6 blocks an hour my ass!

[minor_miner]

Remember supply is btc as a function of dollars, so higher doller costs means lower btc supply.

I don't get this one.

We still generate Bitcoins at 50 BTC/Block, which means 300 BTC/hour at the average 6 Blocks/hour.

So how is the BTC supply now connected to the dollar? (non-rethorical question, I'm serious)

[Hunterbunter]

Remember supply is btc as a function of dollars, so higher doller costs means lower btc supply.

I don't get this one.

We still generate Bitcoins at 50 BTC/Block, which means 300 BTC/hour at the average 6 Blocks/hour.

So how is the BTC supply now connected to the dollar? (non-rethorical question, I'm serious)

I believe he was referring to the creation of BTC being linked to the cost of equipment/electricity in $$. The more expensive it is to mine, the fewer BTCs will be around...although for that to really be correct it can only apply to a particular 2016 block cycle, what with difficultly adjustments and all.

[minor_miner]

I believe he was referring to the creation of BTC being linked to the cost of equipment/electricity in $$. The more expensive it is to mine, the fewer BTCs will be around...although for that to really be correct it can only apply to a particular 2016 block cycle, what with difficultly adjustments and all.

So he thinks that a spike in electricity costs would result in an instantaneous shut-down of the not-yet-paid hardware of miners, even before the difficulty-adjustment comes after 15 days (max)?

That does not sound reasonable at all.

[talldude]

Sorry, but no. It's an equilibrium that sits on those three things (cost for a GH/s of mining power, price of btc in $, difficulty). What we have seen recently is price driving difficulty, but difficulty rising above a certain threshold (determined by a ratio of price and cost of GH/s) can cause rising price to cause an alignment to the ratio (because nothing in the market is making cost of GH/s lower in that ratio). This has happened clear twice as far as I've seen, and is probably happening again with the 50% increase soon.

Explain to me the mechanism behind difficulty having an effect on price. Because I cannot come up with any explanation for it since the same amount of BTC are produced regardless of difficulty. The supply is completely independent of the expense of mining. Just because it's more expensive to mine now doesn't mean that you can get more $ for BTC...

I'm just going to quote from another post of mine where I was talking about the exchange price at $200/btc and $5/btc.

"Something to note is that there is a bit of a difference in demand in these two scenarios. People don't have a demand for btc, they have a demand for the transaction. Let's say they want to use btc to buy a spot troy oz of silver ($36.25). In the first case they need .18 btc, in the second case they need 7.25 btc. Even though the real demand is the same, the nominal demand for btc is higher when the price is lower."

People keep confusing nominal demand for real demand, and I don't get why.

And another thing, an increase in difficulty represents a relative increase in cost to the miner (in both operational and opportunity costs). An increase in costs to the supplier translates into a rightward shifting supply curve. Remember supply is btc as a function of dollars, so higher doller costs means lower btc supply.

You don't seem to understand where prices come from in the aggregate market.

I have to first tackle the last part of your post, or what follows won't make sense. BTC supply is not affected by anything - it is fixed at ~6.7 million BTC in the short term and the rate of increase is fixed at ~2000 blocks per 2 weeks (given steady network hash power). The only thing that changes is the QUANTITY supplied, which is a function of price. The supply curve itself does not move (well, moves to the right at 2000 blocks per 2 weeks).

The demand for BTC is derived from the demand of doing transactions with it and from speculating (it's not really investing at this point, too risky). There most certainly is a demand for BTC. Any good or service (currency included) has a demand and a supply. Even if people only value the transaction, BTC is needed for the transaction, and thus there is a derivative demand for BTC.

Like I said before, price is determined by the intersection of supply and demand. The equilibrium price is the one that clears the market - everyone who wants to buy for more than that $ amount has been satisfied, and everyone who is willing to sell for less is also satisfied. For the price to reach $200/BTC, there has to be a LOT of demand because he supply is fixed.

To give an analogy, let's say there is an island that has 100 rocks, which the islanders use as currency. If there are 100 islanders, each one can have a rock on average. If there are 200 islanders, each one can only have 1/2 of a rock. The real value of a rock has increased DUE TO increased demand. This is the exact mechanism behind BTC dollar price in the long run (short run there's all kinds of speculation etc).

In your example, the real demand for BTC cannot be the same on an aggregate level. There can be only one price that clears the market (law of one price) for any given levels of supply and demand.  Since the supply is fixed, demand must be different in your example.

Here's my visual for this, courtesy of MS paint:



Notice that the quantity of BTC traded for dollars depends on the demand for BTC. A move from low demand (D1) to high demand (D2) increases both the quantity sold of BTC and the dollar price of BTC. Difficulty or whatever else variable you want to throw in does not have any bearing on the dollar value of a bitcoin. Everything depends on how much people want to have bitcoins vs. how much people want to have dollars.

[bcpokey]

Sorry, but no. It's an equilibrium that sits on those three things (cost for a GH/s of mining power, price of btc in $, difficulty). What we have seen recently is price driving difficulty, but difficulty rising above a certain threshold (determined by a ratio of price and cost of GH/s) can cause rising price to cause an alignment to the ratio (because nothing in the market is making cost of GH/s lower in that ratio). This has happened clear twice as far as I've seen, and is probably happening again with the 50% increase soon.

Explain to me the mechanism behind difficulty having an effect on price. Because I cannot come up with any explanation for it since the same amount of BTC are produced regardless of difficulty. The supply is completely independent of the expense of mining. Just because it's more expensive to mine now doesn't mean that you can get more $ for BTC...

I'm just going to quote from another post of mine where I was talking about the exchange price at $200/btc and $5/btc.

"Something to note is that there is a bit of a difference in demand in these two scenarios. People don't have a demand for btc, they have a demand for the transaction. Let's say they want to use btc to buy a spot troy oz of silver ($36.25). In the first case they need .18 btc, in the second case they need 7.25 btc. Even though the real demand is the same, the nominal demand for btc is higher when the price is lower."

People keep confusing nominal demand for real demand, and I don't get why.

And another thing, an increase in difficulty represents a relative increase in cost to the miner (in both operational and opportunity costs). An increase in costs to the supplier translates into a rightward shifting supply curve. Remember supply is btc as a function of dollars, so higher doller costs means lower btc supply.

You don't seem to understand where prices come from in the aggregate market.

I have to first tackle the last part of your post, or what follows won't make sense. BTC supply is not affected by anything - it is fixed at ~6.7 million BTC in the short term and the rate of increase is fixed at ~2000 blocks per 2 weeks (given steady network hash power). The only thing that changes is the QUANTITY supplied, which is a function of price. The supply curve itself does not move (well, moves to the right at 2000 blocks per 2 weeks).

The demand for BTC is derived from the demand of doing transactions with it and from speculating (it's not really investing at this point, too risky). There most certainly is a demand for BTC. Any good or service (currency included) has a demand and a supply. Even if people only value the transaction, BTC is needed for the transaction, and thus there is a derivative demand for BTC.

Like I said before, price is determined by the intersection of supply and demand. The equilibrium price is the one that clears the market - everyone who wants to buy for more than that $ amount has been satisfied, and everyone who is willing to sell for less is also satisfied. For the price to reach $200/BTC, there has to be a LOT of demand because he supply is fixed.

To give an analogy, let's say there is an island that has 100 rocks, which the islanders use as currency. If there are 100 islanders, each one can have a rock on average. If there are 200 islanders, each one can only have 1/2 of a rock. The real value of a rock has increased DUE TO increased demand. This is the exact mechanism behind BTC dollar price in the long run (short run there's all kinds of speculation etc).

In your example, the real demand for BTC cannot be the same on an aggregate level. There can be only one price that clears the market (law of one price) for any given levels of supply and demand.  Since the supply is fixed, demand must be different in your example.

Here's my visual for this, courtesy of MS paint:



Notice that the quantity of BTC traded for dollars depends on the demand for BTC. A move from low demand (D1) to high demand (D2) increases both the quantity sold of BTC and the dollar price of BTC. Difficulty or whatever else variable you want to throw in does not have any bearing on the dollar value of a bitcoin. Everything depends on how much people want to have bitcoins vs. how much people want to have dollars.

Some good points, however i will point out that there is some simplification going on, for example:

"Supply is fixed @ 6.7mil" Well, sorta... but also not really. if all 6.7mil were made available the market would crash like black friday. Fortunately most of the bitcoin supply is actually tied up under the wing of early adopters, who are nicely sitting on it for us. Thanks guys! Next 2000 blocks is actually 100,000 btc, not as small a number as seemed before. Every 2 weeks 100,000 new btc (1.5% of 6.7mil even) are collected and a good chunk of it by people who are looking to SELL SELL SELL, that tends to be what most of the market sees, mined coins by miners who want to pay off their real costing crap.

Aside from that i dont want to quibble with much of your points because my i key isnt working and TOO MANY GODDAMN WORDS HAVE THE LETTER i in THEM.

[talldude]

Some good points, however i will point out that there is some simplification going on, for example:

"Supply is fixed @ 6.7mil" Well, sorta... but also not really. if all 6.7mil were made available the market would crash like black friday. Fortunately most of the bitcoin supply is actually tied up under the wing of early adopters, who are nicely sitting on it for us. Thanks guys! Next 2000 blocks is actually 100,000 btc, not as small a number as seemed before. Every 2 weeks 100,000 new btc (1.5% of 6.7mil even) are collected and a good chunk of it by people who are looking to SELL SELL SELL, that tends to be what most of the market sees, mined coins by miners who want to pay off their real costing crap.

Aside from that i dont want to quibble with much of your points because my i key isnt working and TOO MANY GODDAMN WORDS HAVE THE LETTER i in THEM.

I think you're confusing quantity supplied and aggregate supply. There are 6.7 million coins out there for the taking - the price determines what quantity of those coins will be sold at any given time. Granted, I haven't put in any psychological factors that may actually shift the supply curve since I'm keeping it very clean, basic economics (which means there are a lot of assumptions built into the model which may or may not hold). I'm also not even going to start building a dynamic model that takes time into account.

[Fjordbit]

I don't get this one.

We still generate Bitcoins at 50 BTC/Block, which means 300 BTC/hour at the average 6 Blocks/hour.

So how is the BTC supply now connected to the dollar? (non-rethorical question, I'm serious)

I believe he was referring to the creation of BTC being linked to the cost of equipment/electricity in $$. The more expensive it is to mine, the fewer BTCs will be around...although for that to really be correct it can only apply to a particular 2016 block cycle, what with difficultly adjustments and all.

No, I was referring to the textbook definition of supply, which is the function of units offered at a given price. As the price goes up more units are offered.

People also keep thinking that the mined coins are the only supply and that they all go onto an exchange immediately and that they sell regardless of the price. All of these things aren't true. Before Mt. Gox went down, the daily volume was 8 times the mining rate, we all know that miners hoard their btc, and if the market rate goes down, a lot less people would sell. Similarly, if the cost to mine goes up, then the supply curve will move. This is very basic economics.

[Departure]

Explain to me the mechanism behind difficulty having an effect on price. Because I cannot come up with any explanation for it since the same amount of BTC are produced regardless of difficulty. The supply is completely independent of the expense of mining. Just because it's more expensive to mine now doesn't mean that you can get more $ for BTC...

Agreed, some people can't see this because they have spent money on hardware and they are trying to convince them self's they haven't made a mistake, So at the end of the day it wont matter what you tell these people because they will always make up excuses to why mining effects prices to get them self's through the tough times... But you have it 100% correct and that's the harsh truth....

[Kuber]

Explain to me the mechanism behind difficulty having an effect on price. Because I cannot come up with any explanation for it since the same amount of BTC are produced regardless of difficulty. The supply is completely independent of the expense of mining. Just because it's more expensive to mine now doesn't mean that you can get more $ for BTC...

Agreed, some people can't see this because they have spent money on hardware and they are trying to convince them self's they haven't made a mistake, So at the end of the day it wont matter what you tell these people because they will always make up excuses to why mining effects prices to get them self's through the tough times... But you have it 100% correct and that's the harsh truth....

But if the same amount of daily BTC will be spread on a higher amount of mining people.. every single miner should think that their BTC worth more $ per BTC - so they won't sell, thus won't supply the market with new BTC?
Though I don't know if the impact of stockpiling new BTC is big enough on the market to influence the price.
(Sorry if that thought was already discussed, haven't read the whole topic.)

Btw.: Network total   10.001 Thash/s
        Blocks/hour      6.08 / 592 s

[chungenhung]

it seems like the hashing power of the entire network is going down.
Yesterday it was 11THash, now down to 10.4Thash

[bcpokey]

it seems like the hashing power of the entire network is going down.
Yesterday it was 11THash, now down to 10.4Thash

it is more likely that the hashing power is remaining more or less constant and variance is wagging up and down.

[compro01]

it seems like the hashing power of the entire network is going down.
Yesterday it was 11THash, now down to 10.4Thash

people with inefficient rigs and/or pricey electricity may be shutting them off.

at $0.11/kw-hr (average US residential rate), anything less than 0.215 mhash/J is losing money at current exchange rate.

if you're in new england, you need at least 0.330 to get ahead.

for hawaii, you need at least 0.6.

[tsvekric]

No, I was referring to the textbook definition of supply, which is the function of units offered at a given price. As the price goes up more units are offered.

No, that is quantity supplied.  Supply = total BTC available.  Money supply (M0) is ~6.7million currently.  At any given price there is a different amount of quantity demanded and quantity supplied.  At $0.01 quantity demanded is very high and at $10,000 per BTC quantity supplied would be very high.  When talking about 'Supply' we're not talking at a specified price, we're talking about total available to be supplied in the market.

People also keep thinking that the mined coins are the only supply and that they all go onto an exchange immediately and that they sell regardless of the price. All of these things aren't true. Before Mt. Gox went down, the daily volume was 8 times the mining rate, we all know that miners hoard their btc, and if the market rate goes down, a lot less people would sell. Similarly, if the cost to mine goes up, then the supply curve will move. This is very basic economics.

No, if the cost of mining goes up the supply curve will not move.  You are confusing terms and concepts.  If people suddenly start paying $100 to mine 1BTC that won't suddenly move the market to meet that price - it just makes those people incredibly stupid.  A shift of the supply curve to increase price would mean that supply would be decrease (cost of mining does not change the amount of bitcoins entering the market!). 
We all know that miners hoard their btc?  How do we know that?  Miners aren't some weird exception to the market.  Every bitcoin owner/buyer has preferences and acts somewhat rationally (to a varying degree).  Everyone wants to buy low and sell high.  Nothing about the increased cost of mining would cause people to suddenly be willing the pay a greater amount for the same amount of BTC (a shift in the demand curve). 

[tsvekric]

Also, MtGox and Tradehill are not 'the market'
There is a barrier to trade in the bitcoin market, but that doesn't mean that every bitcoin doesn't have its price.

[Jack of Diamonds]

Also, MtGox and Tradehill are not 'the market'
There is a barrier to trade in the bitcoin market, but that doesn't mean that every bitcoin doesn't have its price.

Yes they are, at least when it comes to pricing and fiat exchanges.

TH and Mt. Gox get more volume in a week than the other exchanges combined get in a year.

Other exchanges are practically meaningless with volumes ranging from 10 to 200 BTC per day, something that is crossed within seconds on Mt. Gox.

[tsvekric]

Also, MtGox and Tradehill are not 'the market'
There is a barrier to trade in the bitcoin market, but that doesn't mean that every bitcoin doesn't have its price.

Yes they are, at least when it comes to pricing and fiat exchanges.

TH and Mt. Gox get more volume in a week than the other exchanges combined get in a year.

Other exchanges are practically meaningless with volumes ranging from 10 to 200 BTC per day, something that is crossed within seconds on Mt. Gox.

Currency exchange is not the only valuation of bitcoin and is only part of the market.  I would imaging SilkRoad and such has been a larger piece of the pie lately since MtGox went down.

[tsvekric]

plus MtGox and Tradehill's volume for today accounts for only about 0.4% of all bitcoins in existence.