Is there evidence that there is a correlation between difficulty and price?

[Este Nuno]

And if so why do you think that is? What causes demand to go up? Supply stays more or less consistent from mining until the reward is halved. So I'm a little unclear on this.

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[odolvlobo]

I would expect there to be a correlation. As the price of BTC goes up, there will be more miners, and thus higher difficulty.

[sturle]

And if so why do you think that is? What causes demand to go up? Supply stays more or less consistent from mining until the reward is halved. So I'm a little unclear on this.

When price is high compared to difficulty, miners invest in more equipment and difficulty goes up.  When price is low and difficulty high, mining becomes unprofitable for many miners.  They stop mining to save electricity, and difficulty goes down.

[myself]

Is there evidence that there is a correlation between difficulty and price?

No

[odolvlobo]

And if so why do you think that is? What causes demand to go up? Supply stays more or less consistent from mining until the reward is halved. So I'm a little unclear on this.

I suspect your question is not really about correlation. You can look at the graphs of price and difficulty and the correlation is obvious.

Perhaps what you really want ask is "Does difficulty affect price?"

I don't think it does, at least not directly. I don't think anyone has come up with a good reason why it would. On the other hand, it could said be that as the difficulty goes up (or the reward goes down) the number of people mining will go down. Some of them might lose interest and that will result in a lower demand for bitcoins.

Supply stays more or less consistent from mining until the reward is halved.

The supply of BTC for sale continues to rise because mining increases the general amount of BTC. The amount of BTC sold on MtGox is 10 times the total amount of BTC being mined, so I don't think that halving the reward will make a noticeable difference in the supply of BTC for sale.

[trogdorjw73]

Is there evidence that there is a correlation between difficulty and price?

No

Wrong. As the others are pointing out, there's a strong correlation between difficulty and price. Difficulty doesn't affect price, of course, but price affects difficulty. I mine for coins, and I'm profitable above around $4 per BTC right now. I used to be profitable above $2 per BTC, but difficulty has more than doubled since that time, and that trend seems set to continue. When the reward halving occurs, I'll need the price to be at $8 or more to realistically turn a meaningful profit.

[myself]

Is there evidence that there is a correlation between difficulty and price?

No

Wrong. As the others are pointing out, there's a strong correlation between difficulty and price. Difficulty doesn't affect price, of course, but price affects difficulty. I mine for coins, and I'm profitable above around $4 per BTC right now. I used to be profitable above $2 per BTC, but difficulty has more than doubled since that time, and that trend seems set to continue. When the reward halving occurs, I'll need the price to be at $8 or more to realistically turn a meaningful profit.

do something
1 open excel
2 take the price on mtgox since day one
3 take the diff since mtgox did open
4 plot a chart with price and diff in % change not value

[RyNinDaCleM]

Is there evidence that there is a correlation between difficulty and price?

No

Wrong. As the others are pointing out, there's a strong correlation between difficulty and price. Difficulty doesn't affect price, of course, but price affects difficulty. I mine for coins, and I'm profitable above around $4 per BTC right now. I used to be profitable above $2 per BTC, but difficulty has more than doubled since that time, and that trend seems set to continue. When the reward halving occurs, I'll need the price to be at $8 or more to realistically turn a meaningful profit.

do something
1 open excel
2 take the price on mtgox since day one
3 take the diff since mtgox did open
4 plot a chart with price and diff in % change not value

well it's not 1:1, but a rising price clearly means that you can expect to see rising difficulty soon after!

[trogdorjw73]

Is there evidence that there is a correlation between difficulty and price?

No

Wrong. As the others are pointing out, there's a strong correlation between difficulty and price. Difficulty doesn't affect price, of course, but price affects difficulty. I mine for coins, and I'm profitable above around $4 per BTC right now. I used to be profitable above $2 per BTC, but difficulty has more than doubled since that time, and that trend seems set to continue. When the reward halving occurs, I'll need the price to be at $8 or more to realistically turn a meaningful profit.

do something
1 open excel
2 take the price on mtgox since day one
3 take the diff since mtgox did open
4 plot a chart with price and diff in % change not value

well it's not 1:1, but a rising price clearly means that you can expect to see rising difficulty soon after!

Exactly. No one said 1:1; they said a "correlation". Obviously there's *some* correlation, so the question is pretty silly as such. Is there a correlation between temperatures outside and the seasons of the year?

[firefop]

Also, as the difficulty goes up - miners make less - resulting in longer periods between selling. This can (and imo does) affect price. If you're close to the edge on your profitability you don't sell below a certain rate.

[sturle]

Also, as the difficulty goes up - miners make less - resulting in longer periods between selling. This can (and imo does) affect price. If you're close to the edge on your profitability you don't sell below a certain rate.

No, miners still make the same in total.  And because the combined daily volume at the exchanges is several orders of magnitude higher than the daily volume of mined coins, I doubt mining has any noticeable effect on the price right now.  Half of the coins which will ever exist have been mined already, and many miners choose to keep their coins.

[davout]

[molecular]

difficulty follows price (all else being equal)... it's as simple as that. People thinking it's the other way around must think again.

[bracek]

as difficulty rises, we can assume that the actual number of individuals mining is rising,
in other words,
the number of people wanting to acquire bitcoin is rising,
some of them could get impatient and acquire bitcoin faster ( by buying it )

[ElectricMucus]

as difficulty rises, we can assume that the actual number of individuals mining is rising,
in other words,
the number of people wanting to acquire bitcoin is rising,
some of them could get impatient and acquire bitcoin faster ( by buying it )

Or we can assume it's the same number of people wanting more bitcoins more badly or even just improved technology.

[Este Nuno]

When I posted this I actually was asking for evidence of correlation between price and difficulty, in the quantitative sense. I have not followed the mining arms race specifically, and I thought that there was at least potential for the difficulty to have risen over time independent of current market price. Theoretically, as a speculative move, someone could both purchase bitcoins, and mine them at break even or loss in the short term because they believed the future price would justify the mining at a loss, and that directly purchasing bitcoins might drive the price too high in a thin market, and therefore both buying and mining might be rational. I can imagine this being the case in the early stages of bitcoin for example.

I realize now that the difficulty has followed the price fairly closely in an apparently somewhat efficient matter. And that the market of miners are more or less just following their personal break even points with regard to the price of bitcoin and their electricity price. 

So at this point I can see that price and difficulty are in fact highly correlated, and changes in difficulty are primarily caused by changes in price.

[bracek]

as difficulty rises, we can assume that the actual number of individuals mining is rising,
in other words,
the number of people wanting to acquire bitcoin is rising,
some of them could get impatient and acquire bitcoin faster ( by buying it )

Or we can assume it's the same number of people wanting more bitcoins more badly or even just improved technology.

in both cases, desire is increasing

[ElectricMucus]

as difficulty rises, we can assume that the actual number of individuals mining is rising,
in other words,
the number of people wanting to acquire bitcoin is rising,
some of them could get impatient and acquire bitcoin faster ( by buying it )

Or we can assume it's the same number of people wanting more bitcoins more badly or even just improved technology.

in both cases, desire is increasing

You lost count that's 2 of 3 cases.

[molecular]

as difficulty rises, we can assume that the actual number of individuals mining is rising,
in other words,
the number of people wanting to acquire bitcoin is rising,
some of them could get impatient and acquire bitcoin faster ( by buying it )

OR we could assume that some newbies decided to mine instead of buy bitcoins and that's bad for price.

OR we could assume the new miners are botnets and/or gamers who just want to make a quick fiat buck and will sell all mining income and that's bad for price.

OR we can make the most sane assumption that the difficulty simply rises because mining profitability has risen (most likely due to a rise in exchange rate, but maybe also due to better technology being delivered or energy cost falling (yeah right))

[molecular]

So at this point I can see that price and difficulty are in fact highly correlated, and changes in difficulty are primarily caused by changes in price.

cool!