The Fallacy of Mining Cost and Bitcoin Price

[murasha]

There was a huge diffuculty update last time, its not easy to mine bitcoins now.
So why peaople sell them for a $15 at tradehill?

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[kokjo]

There was a huge diffuculty update last time, its not easy to mine bitcoins now.
So why peaople sell them for a $15 at tradehill?

mining is not everything, NOOB!

[murasha]

There was a huge diffuculty update last time, its not easy to mine bitcoins now.
So why peaople sell them for a $15 at tradehill?

mining is not everything, NOOB!

Please, re-check my question.

[kokjo]

There was a huge diffuculty update last time, its not easy to mine bitcoins now.
So why peaople sell them for a $15 at tradehill?

mining is not everything, NOOB!

Please, re-check my question.

you are saying: it harder to mine, therefor btc price should also rise, with the difficulty.
i am just saying: NOOB! it is not about mining.

[Jack of Diamonds]

i am just saying: NOOB!

Are you a really little kid? Just saying

Anyways, to OP: Price is not dictated by difficulty but by demand.

While in the past price has risen in a linear curve with difficulty, apparently a ton of old miners have loaded off their early bitcoins onto the market & keep the price low.

Speculators don't care about difficulty of mining. They only care about how many BTC are out there on the open market. And there seem to be plenty even if current miners didn't sell anything for a month.

Convince more people to use bitcoins & drive up demand, or convince old holders not to sell their coins at bargains like they did in mass at $4/btc a month or few back.

Either way works but both are pretty hard to accomplish.

[murasha]

kokjo, yes, you said just wat you said.
But I am not telling that difficulty is only price reason, but difficulty is a strong reason you know.
So something like "you are noob there are other reasons" definitely not an answer for my question.
Thats why I  hope that you will re-chek my question and we will talk about reasons that keeps rate at $15-17 usd per coin.

[killer2021]

Its supply and demand.

People selling off because of fear in the markets. Give it a week or two. Now is good time to buy, not sell.

Hold on to your btc for a while all the fear settles down.

[bitcoinTrader]

Its supply and demand.

People selling off because of fear in the markets. Give it a week or two. Now is good time to buy, not sell.

Hold on to your btc for a while all the fear settles down.

How about shorting (i.e seling and rebuying) rather than buying straight away?

Might be risky though 

[murasha]

apparently a ton of old miners have loaded off their early bitcoins onto the market & keep the price low.

Seems so.
I wish I could check depth of market history for last month.
Also, with mtgox problems maybe alot of bitcoins was stolen - from mtgox accounts, maybe from pools with hacked mtgox passwords, etc.
So maybe those al bitcoins for sale now.
Anywhay, shold we wat for a rise soon looking back at these events?

[kokjo]

kokjo, yes, you said just wat you said.
But I am not telling that difficulty is only price reason, but difficulty is a strong reason you know.
So something like "you are noob there are other reasons" definitely not an answer for my question.
Thats why I  hope that you will re-chek my question and we will talk about reasons that keeps rate at $15-17 usd per coin.

okey then a more serriose answer: mtgox has crashed. people are nervouse, and they dont know to sell or buy.
when trading resumes on mtgox, we will maybe see many panic trades, the price will go up and down, for a few days, who knows.
then when people has chilled a little off, the price will maybe rise again.

it is more the difficulty that follows the price, and not the other way around.
becuase when prices goes up more people will mine, and therefor the difficulty will rise.
and if the price goes down the difficulty will fall, because it will not be profitable for the miners to continue.

there is also many merchants who takes btc as payment.
and the speculators also have something to say about the price.
"panic" noobs who just wants bitcoins, who did buy at $36, when anyone else was selling.
all this factors has alot more to say about the price then mining.

it is not about mining, it about the economy.
if you think price=difficulty, then you are a noob.

sorry for calling you a noob before.

[Jack of Diamonds]

Anywhay, shold we wat for a rise soon looking back at these events?

Maybe in a few months, but not in the recent future.

Even before the crash on Mt. Gox, there were a ton of dimwits panicking and selling a massive amount of BTC even at $10 just because it notched down a dollar during the weekend
(check the price history if you don't believe me).

I.e. hysterical speculators with tons of bitcoins who made idiotic market moves by getting rid of their BTC holdings at any price possible.

How do you educate inexperienced beginners about market fluctuations? You don't. People have to learn it themselves.
Speculators will finally understand that bitcoin is not going to crash or skyrocket just because the value moves $0.5 up or down during the course of a normal day.

[JoelKatz]

There was a huge diffuculty update last time, its not easy to mine bitcoins now.
So why peaople sell them for a $15 at tradehill?

The supply is the same. The demand is the same. Why should the price change?

[Cluster2k]

BTC's price is not increasing as speculators have absolutely no care about how much it costs to buy hardware or pay for electricity and cooling.  The market is already very well supplied with over 6.6 million BTCs.  More than enough to speculate.  It could cost $0.95 to mine $1.00 BTC and the speculators couldn't care less.

[Teej]

It's absurd to think difficulty drives price.

The supply is increasing at a constant, known rate.  ~ 300 coins per hour average. 

The variable is demand. 

How about shorting (i.e seling and rebuying) rather than buying straight away?

That's not shorting.

Shorting is a gambling that the price is going to fall - you sell shares you don't have at what you think is the "high" price, and you have a certain amount of time (based on terms you have with your trading house) in which to buy shares back to cover your short position.  If the price drops as you thought it would, you win.  If the price goes up, you take it in the shorts. 

[murasha]

speculators have absolutely no care about how much it costs to buy hardware or pay for electricity and cooling.

Shure they dont care much about it.
As we seen before, speculators are ready to buy bitcoins for about $30 per coin, correct?

hysterical speculators with tons of bitcoins who made idiotic market

So the reason is hidden in sellers if they selling it now for $17.
I mean current price is caused by sellers more than low buyers bids, correct?
So bids depth was not decreased?
So there are no hidden reasons that makes buyers make low bids - only sellers that ready to sell or such small price?
I cant understand miners that sells bitocins for such price.

It's absurd to think difficulty drives price.

Not exacly.
If I all people got something harder that it was yesterday, thay wants mor money for it.
Its about any product, not just bitcoins.
To make supply stay in constant, people need to add more power to the network. They have to smend more resources.

[murasha]

speculators have absolutely no care about how much it costs to buy hardware or pay for electricity and cooling.

Shure they dont care much about it.
As we seen before, speculators are ready to buy bitcoins for about $30 per coin, correct?

hysterical speculators with tons of bitcoins who made idiotic market

So the reason is hidden in sellers if they selling it now for $17.
I mean current price is caused by sellers more than low buyers bids, correct?
So bids depth was not decreased?
So there are no hidden reasons that makes buyers make low bids - only sellers that ready to sell or such small price?
I cant understand miners that sells bitocins for such price.

It's absurd to think difficulty drives price.

Not exacly.
If I all people got something harder that it was yesterday, they wants more money for it.
Its about any product, not just bitcoins.
To make supply stay in constant, people need to add more power to the network. They have to spend more resources.

[Sukrim]

It's absurd to think difficulty drives price.

Well, as difficulty can influence supply and price can influence difficulty, they are at least loosely linked. You can estimate a maximum value for example for each difficulty, above which it would even pay off to rent Amazon nVidia GPU instances.

A minimum price however is more difficult to guess, as some people will even mine at a loss or don't even face losses when mining, because they dont pay for the electricity themselves.

Currently it looks like 3 difficulty increases ago that a few miners at least suspoend their operations. Noone know if this will continue though. Another factor is that in the past few days much lesss than the daily mining income worldwide was traded on exchanges. This puts quite some pressure on the more nervous "I-have-to-sell-each-day" miners to get rid of their earnings and leaves a lot of other miners with full bags of Bitcoins that they want to get rid of. As you see, they get a bit more careless (a lot of "double trouble" games in the Marketplace popping up) - might even be a good thing, if they now start to use it more as money than as "gold"?

[Teej]

It's absurd to think difficulty drives price.

Not exacly.
If I all people got something harder that it was yesterday, thay wants mor money for it.
Its about any product, not just bitcoins.
To make supply stay in constant, people need to add more power to the network. They have to smend more resources.

The problem here is you're thinking of bitcoin mining as if it were a real world commodity market - as in, say, oil producers pump out oil and put it on the market where it's bought, used and is gone from the marketplace.  Such a market is one-sided.  Those who produce it set the price.  Occasionally commodities traders muddy the water, but by and large the producer determines the price.

That's not what happens here.  

It'd be more appropriate to think of what miners are producing as being like video game / subway / laundry tokens.  They have no value themselves.  Their worth is determined by what people are willing to accept them for, be it at bitmunchies, silkroad, whatever.  For the most part, any bitcoin merchant is basing their price in btc on what they think they can turn around and resell the btc for.  At any time, any token holder is free to resell their tokens.  The cost of producing the tokens is irrelevant...as is the ~ 400 btc per market being brought on the market every hour.  (Yes, ideally it's 300 but at least in recent months it's seemed like miners outpaced the difficulty, averaging 8-9 blocks per hour instead of 6 - if it actually averaged 6, the difficulty wouldn't move)

May not have been the intention behind bitcoin, but that's the way it works today.

There is nothing you can get for bitcoins that you can't get much easier in standard currency...except perhaps if you want the supposed anonymity of shopping at SR.  That is why btc has no value in and of itself.

[Findeton]

Well, as difficulty can influence supply

Difficulty does not influence supply. Supply is practically constant.

[Teej]

Well, as difficulty can influence supply

Difficulty does not influence supply. Supply is practically constant.

Right.  It's quite the contrary - supply influences difficulty.  As supply changes (more or fewer miners) difficulty compensates.

[DrYe5]

I have yet to see a rational explanation of why the price should track mining difficulty. Anyone?

[Sannyasi]

in theory: higher difficulty = less production of coins = less new coins coming into the market = supply/demand does the rest

[drknark]

Since the difficulty adjusts to keep the supply constant, I don't think that argument is valid. There is no reason for the price to track the difficulty. There are however some reasons why the difficulty should follow the price. When the reward for mining increases, more people are likely to start mining or to expand.

[lakehead]

As new people discover bitcoin as an investment, they'll each make a choice... buy bitcoins, or mine bitcoins.  So it goes, the more difficult they are to mine, the more attractive they are as simple buy option.

[fabianhjr]

No, it is more of:
1)Diff rises
2)Supply remains constant
3)Cost of producing a coin increases
4)Miners increase the ask in order to maintain a profit
5)Cycle repeats

[DrYe5]

No, it is more of:
1)Diff rises
2)Supply remains constant
3)Cost of producing a coin increases
4)Miners increase the ask in order to maintain a profit
5)Cycle repeats

Miners can't both buy coins to increase ask and sell coins to maintain profit. This requires new holders.

[Sukrim]

Well, as difficulty can influence supply

Difficulty does not influence supply. Supply is practically constant.

If 50% of miners quit because of difficulty, supply will go down 50% and difficulty will go down LATER to make supply catch up.

Just look at the graphs right now - as soon as there is less hash rate than what the difficulty suggests, you'll see a drop in supply too. Also since the network grew quit a lot so far, even a "correct" block rate of 6 blocks/hour would be quite a cut in supply!

Yes, it can be argued, that if 1 Bitcoin is worth 1 Million USD, it will still be worth to mine with very high difficulties and just get a few Microcoins.
You also need to factor in the psychological aspects of mining - it is much nicer to get 10 BTC worth 10 USD each than one single Millibitcent (0.001 BTC)  when 1 BTC is worth 100 000 USD. People are used to 2 digits max. after the decimal seperator when it comes to currencies. Yes, we could then just switch to trading in Millibitcents or so - BUT this is currently not happening, so people are more reluctant to spend 50 USD for 1 BTC than 50 USD for 1000 Millibitcents!

Currently for an average miner, you only get "a few cents" per day. Even if these would be worth more than a dozen coins some time ago, it sounds less, so they are being valued less. Even right now with >15 USD/coin I rarely see "uneven" amounts of Bitcoins asked/offered in the marketplace for example!

[Teej]

Let me put it this way.

In the past 17.5 hours, there's been approximately (17.5 * 50 * 6)= 5250 new bitcoins produced.

The total number changing hands on the open markets (as represented by bitcoincharts) is less than half of that.

Therefore, at least for this 17.5 hour sample of time, difficulty hasn't mattered in the least.

[kjj]

The system is a chaotic multi-variable nonlinear system where all the parts are interlinked.  Please stop trying to make sense of it by inventing serial relationships that do not exist.

If you serialize it into a false string of A causes B causes C relationships, you can be absolutely positive that you will never understand it.

Edit: 2011-06-26, proofreading failure.  understanding

[tsvekric]

ok, since people like to use gold as an example:

Lets say x amount of gold is worth $100.  It costs you $80 to mine x once you get the equipment and training to do so.  You still sell at $100, although your new gold entering the market will slightly drag the price down (slight increase in supply).  This drag down varies because who knows how much gold can be mined in a day - it changes.  This is not the case with bitcoins, no matter the difficulty there will always be the same amount of bitcoins mined.  This makes the currency facing constant pressure of an increasing supply - but this rate is mostly constant (as in, independent of difficulty).

Now back to gold; suddenly it costs you $10,000 to mine x amount of gold (that sells for $100) and you stupidly decide mining is a good idea.  You spend $10,000, you mine x gold, and you come to the market and want to be compensated for the increasing cost of mining and you are greatly disappointed - from the market's perspective, it is the exact same scenario as was first presenting: x gold enters the market, very slight pressure for the value of gold to move down due to an increase in supply.  The only difference is you were stupid enough to pay $10,000 to get $100 worth of gold.


Eventually mining will become not very profitable - it will only be left for people in it for the long haul who have already bought GPUs, or people who can mine on a free ride (at work or something).  Difficulty will adjust to price, not vice versa.  Once difficulty gets high enough to be not profitable at all, miners will start to leave - price won't just magically go up to help out the poor miners.  As of a month ago mining was profitable for anyone who chose to enter it - this is obviously not something that can be sustained.  Difficulty will rise to the point that it will not make sense for most people to enter it.

[bittersweet]

There was a huge diffuculty update last time, its not easy to mine bitcoins now.
So why peaople sell them for a $15 at tradehill?

It has been explained many times that difficulty doesn't determine price. What determines price is supply and demand. The factor of current difficulty is neglible. First of all, there are millions of coins on the market mined when the price and difficulty were much lower than now. Second, you are wrong if you think selling Bitcoins if it's below profitability margin doesn't make sense. It makes perfect sense if you believe price will go down so you can buy the Bitcoins back later. Or if you need cash. Or if you think investing in mining was your biggest life mistake and just want to quit and sell the hardware and Bitcoins before their price drops even more.

[bitcoinBull]

There was a huge diffuculty update last time, its not easy to mine bitcoins now.
So why peaople sell them for a $15 at tradehill?

Because they are scared they'll have to sell them for less tomorrow.

I've been updating graphs of the price over difficulty ratio since a couple of months ago (check my sig).  With difficulty at 1.3 million and price at $15, that's near the 1:1 ratio which is quite low historically.  Record low was around 0.75 in march when but difficulty was at 100,000 and price was $0.75.  (Yea, it rose that much that quick).

Speculators are fearful right now.  A lot got burned buying at $30.  Now they're selling on the cheap.  Look to price increases around the corner (yes, it will be increasing as a result of the difficulty increase.  Price drives difficulty and difficulty drives price: two-way causality).

[Thanak]

The difficulty of mining has gone up because a lot of people are mining because ... well it's still pretty easy. Right now most of the bitcoin market is for speculator.

Bitcoin has A LOT of potential as a currency but it's just that... potential. If you want to see the price really go up, you need to see real trade being made in bitcoin. That means goods and services, and not the type of services that are linked to bitcoin (mining contract, gambling).

You need to have people offering something of value in exchange for bitcoin... and those people will do it is they expect to get something of value in turn. Gambling and piramide junk are just spam that are keeping real economy from actually happening.

[bitcoinBull]

You need to have people offering something of value in exchange for bitcoin... and those people will do it is they expect to get something of value in turn. Gambling and piramide junk are just spam that are keeping real economy from actually happening.

Us dollars, Euros, etc. aren't something of value in return?  They are.  All that trading for USD is the real economy.  It doesn't need to be trades for drugs, porn, or socks to be real economic activity.

[chiropteran]

Difficulty and BTC value are related, but there is some wiggle room involved.


At one extreme is the cost to produce 1 BTC based on electricity.  If you assume hardware cost is free (as it is for some miners, who only mine on hardware they already bought for other purposes), the cost to produce a BTC is only the additional electricity expended.  

This sets the hard lower limit for value.  If value ever gets lower than this point, NO rational miners will mine, and difficulty will plummet.

At the other extreme is the total package cost to buy hardware, pay for it's leased location, electricity, etc, and pay it all off.  It's harder to pick an exact point, but i'd say for most people when you can pay off the entire hardware investment plus electricity and opportunity costs within 2 weeks of mining...

This sets the hard upper limit for value.  If value gets higher than this point, mining becomes so insanely profitable that even the cautious investors will start buying hardware to mine and difficulty will increase massively.

Reality is that the market adjusts well before these hard limits are ever reached.  But you have to realize, there is a wide spread of values between these extremes.  Based on current difficulty and hardware costs, the hard lower limit is around $2-3/BTC for many electricity costs, while the hard upper limit is around $80/BTC based on some very rough estimates I just made in my mind.  Don't sue me if I am off, the point is there is an upper and lower limit based on difficulty, but it is a wide range and there won't be immediate changes based on difficulty.

[bittersweet]

Us dollars, Euros, etc. aren't something of value in return? They are. All that trading for USD is the real economy.  It doesn't need to be trades for drugs, porn, or socks to be real economic activity.

No, it's not the same. If you have to exchange money every time you want to buy some real goods you can just as well get rid of Bitcoins completely and stay with USD and gold - it's less hassle and less risk. "Economy" based solely on generating numbers and selling them for USD is not sustainable in the long run.

[Thanak]

Us dollars, Euros, etc. aren't something of value in return? They are. All that trading for USD is the real economy.  It doesn't need to be trades for drugs, porn, or socks to be real economic activity.

No, it's not the same. If you have to exchange money every time you want to buy some real goods you can just as well get rid of Bitcoins completely and stay with USD and gold - it's less hassle and less risk. "Economy" based solely on generating numbers and selling them for USD is not sustainable in the long run.

Exactly, the gain of using bitcoin is not worth the hassle of switching cash to bitcoin and then bitcoin to cash (except maybe for drugs  ).

The current price is based on the speculation that real economy will pick up and has little to do with how rare a coin is.  Let's say I invent Thanakcoin, there are just like bitcoin, there will only be 10 of them in the world... they are super hard to mine. How much would they trade for.... zero ! no one expect Thanakcoins to be worth something in the future.

No matter how hard it is to get a bitcoin, if people don't expect a real economy to pickup in the long run, the price will not climb with the difficulty.

[tsvekric]

Difficulty and BTC value are related, but there is some wiggle room involved.


At one extreme is the cost to produce 1 BTC based on electricity.  If you assume hardware cost is free (as it is for some miners, who only mine on hardware they already bought for other purposes), the cost to produce a BTC is only the additional electricity expended.  

This sets the hard lower limit for value.  If value ever gets lower than this point, NO rational miners will mine, and difficulty will plummet.

At the other extreme is the total package cost to buy hardware, pay for it's leased location, electricity, etc, and pay it all off.  It's harder to pick an exact point, but i'd say for most people when you can pay off the entire hardware investment plus electricity and opportunity costs within 2 weeks of mining...

This sets the hard upper limit for value.  If value gets higher than this point, mining becomes so insanely profitable that even the cautious investors will start buying hardware to mine and difficulty will increase massively.

Reality is that the market adjusts well before these hard limits are ever reached.  But you have to realize, there is a wide spread of values between these extremes.  Based on current difficulty and hardware costs, the hard lower limit is around $2-3/BTC for many electricity costs, while the hard upper limit is around $80/BTC based on some very rough estimates I just made in my mind.  Don't sue me if I am off, the point is there is an upper and lower limit based on difficulty, but it is a wide range and there won't be immediate changes based on difficulty.

No, that doesn't make sense.  Miners do not all pay the same costs, they will drop out gradually as price drops/difficulty rises and will start up as price rises/difficulty falls.  Some people have very little costs, and if BTC gets low enough difficulty could drop to a point where even CPU mining would make sense again (especially for people who don't pay the electricity costs of the computer they are mining on).  I don't understand why you are using the term 'hard limit' for any of this.  It is a gradient.  As price rises, so will difficulty.  If electricity costs fall, difficulty rises (if price stays the same).  It is a marginal adjustment and BTC could rise to $100 each and depending on other factors it might not be rational to buy a mining rig.  

[Jaime Frontero]

The system is a chaotic multi-variable nonlinear system where all the parts are interlinked.  Please stop trying to make sense of it by inventing serial relationships that do not exist.

If you serialize it into a false string of A causes B causes C relationships, you can be absolutely positive that you will never understanding it.

^^this.

[bitcoinBull]

Us dollars, Euros, etc. aren't something of value in return? They are. All that trading for USD is the real economy.  It doesn't need to be trades for drugs, porn, or socks to be real economic activity.

No, it's not the same. If you have to exchange money every time you want to buy some real goods you can just as well get rid of Bitcoins completely and stay with USD and gold - it's less hassle and less risk. "Economy" based solely on generating numbers and selling them for USD is not sustainable in the long run.

You've already assumed that people buy BTC in order to buy real goods.  They don't.  We know that because the volume on the exchanges (who trade BTC for USD etc) is far greater than the volumes merchants see (who trade BTC for goods). 

So we know that most people buy BTC to store and transfer value, not goods per se.  They do so because bitcoin has many advantages over USD and gold (digital, decentralized, etc).  I agree it carries more risk, but with that risk also comes reward .  Bitcoin is like any other speculative asset (which can include any investment: currencies, real estate, commodities, tulips, etc) and is certainly one of the riskier (since it is newer).

But the speculation is not that people will want bitcoins as collector items or to buy alpaca socks or virtual avatars or anything else.  I speculate mainly that people will want bitcoins to store or transfer value not seizable by a central authority (which is to say that bitcoin is secure), and that others will continue speculating.

Ask the financial industry if speculation isn't a "real economy".  Or ask a homeowner burnt buy the mortgage crisis.  Bitcoin is a very real economy of a digital good and could be sustainable for as long as we live in a digital age.

[chiropteran]

No, that doesn't make sense.  Miners do not all pay the same costs, they will drop out gradually as price drops/difficulty rises and will start up as price rises/difficulty falls.

Duh.  That is exactly what I said. 

The hard limit is where all miners drop out or all miners mine.  Yes, there are a few irrationals who might mine even when it is economic suicide, and a few irrationals who won't mine even when it's guaranteed pure profit, but for the most part the hard limits apply.

In-between the limits, *some* miners will mine and others will choose not to, depending on individual situations.

 Some people have very little costs, and if BTC gets low enough difficulty could drop to a point where even CPU mining would make sense again (especially for people who don't pay the electricity costs of the computer they are mining on).  I don't understand why you are using the term 'hard limit' for any of this.

 

Because it is a hard limit.  At a certain price to difficulty ratio, electricity cost even for the most efficient miners is greater than mining income.  At that hard limit, only fools mine.

It is a gradient.  As price rises, so will difficulty.  If electricity costs fall, difficulty rises (if price stays the same).  It is a marginal adjustment and BTC could rise to $100 each and depending on other factors it might not be rational to buy a mining rig.  

Did you misunderstand my entire post?  My point was that difficulty and price are interlinked.  Saying "as price rises, so will difficulty" is an odd way to paraphrase my post.  Thank you for agreeing, even if you do so in an overly simplistic manner.  The numbers I listed were based on current difficulty.  Obviously if you assume some OTHER number for difficulty, the numbers I picked may not apply.

[CNMOH]

The key to understanding the bitcoin economy is knowing that you cannot understand it.

So just shut up and mine until it is no longer profitable.

[bittersweet]

But the speculation is not that people will want bitcoins as collector items or to buy alpaca socks or virtual avatars or anything else.

That's the only Bitcoin speculation that makes any sense, that in the future more traders than now will accept it as currency.

I speculate mainly that people will want bitcoins to store or transfer value not seizable by a central authority (which is to say that bitcoin is secure), and that others will continue speculating.

LOL. Well, good luck with that...

[bitcoinBull]

But the speculation is not that people will want bitcoins as collector items or to buy alpaca socks or virtual avatars or anything else.

That's the only Bitcoin speculation that makes any sense, that in the future more traders than now will accept it as currency.

Trading bitcoins for dollars is accepting it as currency.  And yes, I am speculating that there will be more traders in the future than now.

I speculate mainly that people will want bitcoins to store or transfer value not seizable by a central authority (which is to say that bitcoin is secure), and that others will continue speculating.

LOL. Well, good luck with that...

Thanks.  I've had great luck so far.  Of course, its not pure luck but also good foresight, IMHO.

[tsvekric]

No, that doesn't make sense.  Miners do not all pay the same costs, they will drop out gradually as price drops/difficulty rises and will start up as price rises/difficulty falls.

Duh.  That is exactly what I said. 

The hard limit is where all miners drop out or all miners mine.  Yes, there are a few irrationals who might mine even when it is economic suicide, and a few irrationals who won't mine even when it's guaranteed pure profit, but for the most part the hard limits apply.

There will never be a situation where no miners mine.  First of all, bitcoin would collapse in security, and second of all, I'd just sit at my job and CPU mine and make 300BTC/hr.  That's why there is no hard limits - free riders on one side, barrier to entry (expertise, OpenCL-ready graphics card availability) on the other.  If BTC drops below $2/BTC I will still mine because it doesn't cost me anything to sit at my work computer and run a mining program.

It is a gradient.  As price rises, so will difficulty.  If electricity costs fall, difficulty rises (if price stays the same).  It is a marginal adjustment and BTC could rise to $100 each and depending on other factors it might not be rational to buy a mining rig.  

Did you misunderstand my entire post?  My point was that difficulty and price are interlinked.  Saying "as price rises, so will difficulty" is an odd way to paraphrase my post.  Thank you for agreeing, even if you do so in an overly simplistic manner.  The numbers I listed were based on current difficulty.  Obviously if you assume some OTHER number for difficulty, the numbers I picked may not apply.

Difficulty is a function of price of BTC and cost of mining and not vice versa - we agree on that, I think.  But the market for BTC/$ does not 'adjust' to difficulty in any way.

[DrYe5]

Mining generates bitcoins which devalues each individual bitcoin. It occurs at a known rate, regardless of the number of miners. It should theoretically always be priced in.

Saying mining costs X and gives bitcoins X value is like saying because you paid $10 for a gallon of milk, milk should now cost $10.

This fallacy results from cognitive dissonance; too many miners in the shaft.

[HappyFunnyFoo]

99% of bitcoin price is pure market speculation.

The problem with assuming the value of bitcoin will relate directly to power consumption & generation costs is that this really only logically follows if you can rapidly convert bitcoins back into usable units of power - e.g., "power tokens".  This is not the case.  You could exchange bitcoin for dollars and then pay for your power bill, but there's absolutely no guarantee that selling 100 btc won't tank the market, or that the price drops relative to the dollar and they're redeemable for nothing.  Therefore, the cost of 'mining' bitcoins is only loosely related to power consumption costs.  Another problem with assuming the price is a function of power consumption & mining difficulty is you're admitting that bitcoin deflates 30-50% every 9 days, since if the value of bitcoin is a function of power consumption & hash difficulty, and power consumption/hashing requirements increase 30-50% every 9 days at current rates, it becomes clear that existing bitcoins increase in value 30-50% every 9 days.  That's rampant, impossible deflation.  Bitcoin is a useless commodity like gold - esteemed for its shininess and malleability, ineffective as a medium of exchange in modern day society, and limited in function outside of being a great tool for the criminal market.

[chiropteran]

There will never be a situation where no miners mine.  First of all, bitcoin would collapse in security, and second of all, I'd just sit at my job and CPU mine and make 300BTC/hr.  That's why there is no hard limits - free riders on one side, barrier to entry (expertise, OpenCL-ready graphics card availability) on the other. 

I think you still missed something I am trying to get across.

The hard limit I stated is for the current difficulty.  Now in reality, if that limit is reached (BTC value is below electricity cost to mine), when miners start to mass drop-out, difficulty will go down in the next adjustment and everything will be fine.  Also, many miners will drop out early, before the hard limit is reached, because individual energy costs vary and willingness to mine for little profit isn't universal.

The hard limit simply means everyone would drop out if reached this point.  Reality is that most miners would drop out before it is reached, and furthermore reality is that as these miners dropped out difficulty would go down before the hard limit was hit and adjust the limit.


As far as the "other side", the barrier to entry you refer to doesn't exist because it doesn't require new miners to start mining- existing miners can simply add additional mining hardware, if profit is high enough.  It doesn't matter if x% of bitcoin users will never have the capability to buy even a cheap mining rig.  If it becomes profitable enough, mining difficulty WILL be pushed up because of existing miners who add additional capacity.

Although, just like the lower hard limit, the upper hard limit will never really be reached, because some miners are willing to add more capacity at lower levels of profit, which in turn will push up difficulty and keep the hard limit from ever being reached under normal circumstances.

If BTC drops below $2/BTC I will still mine because it doesn't cost me anything to sit at my work computer and run a mining program.

I covered this too.  A few irrational people would mine even knowing it'll be at a net loss.   While it might be a gain for you, your employer is losing electricity, and overall it's a net loss..  You might as well steal money from a bank and use it to pay for your electricity.  But again, this wouldn't occur because the market would adjust before hitting this point.

[DrYe5]

99% of bitcoin price is pure market speculation.

The problem with assuming the value of bitcoin will relate directly to power consumption & generation costs is that this really only logically follows if you can rapidly convert bitcoins back into usable units of power - e.g., "power tokens".  This is not the case.  You could exchange bitcoin for dollars and then pay for your power bill, but there's absolutely no guarantee that selling 100 btc won't tank the market, or that the price drops relative to the dollar and they're redeemable for nothing.  Therefore, the cost of 'mining' bitcoins is only loosely related to power consumption costs.  Another problem with assuming the price is a function of power consumption & mining difficulty is you're admitting that bitcoin deflates 30-50% every 9 days, since if the value of bitcoin is a function of power consumption & hash difficulty, and power consumption/hashing requirements increase 30-50% every 9 days at current rates, it becomes clear that existing bitcoins increase in value 30-50% every 9 days.  That's rampant, impossible deflation.  Bitcoin is a useless commodity like gold - esteemed for its shininess and malleability, ineffective as a medium of exchange in modern day society, and limited in function outside of being a great tool for the criminal market.

So ask yourself this: If you were a miner for the past year, six months, whatever and the price hit a stable point. Would you sell? How much?

[wolftaur]

So ask yourself this: If you were a miner for the past year, six months, whatever and the price hit a stable point. Would you sell? How much?

I sell a portion. I have to be able to give the electric company the money for what my mining rigs use. I sometimes sell to get more hardware. But I'm really planning to hold at least some on a continual basis, if possible. Having something spendable is always a good thing, whether it's fiat or not. Even if I can't buy everything I need (at the moment!) with bitcoins, I always have the option of buying something I need I can get with bitcoins, and leaving more dollars in my bank account as a result.

[dinzy]

If difficulty goes up that means more people are mining, hence there is a higher demand for BTC since more are involved in creating them.  New miners are likely new to bitcoin and hence will want to mine/buy coins.  So difficulty increase could correlate well to price increase if it is due to increased demand. 

[DrYe5]

If difficulty goes up that means more people are mining,

Not entirely true. Difficulty also increases with time, even if the same or even less people are mining.

hence there is a higher demand for BTC since more are involved in creating them. 

Also not true. Since some can mine for free (on CPU, at school, etc.), mining demand is not like buying demand. They must be accounted for separately.

  So difficulty increase could correlate well to price increase if it is due to increased demand. 

Contrarily, buying demand is reduced by mining.

[DrYe5]

Difficulty also increases with time, even if the same or even less people are mining.

I suppose this isn't entirely true? Can someone elucidate?

[Keninishna]

Well I wonder what the average cost of a 1 GH/s rig. Lets say 800$ and eletricity to run it for 1 month lets say 25$. That rig will generate ~ 22 bitcoins a month. Initial investment: 38$ a BTC. Close to double market price and your mining investment will stay around that over time due to difficulty increases. I think the market is just a few months lagged but once people realize the worth of their hard earned bitcoins it will go up because its cheaper to just buy the coins then to mine them.

[chiropteran]

Not entirely true. Difficulty also increases with time, even if the same or even less people are mining.

No, it does not.  It goes down if less people are mining.  Where do you get your facts?

[DrYe5]

Not entirely true. Difficulty also increases with time, even if the same or even less people are mining.

No, it does not.  It goes down if less people are mining.  Where do you get your facts?

I acknowledge as much in the following post. Thanks for the help.

Edit: There's confusion between cost of mining and mining difficulty. Because the bitcoins afforded by a block drops over time, it is possible for the cost of mining to increase while the number of miners decrease, but only at the end of a 210,000 block series. The rest of the time difficulty should indicate the hashing power of the community, not the number of miners.

There's no way to show these miners would be market buyers and to what extent. Again, it's possible to mine for free, especially this community.

[Jack of Diamonds]

Difficulty also increases with time, even if the same or even less people are mining.

I suppose this isn't entirely true? Can someone elucidate?

It's entirely untrue.

Difficulty will go down if less than 6 blocks per hour are found on average during a 336 hour span.

If people find more than 6 blocks/h difficulty will adjust upwards.

[Jonathan Ryan Owens]

Difficulty also increases with time, even if the same or even less people are mining.

I suppose this isn't entirely true? Can someone elucidate?

It's entirely utnrue.

Difficulty will go down if less than 6 blocks per hour are found on average during a 336 hour span.

If people find more than 6 blocks/h difficulty will adjust upwards.

Difficulty is the wagging of the dog in terms of price. The old Bitcoin money came into the market, which made speculation possible. Now there will be a moderate weekly gain, more press and more demand. The largest holders of Bitcoin know better than to dump their entire supply onto the market, as they lose out that way.

The market will always adjust. Difficulty and measured depreciation are great.