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Author Topic: Static or Reducing Difficulty, Panic?  (Read 2434 times)
MoonShadow
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June 07, 2011, 05:40:48 PM
 #21

Can you show me how difficulty affects price?

Here is the correlation between difficulty and price.  They have been VERY closely correlated historically.  People who say they are not related are misinformed

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.

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chiropteran
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June 07, 2011, 07:31:18 PM
 #22

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.

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.

tomcollins
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June 07, 2011, 08:11:51 PM
 #23

Can you show me how difficulty affects price?

Here is the correlation between difficulty and price.  They have been VERY closely correlated historically.  People who say they are not related are misinformed

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.

But people walking outside with umbrella is highly correlated with rain, therefore umbrellas cause rain!
tomcollins
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June 07, 2011, 08:20:35 PM
 #24

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.

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.

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.
ryepdx
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June 07, 2011, 09:24:51 PM
 #25

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.

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
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