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Author Topic: difficulty is holding back BTC value  (Read 2285 times)
chiropteran
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June 17, 2011, 02:57:22 PM
 #1

Would you pay $100 for an oz of gold, if you knew you could mine up 2 oz of gold for $30 of labor and a $20 shovel, with 100% predictability?  For most, the answer is, "of course not".  

Some irrational people will pay, because they don't do the work to determine if it's more efficient to mine the gold.  But most won't.

I feel that the value of 1 BTC won't rise above $20 and stay above $20 until the cost to mine 1 BTC is at or above $20 for most situations.

If BTC is to ever reach values of $1000 per coin or $100,000 coin, difficulty needs to increase 100 or 10,000 times.  Is there even enough mining hardware in existence to bring difficulty this high?

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onesalt
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June 17, 2011, 03:04:13 PM
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Hmm yes, make bitcoins almost impossible to obtain, thus giving all the buying power to a few pools who would conceivably be able to manipulate the market in a 51% attack. This is a good idea.
Coma
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June 17, 2011, 03:19:11 PM
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I think we are way above the 1 block per 10 minutes average. Difficulty should rise.
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June 17, 2011, 05:08:54 PM
 #4

Would you pay $100 for an oz of gold, if you knew you could mine up 2 oz of gold for $30 of labor and a $20 shovel, with 100% predictability?  For most, the answer is, "of course not".  

Except that the shovel does not cost $20, but more in the region of $1500. And what's more, its effectiveness decreases exponentially every few days in such a way that you cannot even be 100% sure of mining enough bitcoins to recoup your costs, before the shovel is practically obsolete.
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June 17, 2011, 05:27:25 PM
 #5

The thing is the bitcoin system is built so that mining makes up a progressively smaller amount of the total share of bitcoins over time, so those mining have less of an affect on prices as we continue on...
The other thing is that it doesn't really matter how many people are mining and at what difficulty because difficulty adjusts.  The target rate stays the same (for now) no matter how hard everyone is fighting for the next block.  Let's call Y the (price$ of BTC)*50*(your rate of winning a block at current difficulty with a mining rig).  If Y>(the cost of buying that mining rig + the cost of running that mining rig) then people will continue to enter the race for a block.  Once it drops below that over a certain time frame, it will just be left with those who have Y>(the cost of running the mining rid you already have) unless the selling off the rig used would net higher than Y over time. 

The thing is that difficulty shouldn't be affecting price.  The rate of BTC going to miners is going to stay about the same no matter the difficulty, so even if its volume shifted price it wouldn't be dependent on difficulty.
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June 19, 2011, 02:14:39 AM
 #6

The thing is the bitcoin system is built so that mining makes up a progressively smaller amount of the total share of bitcoins over time, so those mining have less of an affect on prices as we continue on...
The other thing is that it doesn't really matter how many people are mining and at what difficulty because difficulty adjusts.  The target rate stays the same (for now) no matter how hard everyone is fighting for the next block.  Let's call Y the (price$ of BTC)*50*(your rate of winning a block at current difficulty with a mining rig).  If Y>(the cost of buying that mining rig + the cost of running that mining rig) then people will continue to enter the race for a block.  Once it drops below that over a certain time frame, it will just be left with those who have Y>(the cost of running the mining rid you already have) unless the selling off the rig used would net higher than Y over time. 

The thing is that difficulty shouldn't be affecting price.  The rate of BTC going to miners is going to stay about the same no matter the difficulty, so even if its volume shifted price it wouldn't be dependent on difficulty.

I agree with that mostly, but there is also the fact that if mining becomes too unprofitable people who want to get bitcoins will buy bitcoins rather than mining hardware, thus driving up the price.

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Jaime Frontero
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June 19, 2011, 02:43:41 AM
 #7

* sigh *

to conflate mining difficulty with BTC exchange rates is the same as spending half of eternity (see: Zeno, paradox) trying to find the mathematical relationship between the prices of hookers and blow.

i mean, sure:  it looks like they're on the same table...
chiropteran
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June 19, 2011, 03:11:24 AM
 #8

* sigh *

to conflate mining difficulty with BTC exchange rates is the same as spending half of eternity (see: Zeno, paradox) trying to find the mathematical relationship between the prices of hookers and blow.

i mean, sure:  it looks like they're on the same table...

Let me ask you a question.  If you could spend $500 on a mining contract and be GUARANTEED 200 BTC in a week, or you could spend $500 US on BTC directly and have 10 BTC delivered in a week, which would you pick?  This is ignoring difficulty, randomness of mining, etc- the mining contract guarantees you 200 BTC in the same time frame as you would receive BTC buying them directly.  Please answer seriously.

bcpokey
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June 19, 2011, 03:23:42 AM
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* sigh *

to conflate mining difficulty with BTC exchange rates is the same as spending half of eternity (see: Zeno, paradox) trying to find the mathematical relationship between the prices of hookers and blow.

i mean, sure:  it looks like they're on the same table...

Let me ask you a question.  If you could spend $500 on a mining contract and be GUARANTEED 200 BTC in a week, or you could spend $500 US on BTC directly and have 10 BTC delivered in a week, which would you pick?  This is ignoring difficulty, randomness of mining, etc- the mining contract guarantees you 200 BTC in the same time frame as you would receive BTC buying them directly.  Please answer seriously.

What is the basis of this question? Obviously if I could choose between 1 widget or 100 widgets for the same price I'll go with 100. But consider this, if 10 bitcoins are worth $500, why would anyone sell a mining contract to deliver 200 bitcoins for $500? If they mined 200 bitcoins themselves, they could sell them for $10,000. Would be mildly retarded to make that contract and lose 20x value. The only feasible mining contracts are ones whereby the miner is paid the equivalent amount to the hardware costs to generate the amount of BTC/Hashrate they promise (or perhaps with a small discount) for a limited duration. This again will not relate BTC price to mining, but rather mining to BC price.
chiropteran
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June 19, 2011, 03:30:42 AM
 #10


What is the basis of this question? Obviously if I could choose between 1 widget or 100 widgets for the same price I'll go with 100. But consider this, if 10 bitcoins are worth $500, why would anyone sell a mining contract to deliver 200 bitcoins for $500? If they mined 200 bitcoins themselves, they could sell them for $10,000. Would be mildly retarded to make that contract and lose 20x value. The only feasible mining contracts are ones whereby the miner is paid the equivalent amount to the hardware costs to generate the amount of BTC/Hashrate they promise (or perhaps with a small discount) for a limited duration. This again will not relate BTC price to mining, but rather mining to BC price.

I simply wanted to establish the fact that there indeed is a relationship between difficulty of mining and price of BTC.  The relationship has been shown, now we are simply haggling over price.

bcpokey
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June 19, 2011, 03:40:04 AM
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What is the basis of this question? Obviously if I could choose between 1 widget or 100 widgets for the same price I'll go with 100. But consider this, if 10 bitcoins are worth $500, why would anyone sell a mining contract to deliver 200 bitcoins for $500? If they mined 200 bitcoins themselves, they could sell them for $10,000. Would be mildly retarded to make that contract and lose 20x value. The only feasible mining contracts are ones whereby the miner is paid the equivalent amount to the hardware costs to generate the amount of BTC/Hashrate they promise (or perhaps with a small discount) for a limited duration. This again will not relate BTC price to mining, but rather mining to BC price.

I simply wanted to establish the fact that there indeed is a relationship between difficulty of mining and price of BTC.  The relationship has been shown, now we are simply haggling over price.


My point is that the situation is completely artificial and this is why bitcoin price is not dependent on mining. It's like saying the price of gold is related to oranges because:

If you could buy 1oz of gold for $500 in a week, or choose between giving someone $500 worth of oranges for 100ounces of gold in a week, which would you choose? Ah-ha, therefore oranges effect the price of gold!

If the situation would never reasonably occur it is invalid as an argument. (p.s. oranges are a commodity so it's not as totally ridiculous as it sounds).
chiropteran
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June 19, 2011, 03:44:34 AM
 #12


If the situation would never reasonably occur it is invalid as an argument.

Do you know why the situation would never reasonably occur?  I'll tell you why: because the value of BTC is related to difficulty, and before it reached a 20:1 relationship more miners would start mining and some buyers would quit buying.

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June 19, 2011, 07:23:31 AM
 #13


If the situation would never reasonably occur it is invalid as an argument.

Do you know why the situation would never reasonably occur?  I'll tell you why: because the value of BTC is related to difficulty, and before it reached a 20:1 relationship more miners would start mining and some buyers would quit buying.

You're making claims without anything to back them up.

Still around.
mp420
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June 19, 2011, 09:09:34 AM
 #14


If the situation would never reasonably occur it is invalid as an argument.

Do you know why the situation would never reasonably occur?  I'll tell you why: because the value of BTC is related to difficulty, and before it reached a 20:1 relationship more miners would start mining and some buyers would quit buying.

Do you perhaps subscribe to the labour theory of value? You do realize it has been quite universally rejected and disqualified?

The value of BTC is related to difficulty, yes, but the causality goes primarily the other way around. Value of BTC drives difficulty. Why is this? It's because there are delays and uncertainty in the system. Mining (at least GPU mining) has been fairly profitable so far, but there's no guarantee it will be in future. Miners are willing to invest into mining hardware and take the risks only if they perceive that the profit margin offsets the risks. And of course there's a delay between deciding to start mining and actually setting up a mining rig.

It's all about supply and demand, and marginal utility.
chiropteran
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June 19, 2011, 01:48:45 PM
 #15

Value of BTC drives difficulty.

And vice versa, as shown above.  Or are you an irrational who would buy 10 BTC for $500 even if you could mine 200 for the same $500?

Mining and buying BTC are 2 different ways to do the same thing: obtain BTC.  If you are rational about it, and one method is significantly more efficient than the other, you will use that method.  Therefore difficulty and value are closely related.  Difficulty gets too low, rational people shift to mining.  Value gets too low, and rational people shift away from mining into buying.

For this to not be true, the following statements would apply to you.

1- You would continue mine and expend money on mining at a loss.

2- You would pay $500 directly for 10 BTC even when mining contracts offering 200 BTC for $500 exist.


I believe these two examples are acts of irrational people.  Perhaps a few members of the bitcoin community would take such actions, but I believe the market as a whole is mostly rational and all evidence so far as shown that it is as far as these examples go.

Here is some more evidence.
http://forum.bitcoin.org/?topic=7427.0

Notice that whenever things get too far out of whack, there is a huge correction.

hugolp
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June 19, 2011, 01:54:24 PM
 #16

Value of BTC drives difficulty.

And vice versa, as shown above.  Or are you an irrational who would buy 10 BTC for $500 even if you could mine 200 for the same $500?

Mining and buying BTC are 2 different ways to do the same thing: obtain BTC.  If you are rational about it, and one method is significantly more efficient than the other, you will use that method.  Therefore difficulty and value are closely related.  Difficulty gets too low, rational people shift to mining.  Value gets too low, and rational people shift away from mining into buying.

Not necesarely. A lot of people dont have the knowledge or can not be bothered going into mining, so even if mining is more profitable at some point they will be buying. In the same way, even when buying is the most profitable option people can make long term plan and decide to go mining. In reality, nobody knows what will be more profitable, mining or buying. All people do is decide whether mining or buying is more profitable under the present circusntamces, but nobody knows what will be the future circumpstances so in reality nobody knows what the answer is. Its not as simple as you are painting it.
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June 19, 2011, 02:33:51 PM
 #17

I agree with the original poster, there probably is definietly some kind of correlation between difficulty and the price of bitcoin. I bet if you could graph it you would prove his theory pretty accurately.

I personally would take into account the cost of making a bitcoin vs buying it. I actually considered all of this when I thought of buying a mining rig.

difficutly will also match price because if there is any profit to be made in running your mining rig, people will do so until the cost of making a bitcoin equals the price of the bitcoin. Simple economics 101 here.


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June 19, 2011, 02:48:33 PM
 #18

If everything were in a state of equilibrium, then what the OP stated would be true. As things currently stand, the Bitcoin economy is expanding and things are certainly not in equilibrium.

It may still be cheaper to produce a Bitcoin vs. mining, but if I had an immediate need for 50 BTC to buy something from Silk Road I would certainly not attempt to order parts from Newegg, build the miners and then wait several weeks for my 50 BTC to trickle in. Instead, I would first try to buy it locally (possibly from Craigslist), failing that I would go the Mt. Gox which would take 1 week max.

Yes, there still is some relation between the cost of mining 1 BTC and the price of 1 BTC on the open market, but it is just one of the many factors that determine the open market price. While there is a tendency for both prices to converge over the long term, in the near term you cannot really say what will happen.
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