hindering growth (see SatoshiDice), altcoin popularity rising (LTC soon to be added to MtGox; Ripple emerging as possible alternative). Oh, and of course that there are no popular actually used (ie, by lots of people with lots of volume) economic applications I know of besides SatoshiDice and Silk Road. There is still no Bitcoin economy.

PS: Talking on a scale of weeks/months here, of course. Short term I guess I am mildly bullish.