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Author Topic: Why oh why does blocks/hr rate rise at the end if a difficulty period?  (Read 1514 times)
Veldy
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June 24, 2011, 04:06:59 AM
 #1

Last value pulled from Bitcoin Charts.

Blocks/hour12.92 / 279 s
Difficulty877227
Estimated1369141 in 93 blks

56% increase in approximately 7 hours.

EVERYTIME the rate rises dramatically just before the difficulty rise; perhaps increasing quite noticeably about two days prior to the actual rise.  I am sure there are a lot of individual miners out there are are trying to add a little to earn a little more, but I think the major increase is due to major investment by a few individuals; probably many who got in early and have a hoard of coins and even at today's $13-$17 rate per BTC that far exceeds the cost per coin of their original mining. 

Why does this bother me?  Well the obvious reason is my return goes down per unit of effort.  That is not the real reason however, as I didn't expect to be able to mine forever anyway.  The real reason it bothers me is that there are, presumably three types of miners out there:

  • Miners who used existing hardware, maybe with some modifications and started mining.  Maybe put enough parts together to get a few GPUs mining on one or more machines.  [This would be me .. no intentions of building out more hardware when mining ceases to be profitable (and when coins that are cheap now don't show signs of price increase later to make short term mining loss calculated risk investment)].  Most miners here probably don't mine on hardware purchased with credit or money they could not afford to spend.
  • Those who discovered Bitcoin and see all the upside, don't know or care to know about the real risk and jumped in head first.   These miners ordered massive rigs and invested thousands of dollars.  I know of one case in the forum of $10,000 and the person did not really even have a clue how bitcoin worked, or what they were building (but not a hardware novice).  I think miners in this category are either those who gladly spend on credit or spend money they can't afford to lose/use with the hope/belief that it will pay off (and for many, especially earlier on, it has).  Others in this group are likely individuals with a lot of disposable income, not really taking a risk, but may never recover the investment (or may, again especially if early on).
  • Then there is this last group.  Early miners who learned about this long before most of the world and were mining coins at a hefty rate at low difficulty, but the price of a bitcoin was quite low.  These might be called the faithful, and certainly the early adopters.  They are also the people, in many cases, with hoards of coins.  They have the problem of not being able to get market value for their coins due to dumping a large number at once would drive the price down, but over time, yes, money!  These individuals, in many cases, are using proceeds to continuously build more rigs and thus keep their mining rate up by building to keep up with difficulty [and then some since we are double what we should be for blocks/hour]

It is the last group that bothers me the most.   Yes, they took the initial risk when it was probably the highest, but they were also able to do it on just their gaming machines for quite awhile and make a lot of coins.  The net effect of the continued expansion, especially by this last group, is that they start "out mining" the median miner by such a significant amount and the difficulty grows so quickly [consider the difficulty percentage increase since just April 1st] that mining proceeds are rapidly approaching a trickle and may cease to be worth the effort very soon for the median miner [probably much higher than the median in fact].  This will lead to the consolidation of mining into the hands of a relative few.  The individuals in the first group will almost certainly drop out (I am one of those; never had the intention to build out a farm ... risk/reward is too high).  The second group will likely follow, although many of them may make a second attempt and double down, still not thinking about risk and in many cases going into further debt or spending more money that can't be afforded ... or the person with even more disposable income who just doesn't want to see it end for themselves.  The second group is a significant contributor to the problem, but will themselves be pushed aside in all likelihood; just after the first group.  The last group however, will have all the mining power in the hands of a few and hoards of coins in many cases which potentially allows for some market manipulation by buying and selling coins [perhaps in collusion with each other].  These people remain profitable on equipment, drove out most of the mining community and have already earned enough to have made a profit in spite of a hoard of coins ready to be sold at their whim.  Pool operators, exchange operators and a few other types earned their coins as part of a business venture and thus, may fall into any one of the groups.

Why does this trouble me?  Well, with control over mining, many if not most with significant number of coins and the rest of the market left to speculators until [if] commercial interests find a way into the bitcoin market directly [Amazon.com would be a huge boost for bitcoin for instance].  Speculators, especially with the coin rich few able to manipulate the market a little bit, will keep prices volatile as volume begins to rebuild in exchanges, and that will inhibit commercial ventures into the market.  Certainly, it is not difficult to see the number of coins out there and realize that many haven't moved in a long long time; trading is largely newly mined coins and coins already on the open market changing hands relatively often.  Knowing that the large bounty is out there, commercial entrance into the market would be dangerous indeed [unless used only as a fast medium of exchange ... so that they never hold coins, but simply use it as a currency vehicle]. 

Ok, enough, I have made my point.  I am afraid that this giant hardware build out, especially by the few in the last group, are risking future damage to bitcoin.  They would be left competing among each other with massive amounts of hardware [getting unknown financial returns .. no idea what the future price will be when this point is reached] and locking out all the rest who are making honest attempts at helping the mining cause at possibly a little profit.

Do I expect this post to make anybody think twice about what they are doing?  No, not really; although I hope it tempers the mania of the individuals in the second group who are building out on credit or money they can't afford to spend.  I would hate to read about people who have gotten in too deep and can't get out [especially at today's bank robber credit card interest rates].  This applies to speculators as well, but at least they are not consolidating the mining power and holding on to marking moving numbers of coins [in most cases anyway].

Good luck all, but be careful ... people are clearly playing this for everything that it is worth and many [almost all the rest] are unwitting pawns who are taking a gamble with the hope of a getting their cut and getting rid of risk before being caught holding the hot potato.

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Veldy
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June 24, 2011, 05:40:34 AM
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It's because the Difficulty is starting to run out. Wink

That's what I said.  However, it isn't as if everybody keeps their gear offline until right before the difficulty change.  There is always a block rate spike in the 48-72 hours leading up to that time.  It's an odd trend if you ask me.  If it were just natural acquisition of hardware by new or growing miners, then it should be somewhat linear [clearly a drop after each difficulty increase], but it is more linear after the difficulty increase and then it takes a more exponential spike at the end of the difficulty period.  That doesn't seem like natural growth of interest or variability due to latency between hardware orders and getting the rig setup and online.  Maybe it is just coincidence over the last several difficulty periods?  Eh?

Oh yeah, it is already up to 13.52 / 266 s.  Pretty steep increase for an hour forty minutes or so.

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June 24, 2011, 01:14:24 PM
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I don't know what would you accept as a reasonable answer. You can be lucky I didn't discover bitcoin mining at the start of this year, because I would buy $75k worth of mining gear out of the gate and add approximately $10k hardware every month until today. As of today I would stop adding more hardware and would continue mining as long as I would still be up, even 1 cent over my electricity cost. I'm sure there are some bigger farms out there that maybe no one knows  about, but the thing is mine would be a significant % of the overall market for a long time. When difficulty would be high to meet my electricity cost I would sell 50% of my hardware at very reasonable price of lets say 40-50% of retail value. I would still mine with the rest and be willing to take a small loss on monthly basis. If difficulty would still go higher and there would be no sign of miners slowing down I would sell the rest of the hardware.

Up to that point I wouldn't sell a single coin. I would then calculate what I spent so far on my hardware+electricity+other costs-my hardware sale, and the amount of coins I would generate up to that point. Then I would wait for the right time to market enough of the coins to recoup all of my costs. I would split the rest of the coins 60:40, and start daytrading with the 40% part while keeping 60% for long term, no matter what happens with bitcoins for a few years.


I don't know why wouldn't early miners who then turned somewhat pro take a similar path. This is basically the answer to what you are asking when you grouping miners into 3 different groups.

I really don't understand anyone who is thinking that early miners had any risk, when its clearly obvious that they were always mining way more vs the current bitcoin price at that time, basically recouping their hardware cost within a month or two.


In the future, there will be less and less dedicated mining farms and more and more random miners who randomly discovered bitcoins and they happen to have some hashing power. This way the bitcoin project will spread out to more users who might eventually all throw few extra $ at the idea. If the total pool of bitcoin owners grows enough in the next 3 to 10 years this project will be successful, if not the whole thing will fade away and there will be a better bitcoin II project soon after followed by another and another until we get it right.
talldude
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June 24, 2011, 01:56:11 PM
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I really don't understand anyone who is thinking that early miners had any risk, when its clearly obvious that they were always mining way more vs the current bitcoin price at that time, basically recouping their hardware cost within a month or two.


Hindsight is 20:20. Bitcoin has always been very risky - you don't know if it's going to be around next month (political risk, price risk). It's easy to say now that it was a good idea to mine 6 months ago, but no one knew that for a fact back then.
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June 24, 2011, 06:25:52 PM
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OK, I should have worded it differently. Risk/reward was lightyears better back then compare to probably any difficulty increase that followed. So sooner you discovered bitcoins, less risky it was to add hashing power.
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June 25, 2011, 02:24:52 AM
 #6

All of this goes away when the LargeCoin group makes their ASIC.  They will then control the system because one well-designed ASIC could do 10TH/S.  If they have 1000 of these, so much for any GPUs
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