Price V Difficulty speculation.

[Adrian-x]

My guess is, there are a lot of ASIC's coming on the market and the difficulty is going to rise for a while as it has. (I guess this is the start of the swan song for GPU mining - like GPU's were for CPU miners.) 

Supply of BTC is half what it was after June 2011 spike. I imagine it is going to be something similar to the time between October 2010 and March 2011 when Difficulty increased rapidly relative to Price. (When the first publically available GPU mining software came online triggering a demand for buying BTC over mining it)

So what going to happen in the coming year, is BTC undervalued given the coming ASIC arms race like the 2012's were relative to the 13's? 

Anyone care to share their thoughts?

The graph below is just a graphic representation of web data available it would have more value if you could show this relative to market adoption (possibly correlate mining reword relative to QT client downloads per month).

[smoothie]

So this assumes that difficulty will not rise substantially?

I doubt that with all the new influx of ASICs .

[Adrian-x]

So this assumes that difficulty will not rise substantially?

I doubt that with all the new influx of ASICs .

I am sure difficulty will go up a lot my lines on a jpg, show about a 40% increase in difficulty and a possible drop when GPU's pull out, maybe GPU Miners will start dropping out when we have another 2 big difficulty jump like the last one. Or maybe ASIC's go on and on and get cheaper and cheaper.

What I would like to know is could we see a flattening out of difficulty and price, if Difficulty increases exponentially, we will see far fewer new coins, in the hands of the many, kind of like the pre GPU miners, and delayed price action, or  an increase in price to offset the smaller 25BTC reward.  

Are we looking at the $1 catalyst that drove difficulty (GPU's) and the $30 catalyst that drove Mining adoption, and the $200 catalyst that drove huge Mining investments?  Or are we looking at something else?

[Rival]

Oddly enough, difficulty has very little to do with the value of BTC. I know it is counter-intuitive, but it is nonetheless true. In any given time frame the number of coins mined on average is stable. When it gets out of whack, the difficulty adjusts to get it "back in whack". The difficulty level functions as an automatic stabilizer on the supply. When a bunch of GPU miners blow a gasket because the difficulty rose and their profits evaporate, what you have to understand is that other people simply brought more hash power online and took the profit from the GPU miners. But the amount of coins mined remains stable. (There are minor variations when the hash rate gets way ahead of the difficulty, as just happened, and a larger than normal amount of coins are generated before the difficulty can catch up.)

The only thing an increase in difficulty means is that some people have increased the hash rate and are now taking an increased slice of the pie. The size of the pie however, remains basically the same. Only three things can increase the value of BTC: Increased levels of fiat being exchanged for BTC, increased levels of economic activity utilizing BTC, and decreasing the amount of BTC that is liquid and available for purchase/transactions that already exist (liquidity squeeze). If you see anything that indicates that these things are happening, it is a good indicator that BTC prices will rise.

Difficulty has no more than a temporary transitive effect on BTC price, and it can be safely ignored.

[chiropteran]

Oddly enough, difficulty has very little to do with the value of BTC. I know it is counter-intuitive, but it is nonetheless true. In any given time frame the number of coins mined on average is stable. When it gets out of whack, the difficulty adjusts to get it "back in whack". The difficulty level functions as an automatic stabilizer on the supply. When a bunch of GPU miners blow a gasket because the difficulty rose and their profits evaporate, what you have to understand is that other people simply brought more hash power online and took the profit from the GPU miners. But the amount of coins mined remains stable. (There are minor variations when the hash rate gets way ahead of the difficulty, as just happened, and a larger than normal amount of coins are generated before the difficulty can catch up.)

The only thing an increase in difficulty means is that some people have increased the hash rate and are now taking an increased slice of the pie. The size of the pie however, remains basically the same. Only three things can increase the value of BTC: Increased levels of fiat being exchanged for BTC, increased levels of economic activity utilizing BTC, and decreasing the amount of BTC that is liquid and available for purchase/transactions that already exist (liquidity squeeze). If you see anything that indicates that these things are happening, it is a good indicator that BTC prices will rise.

Difficulty has no more than a temporary transitive effect on BTC price, and it can be safely ignored.

Nonsense.  Difficulty doesn't adjust the number of bitcoin produced, but it has a massive effect on price.  When you buy a product in the store, which is sold in a competitive market (for example, orange juice) production costs of that product are a very important determinant of the price of that product.  If orange juice production costs increase, the price you pay increases also.

How can you expect to buy bitcoins for $1 when miners are paying $80 worth of electricty to produce each one?  It's not going to happen.  That is 3600 bitcoin per day that are going to be priced above market rate because miners won't take a loss.  With the current market, take 3600 bitcoin away that would normally be sold every day will certainly pressure value upwards.

On the other hand, if people are paying $250 per bitcoin while miners are profucing them for net $20 each, miners will be overjoyed to sell every bitcoin they produce.  That is basically 3600 bitcoin per day being dumped on the market at any price that will sell.  How can this not drive down the value of bitcoin?


Finally, look at historical difficulty vs value graphs.  Regardless of the absolute reasoning, there is clearly a close connection that has existed since the earliest days of bitcoin.

http://www.bitcoinx.com/charts1/chart_large_lin.png <- clearly obvious that if price gets out of whack with difficulty, there is a big correction downwards.

[adpinbr]

I'm interested wether the difficulty and price will go higher % wise for BTC or LTC considering gpu miners will be pushed out and into LTC

[Its About Sharing]

Difficulty is going up way more than what you are assuming in that graph. How do you have as having fallen? (Sorry if I'm off but I don't see dates there, just the run-up in price and fall).

http://bitcoindifficulty.com/

[lch]

Nonsense.  Difficulty doesn't adjust the number of bitcoin produced, but it has a massive effect on price.  When you buy a product in the store, which is sold in a competitive market (for example, orange juice) production costs of that product are a very important determinant of the price of that product.  If orange juice production costs increase, the price you pay increases also.

How can you expect to buy bitcoins for $1 when miners are paying $80 worth of electricty to produce each one?  It's not going to happen.  That is 3600 bitcoin per day that are going to be priced above market rate because miners won't take a loss.  With the current market, take 3600 bitcoin away that would normally be sold every day will certainly pressure value upwards.

On the other hand, if people are paying $250 per bitcoin while miners are profucing them for net $20 each, miners will be overjoyed to sell every bitcoin they produce.  That is basically 3600 bitcoin per day being dumped on the market at any price that will sell.  How can this not drive down the value of bitcoin?


Finally, look at historical difficulty vs value graphs.  Regardless of the absolute reasoning, there is clearly a close connection that has existed since the earliest days of bitcoin.

http://www.bitcoinx.com/charts1/chart_large_lin.png <- clearly obvious that if price gets out of whack with difficulty, there is a big correction downwards.

I disagree with what you have said.

Price is determined by supply and demand. Not the cost of production.

As difficulty increases, the cost of mining increase. As cost increases the pressure on miners to sell bitcoins increases as well, because they need the money to maintain their miners. This selling pressure will drive down the price of bitcoins. Even if miners to refuse the sell at a loss, other people will still sell because they have no cost.

Currently miners produce 11.95% of the total bitcoins  per year. If miners hold all the bitcoins they mine, taking a lost every month, than it may cause a collapse. However, that is unlikely, because  they may not be able to operate without profit for that long. Another thing to note is that the percentage will decrease as we have more bitcoins in circulation and as block reward decrease. Thus it safe to conclude that the dangers of a miner based price collapse will decrease every year.

[Its About Sharing]

Here is some good info from BFL: https://forums.butterflylabs.com/bitcoin-pools/2452-estimated-bitcoin-difficulty-august.html

snippet:

wildfire.ca
Were going though 15 -40% changes a month right now and no one even has a unit yet. It's easy going to get over 250m. With minimum monthly increases of 20 -60% for at least 6-12mo after that. Avalon says they have 1200 GHs out and BFL seems to have about 30Ghs in semi public hands. Once they both get there shipping up to speed the difficultly is going to blow all these numbers out of the water. There have been times in bitcoins difficulty history when its gone up 90%, 300% then 50% then 60% all in consecutive months and this was when next to no one was using it. Now everyone knows about it.

[giantdragon]

I fully agree with chiropteran. No sane miner will sell generated Bitcoins for price less that cost of production + some profit. With difficulty increase production costs rise dramatically (ASICs costs a lot and have no other application than mining).

[chiropteran]

Price is determined by supply and demand. Not the cost of production.

As difficulty increases, the cost of mining increase. As cost increases the pressure on miners to sell bitcoins increases as well, because they need the money to maintain their miners. This selling pressure will drive down the price of bitcoins.

You are writing on the assumption that every miner sells every bitcoin immediately at market value.  I can tell you that isn't true.  I got into bitcoin in the summer of 2011, right before the first $32 bubble and following crash. When bitcoin crashed from $32 eventually down to $3 per bitcoin, I did not sell a single one.  Every single bitcoin I mined I kept.  I didn't sell again until the end of 2012 when bitcoin started to rise rapidly again, I foolishly sold about 10 bitcoin for $20-$24 each.  The point is that miners are indeed influenced by price and it's relation with difficulty.

Or...
>Price is determined by supply and demand.

I agree, but supply is determined by willingness of miners to sell mined coins, which is directly determined by cost of production.

>Even if miners to refuse the sell at a loss, other people will still sell because they have no cost.

Yes, there are some irrational actors in every market, but their overall influence is small compared to the majority and they are not enough to cause a long term price change.  If some miners sell at a loss that is their own problem, but my feeling is that such miners are in the minority.

[lch]

You are writing on the assumption that every miner sells every bitcoin immediately at market value.  I can tell you that isn't true.  I got into bitcoin in the summer of 2011, right before the first $32 bubble and following crash. When bitcoin crashed from $32 eventually down to $3 per bitcoin, I did not sell a single one.  Every single bitcoin I mined I kept.  I didn't sell again until the end of 2012 when bitcoin started to rise rapidly again, I foolishly sold about 10 bitcoin for $20-$24 each.  The point is that miners are indeed influenced by price and it's relation with difficulty.

I am assuming that miners are more likely to sell their BTC when cost is high.

Yes, there are some irrational actors in every market, but their overall influence is small compared to the majority and they are not enough to cause a long term price change.  If some miners sell at a loss that is their own problem, but my feeling is that such miners are in the minority.

I am talking about the 99% of non-miners.

[chiropteran]

I am assuming that miners are more likely to sell their BTC when cost is high.

Why would it be different from any other business market?  When hard drive factories were destroyed by flooding (or whatever it was) did the hard drive manufacturers drop prices to sell more product to make up for the loss?  Hell no, hard drive prices went through the roof.  It was too expensive to produce more at the current price, so manufacturers raised prices across the board.

I am talking about the 99% of non-miners.

I'm talking about 3600 bitcoins per day.  The rest of the market can do whatever it always does, I'm saying that the newly mined 3600 bitcoin EVERY DAY is enough to push the market around a bit on it's own, regardless of what non-miners do.

Looking at mtgox right now, if 3600 bitcoin were dumped on the market as a market sell value of bitcoin would drop from $121.44 down to $118.14.  If someone were to buy 3600 bitcoin at market rates right now it would push value up to $123.80.  That is just one day's worth of mined coin.  There are other factors, but mined coin alone can account for a $2-3 change in bitcoin value each day.  Over a few months the change could be huge.  Now, most of the time things are in a relative level of equilibrium- enough mined coin are sold to keep the market fairly stable, while I'm sure some are hoarded.  But if the difficulty/value ratio gets too far out of whack that will change, and as anyone can see a 3600 coin per day change can push value around quite a bit.  Add that up over the course of weeks or months and price will dramatically change just because of the actions of miners.

[lch]

I'm talking about 3600 bitcoins per day.  The rest of the market can do whatever it always does, I'm saying that the newly mined 3600 bitcoin EVERY DAY is enough to push the market around a bit on it's own, regardless of what non-miners do.

Looking at mtgox right now, if 3600 bitcoin were dumped on the market as a market sell value of bitcoin would drop from $121.44 down to $118.14.  If someone were to buy 3600 bitcoin at market rates right now it would push value up to $123.80.  That is just one day's worth of mined coin.  There are other factors, but mined coin alone can account for a $2-3 change in bitcoin value each day.  Over a few months the change could be huge.  Now, most of the time things are in a relative level of equilibrium- enough mined coin are sold to keep the market fairly stable, while I'm sure some are hoarded.  But if the difficulty/value ratio gets too far out of whack that will change, and as anyone can see a 3600 coin per day change can push value around quite a bit.  Add that up over the course of weeks or months and price will dramatically change just because of the actions of miners.

So, none of the miners need to pay for maintenance if margins goes down?

[mgio]

Oddly enough, difficulty has very little to do with the value of BTC. I know it is counter-intuitive, but it is nonetheless true. In any given time frame the number of coins mined on average is stable. When it gets out of whack, the difficulty adjusts to get it "back in whack". The difficulty level functions as an automatic stabilizer on the supply. When a bunch of GPU miners blow a gasket because the difficulty rose and their profits evaporate, what you have to understand is that other people simply brought more hash power online and took the profit from the GPU miners. But the amount of coins mined remains stable. (There are minor variations when the hash rate gets way ahead of the difficulty, as just happened, and a larger than normal amount of coins are generated before the difficulty can catch up.)

The only thing an increase in difficulty means is that some people have increased the hash rate and are now taking an increased slice of the pie. The size of the pie however, remains basically the same. Only three things can increase the value of BTC: Increased levels of fiat being exchanged for BTC, increased levels of economic activity utilizing BTC, and decreasing the amount of BTC that is liquid and available for purchase/transactions that already exist (liquidity squeeze). If you see anything that indicates that these things are happening, it is a good indicator that BTC prices will rise.

Difficulty has no more than a temporary transitive effect on BTC price, and it can be safely ignored.

Nonsense.  Difficulty doesn't adjust the number of bitcoin produced, but it has a massive effect on price.  When you buy a product in the store, which is sold in a competitive market (for example, orange juice) production costs of that product are a very important determinant of the price of that product.  If orange juice production costs increase, the price you pay increases also.

How can you expect to buy bitcoins for $1 when miners are paying $80 worth of electricty to produce each one?  It's not going to happen.  That is 3600 bitcoin per day that are going to be priced above market rate because miners won't take a loss.  With the current market, take 3600 bitcoin away that would normally be sold every day will certainly pressure value upwards.

On the other hand, if people are paying $250 per bitcoin while miners are profucing them for net $20 each, miners will be overjoyed to sell every bitcoin they produce.  That is basically 3600 bitcoin per day being dumped on the market at any price that will sell.  How can this not drive down the value of bitcoin?


Finally, look at historical difficulty vs value graphs.  Regardless of the absolute reasoning, there is clearly a close connection that has existed since the earliest days of bitcoin.

http://www.bitcoinx.com/charts1/chart_large_lin.png <- clearly obvious that if price gets out of whack with difficulty, there is a big correction downwards.

You are completely wrong. Difficulty does not drive price. Price drives difficulty. If it is not longer profitable to mine, miners will stop mining and difficulty will decrease. If bitcoin goes up, more people will begin mining to take advantage of it. Difficulty would then go up.

If it cost $80 of electricity to make a $1 bitcoin, well then, no one would mine and the difficulty would plummet. The miners aren't able to demand any specific price. The market dictates that. And yes, they will take a loss if the need the money. But very quickly they will simply stop mining if they are going to keep on taking a loss.

Miners don't necessarily sell their bitcoins. They may to chose to hold. Whether they do depends on the bitcoin price and what they feel like the price will do. It is independent of difficulty though.

[chiropteran]

You are completely wrong. Difficulty does not drive price. Price drives difficulty. If it is not longer profitable to mine, miners will stop mining and difficulty will decrease. If bitcoin goes up, more people will begin mining to take advantage of it. Difficulty would then go up.

If it cost $80 of electricity to make a $1 bitcoin, well then, no one would mine and the difficulty would plummet. The miners aren't able to demand any specific price. The market dictates that. And yes, they will take a loss if the need the money. But very quickly they will simply stop mining if they are going to keep on taking a loss.

Miners don't necessarily sell their bitcoins. They may to chose to hold. Whether they do depends on the bitcoin price and what they feel like the price will do. It is independent of difficulty though.

Why did the value crash at $32 in 2011, but is holding steady at $120~ today?  Difficulty does indeed limit price.

If you could pay $100 for hardware (immediately delivered, no BFL shenanigans) that was mathematically proven to mine 5 bitcoin over the next month, or you could pay $200 for 1 single bitcoin, which one would you pick?  Most rational investors will buy bitcoin from the cheapest source.  If mining is a sure bet, and effectively significantly cheaper than buying directly, rational investors will mine. 

When bitcoin hit $30 back in June 9, 2011, difficulty was less than 1/30th of what it is today.  That would translate into $900 per bitcoin today.  Anyone who mines can do the math, if bitcoin was worth $900 each at current difficulty mining would be far more profitable than anything else, and buying bitcoin would be incredibly stupid when you can mine the coin for a fraction of the market price. 

>The miners aren't able to demand any specific price.

Sure they can.  Every bitcoin trader can pick their own price.  The special thing about miners is that they bring in 3600 brand new bitcoin every day.  As a trader or speculator, you only want to sell bitcoin if you think it's time to take some profit, or if you think value is likely to fall.  Miners don't care much about those things, but they do know enough that selling at a loss is dumb.  I don't claim to know how many miners hoard and how many immediately sell, but lets say it's a 50/50 split.  That would mean that the current equilibrium around $120 is based on 1800 bitcoin entering the system daily, at market prices.  If you study the exchanges at all you should be smart enough to realize that 1800 is a very significant amount of coin, enough to push value up or down by $1 easily.  Add that up for every single day, as mining is always going on, and you should realize that miners can and do demand whatever price they want, over time.  You remove that usual 1800 bitcoin per day flow from mining and value will climb by $1-2 per day on average.

Now, this doesn't occur much because typically value and difficulty DO follow each other fairly well.  But if you look at the graph I posted above ( http://www.bitcoinx.com/charts1/chart_large_lin.png ) it should be as clear as air that in the last 3 years, price exceeded the difficulty curve twice, and each time was followed by an immediate correction downwards inline with difficulty.  On the other hand, there have been ZERO equivalent corrections during times when difficulty exceeded value as usual.  You can hand wave and explain all you want, but from bitcoin's inception up until today price has indeed followed difficulty.

So, none of the miners need to pay for maintenance if margins goes down?

I don't think most do, no.  I think the majority are regular people who have a day job and mine on the side.  Do you personally know anyone who has quit their job to simply focus on mining bitcoin?  Mining is a fairly hands-off task, once you get things running you don't need to spend a lot of time on it, so you would have to have a really serious operation before it made sense to focus on mining full time at the expense of regular alternative income.

[mgio]

You are completely wrong. Difficulty does not drive price. Price drives difficulty. If it is not longer profitable to mine, miners will stop mining and difficulty will decrease. If bitcoin goes up, more people will begin mining to take advantage of it. Difficulty would then go up.

If it cost $80 of electricity to make a $1 bitcoin, well then, no one would mine and the difficulty would plummet. The miners aren't able to demand any specific price. The market dictates that. And yes, they will take a loss if the need the money. But very quickly they will simply stop mining if they are going to keep on taking a loss.

Miners don't necessarily sell their bitcoins. They may to chose to hold. Whether they do depends on the bitcoin price and what they feel like the price will do. It is independent of difficulty though.

Why did the value crash at $32 in 2011, but is holding steady at $120~ today?  Difficulty does indeed limit price.

If you could pay $100 for hardware (immediately delivered, no BFL shenanigans) that was mathematically proven to mine 5 bitcoin over the next month, or you could pay $200 for 1 single bitcoin, which one would you pick?  Most rational investors will buy bitcoin from the cheapest source.  If mining is a sure bet, and effectively significantly cheaper than buying directly, rational investors will mine.  

When bitcoin hit $30 back in June 9, 2011, difficulty was less than 1/30th of what it is today.  That would translate into $900 per bitcoin today.  Anyone who mines can do the math, if bitcoin was worth $900 each at current difficulty mining would be far more profitable than anything else, and buying bitcoin would be incredibly stupid when you can mine the coin for a fraction of the market price.  

>The miners aren't able to demand any specific price.

Sure they can.  Every bitcoin trader can pick their own price.  The special thing about miners is that they bring in 3600 brand new bitcoin every day.  As a trader or speculator, you only want to sell bitcoin if you think it's time to take some profit, or if you think value is likely to fall.  Miners don't care much about those things, but they do know enough that selling at a loss is dumb.  I don't claim to know how many miners hoard and how many immediately sell, but lets say it's a 50/50 split.  That would mean that the current equilibrium around $120 is based on 1800 bitcoin entering the system daily, at market prices.  If you study the exchanges at all you should be smart enough to realize that 1800 is a very significant amount of coin, enough to push value up or down by $1 easily.  Add that up for every single day, as mining is always going on, and you should realize that miners can and do demand whatever price they want, over time.  You remove that usual 1800 bitcoin per day flow from mining and value will climb by $1-2 per day on average.

Now, this doesn't occur much because typically value and difficulty DO follow each other fairly well.  But if you look at the graph I posted above ( http://www.bitcoinx.com/charts1/chart_large_lin.png ) it should be as clear as air that in the last 3 years, price exceeded the difficulty curve twice, and each time was followed by an immediate correction downwards inline with difficulty.  On the other hand, there have been ZERO equivalent corrections during times when difficulty exceeded value as usual.  You can hand wave and explain all you want, but from bitcoin's inception up until today price has indeed followed difficulty.

So, none of the miners need to pay for maintenance if margins goes down?

I don't think most do, no.  I think the majority are regular people who have a day job and mine on the side.  Do you personally know anyone who has quit their job to simply focus on mining bitcoin?  Mining is a fairly hands-off task, once you get things running you don't need to spend a lot of time on it, so you would have to have a really serious operation before it made sense to focus on mining full time at the expense of regular alternative income.

You still have it backwards. If it is cheaper to mine as a source of bitcoins at bitcoins current price, then people will mine and the difficulty will rise. That has 0 effect on the price of bitcoin. There are always going to be 3600 coins mined per day (until the block reward halves again). This never changes. Everyone else must buy bitcoins if they want them.

You are saying that if mining is cheaper relative to price then everyone will mine and price will drop. This is not true, because difficulty will quickly rise to compensate. Those who still want bitcoins will be forced to buy. Again, this is because the number of coins produced per day is constant, no matter how profitable mining appears to be.

When I look at that graph, I see difficulty lagging price. A boost in price, causes more people to want to mine, and thus a later rise in difficulty. It's not the other way around.

We'll see what happens in the next couple of months. DIfficulty will go up 2, 3, maybe 4 times by the end of the summer. During that time, I predict bitcoins price will not move much at all, and may even decrease slowly. I doubt we will see sustained price above 140 the next few months.

[kokojie]

Oddly enough, difficulty has very little to do with the value of BTC. I know it is counter-intuitive, but it is nonetheless true. In any given time frame the number of coins mined on average is stable. When it gets out of whack, the difficulty adjusts to get it "back in whack". The difficulty level functions as an automatic stabilizer on the supply. When a bunch of GPU miners blow a gasket because the difficulty rose and their profits evaporate, what you have to understand is that other people simply brought more hash power online and took the profit from the GPU miners. But the amount of coins mined remains stable. (There are minor variations when the hash rate gets way ahead of the difficulty, as just happened, and a larger than normal amount of coins are generated before the difficulty can catch up.)

The only thing an increase in difficulty means is that some people have increased the hash rate and are now taking an increased slice of the pie. The size of the pie however, remains basically the same. Only three things can increase the value of BTC: Increased levels of fiat being exchanged for BTC, increased levels of economic activity utilizing BTC, and decreasing the amount of BTC that is liquid and available for purchase/transactions that already exist (liquidity squeeze). If you see anything that indicates that these things are happening, it is a good indicator that BTC prices will rise.

Difficulty has no more than a temporary transitive effect on BTC price, and it can be safely ignored.

Nonsense.  Difficulty doesn't adjust the number of bitcoin produced, but it has a massive effect on price.  When you buy a product in the store, which is sold in a competitive market (for example, orange juice) production costs of that product are a very important determinant of the price of that product.  If orange juice production costs increase, the price you pay increases also.

How can you expect to buy bitcoins for $1 when miners are paying $80 worth of electricty to produce each one?  It's not going to happen.  That is 3600 bitcoin per day that are going to be priced above market rate because miners won't take a loss.  With the current market, take 3600 bitcoin away that would normally be sold every day will certainly pressure value upwards.

On the other hand, if people are paying $250 per bitcoin while miners are profucing them for net $20 each, miners will be overjoyed to sell every bitcoin they produce.  That is basically 3600 bitcoin per day being dumped on the market at any price that will sell.  How can this not drive down the value of bitcoin?


Finally, look at historical difficulty vs value graphs.  Regardless of the absolute reasoning, there is clearly a close connection that has existed since the earliest days of bitcoin.

http://www.bitcoinx.com/charts1/chart_large_lin.png <- clearly obvious that if price gets out of whack with difficulty, there is a big correction downwards.

Wrong, the price of orange juice is set by the demand of orange juice. If people don't want it, your cost to produce that orange juice is irrelevant. Also even if people do want it, but the price is too high, people will not buy it, so it doesn't matter if it cost you $10000 to produce orange juice (or mine bitcoin).

[johnyj]

This has been discussed for countless times, the only thing I can say is that there are many actors and each actor has his own different view

At one end of the spectrum, there are true believers and long term investors who want to get bitcoin (like winklevoss twins), they just want to get coin at the lowest cost and maybe hold them for decades. If it is cheaper to mine, they will invest in mining contracts, if it is cheaper to buy, they will buy from market. If there are many people mining, then it will become very difficult for them to mine the amount of coin they want, they will buy and raise the price. These people actively affect the market price, for them the difficulty directly affect their purchase decision and in turn affect the market price

At the other end of the spectrum, are those people who don't believe bitcoin and just want to make some quick fiat profit through mining, they will just sell the coins when the price is higher than their cost, and when price dropped below their cost, they will shutdown the mining operation. These people never hold bitcoin for too long and they passively react to the market price

Currently when ASIC miners are being deployed, the mining profit of ASIC devices are very high, most of the investors will invest in mining equipment and contracts, that in turn will reduce the buying support of the bitcoin. So until ASIC become widely adopted and their ROI dropped to a more reasonable level, there will be fewer bitcoin buyers to support the price. If the price falls or difficulty skyrocketing, that equilibrium will arrive much earlier

There are many GPU miner who missed the ASIC pre-order and can't get ASIC miners in a reasonable time frame if they order now, they might still consider buying bitcoins, but now the price is high, their purchase is not going to give the price much support

[Rival]

Bitcoins are not orange juice. Orange juice gets consumed, bitcoins do not.

That said, I think the point being missed by many is that bitcoins will always be profitable to mine... for somebody. Those with the best margins will continue to mine, those with the poorest will drop out. But as has been stated repeatedly, 3600 coins per day, whether mined by CPU, GPU, FPGA, or ASIC. Talk of this group or that group getting priced out means nothing. It never did, because someone will mine 3600 coins today, tomorrow, and the next day. The price of BTC does not make a single extra coin per day get mined even if every person on earth starts mining tomorrow. The difficulty simply rises to bring the number mined per day back to 3600.

The supply is increasing by 3600 per day and there is nothing anyone anywhere is going to do about it. Difficulty assures this. How much it costs Joe Blow to mine does not affect the price of bitcoins in the least. He may stop mining if it becomes unprofitable, but everyone who keeps mining will share the coins he would have mined. They will be mined anyway whether Joe mines them or not.

When a miner becomes unprofitable it is simply because other people are drinking his milkshake. Everything else is noise.