Difficulty and BTC value

[Trongersoll]

like any commodity, there is more to the price than just supply and demand. there is a psycological factor as well. One could argue that the charts showing a correlation are showing a coincidence. One could argue that because people believe that price rises with difficulty it will because the sellers will demand it and the buyers will follow. One can only argue increased or decreased demand because difficulty is adjusted to insure a stable supply.

Is there a correlation? there appears to be but not for any reason that anyone can actually prove.

The value of anything is only what someone else is willing to pay for it, not what the holder declares it to be.

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[drwho88888]

To use correlation in a profitable manner you don't need to prove causation and don't need to have a clue what the reason behind the correlation is. Just as long as the correlation can be walked forward, that's all that's needed.

That leads me to the next question. It will only be a matter of months before mining with everyday kit becomes a waste of time. Only those with kit in the tens of Gh's will get anything out of it. So what d'you think will happen then to the value of BTC ? And what will happen when they've all been mined ? Will the concept be dead by then ?

[btcfarseer.com]

Basically, the higher the difficulty, the higher the baseline for the price. Just my wild guess, not verified. If you are interested in difficulty, also you can check out this website to see how others' guess about future difficulty. http://btcfarseer.com

[ripple]

In the long term the Bitcoin price could be the most important factor affecting difficulty levels, as with higher Bitcoin prices greater resources are used for mining Bitcoins, pushing up hash rates and then difficulty levels.

In the medium term those ASIC bulk chip sales from Avalon will be the main consideration. The extra estimated 84 TH/s, at around $2.8 million in chip value, could have an enormous impact on mining output and difficulty levels thereafter, expected at end July 2013. ASICminer and products from other producers will also feature.

In calculating return on investment miners have to consider firstly the Bitcoin price and secondly the technology improvements allowing a faster hashrate per KW/h. It is hard to predict either future Bitcoin prices or technology improvements though in the medium term technology advancements are mostly visible.  In the longer term an adaption of Moore's law could apply to mining, if you consider the upgrade path we have seen for mining from Central processor, Graphics Processor, FPGA then ASIC etc.

I have plotted the following graph for a two year period comparing difficulty and Bitcoin price.

For most uses the graphical plot is quite satisfactory to judge the correlation by eye.

Whether there is evidence of the causal relationship for a econometrics statistician to prove a hypothesis on past data is relatively easy to establish by simply plugging the data into a advanced financial econometrics software program which gives you the probability of relationships and other measures such as the error variables, lag and noise.  I was about to do this when I discovered that while I have accurate Bitcoin price data, the data for past daily difficulty levels I had gathered, while fine for examining graphical correlation, that it may not be 100% accurate for other uses due to time Unix period between measures not being exactly 24 hours i,e, +{Time}/60/60/24+25569.

I sourced the data here:  blockexplorer.com/q/nethash

If anyone can point me to a source of 100% accurate daily historic data for difficulty levels from day one of Bitcoin to the present it would be very helpful indeed.

[bcpokey]

Crazy to me that this thread keeps coming up.

If you think that somehow difficulty influences the price, then you must be buying bitcoins like crazy right now given that difficulty is nearly guaranteed to to explode by the end of the year.

[notung]

My intuition says that there is a relationship, althought difficulty is just one of the aspects that could determine price and the opposite. Many other variables are involved.

Price could affect difficulty in this way:
1. Price raises
2. People gets interested in mining as it could be more profitable
3. Higher mining rate -> Higher difficulty
(opposite if price goes down)

[drwho88888]

If you think that somehow difficulty influences the price, then you must be buying bitcoins like crazy right now given that difficulty is nearly guaranteed to to explode by the end of the year.

Its that that I find interesting to speculate on. What will happen to BTC value when its no longer viable to mine without having an ASIC Thasher ?

Interest in the whole concept will wain because at the moment anyone can grab BTC for free (so to speak) but from a few months time all cpu, gpu and low hash ASIC mining rigs will be worthless. Will BTC plummet, or will it be worth more because of the limited availability (like gold). I suspect forums like this will also wain. It'll be interesting to see what happens.

[bcpokey]

My intuition says that there is a relationship, althought difficulty is just one of the aspects that could determine price and the opposite. Many other variables are involved.

Price could affect difficulty in this way:
1. Price raises
2. People gets interested in mining as it could be more profitable
3. Higher mining rate -> Higher difficulty
(opposite if price goes down)

I don't think anyone questions that price influences difficulty. That is almost a given. The question is whether difficulty influences price, which doesn't make sense to some (like me) but does to others.

If you think that somehow difficulty influences the price, then you must be buying bitcoins like crazy right now given that difficulty is nearly guaranteed to to explode by the end of the year.

Its that that I find interesting to speculate on. What will happen to BTC value when its no longer viable to mine without having an ASIC Thasher ?

Interest in the whole concept will wain because at the moment anyone can grab BTC for free (so to speak) but from a few months time all cpu, gpu and low hash ASIC mining rigs will be worthless. Will BTC plummet, or will it be worth more because of the limited availability (like gold). I suspect forums like this will also wain. It'll be interesting to see what happens.

This is what I believe is the main misunderstanding of bitcoin. Certainly when people hear that their computer can become a magical money printing machine, it sparks some serious interest in bitcoin, but mining is not the driving factor behind the adoption, use and general success of bitcoin. In some ways it's a detrimental factor (it introduces continuous inflation which investors must see as an acceptable loss).

Most of the value of bitcoin comes not from miners (typically they are only a sapping force eating away at its value) but from speculators. Is bitcoin worth the 1Billion USD that it is currently valued at? Probably not. But it is buoyed by those who want to get in at the ground floor, for something they believe will one day grow to something far more valuable than its current worth. Some are emboldened by increased adoption amongst merchants, or news reports of the success of bitcoin in some area, others hope to cash in on the soon to be demise by selling into hype, etc.

But mining by and large is its own separate entity, not completely divorced from bitcoin world, but certainly operating at an arms length.

[drwho88888]

But mining by and large is its own separate entity, not completely divorced from bitcoin world, but certainly operating at an arms length.

I'm not so certain. At the moment I think it has quite a strong influence on the current price though its influence will eventaully go by definition.

It then depends on how well BTC has been able to convince the mainstream to accept its prescence. Personally I think its a no-brainer for acceptance as long as it doesn't have too great a volatiity, can't be cracked and can't be manipulated too easily (though we're all quite happy to accept a currency which can be at the moment viz USD, GBP etc).

There are so many arguments in favour of BTC, it would be a shame to find it doesn't gain ground in the mainstream.

[firefop]

But mining by and large is its own separate entity, not completely divorced from bitcoin world, but certainly operating at an arms length.

I'm not so certain. At the moment I think it has quite a strong influence on the current price though its influence will eventaully go by definition.

It then depends on how well BTC has been able to convince the mainstream to accept its prescence. Personally I think its a no-brainer for acceptance as long as it doesn't have too great a volatiity, can't be cracked and can't be manipulated too easily (though we're all quite happy to accept a currency which can be at the moment viz USD, GBP etc).

There are so many arguments in favour of BTC, it would be a shame to find it doesn't gain ground in the mainstream.

Everyone says that miners contribute 'such a small amount of btc' that it doesn't affect btc prices but I'm a miner - and I notice patterns. I tend to sell my btc (hey gotta pay electric bills!) on the third tues or wed of each month. That's the only time I sell... It's when I am able to the most (on average) for the entire month.

As asic tech becomes more available we are going to see the price crash - no sane miner is going to sit on BTC made in a short period of time when he can sell it and recoup it's purchase cost. Since difficulty is a reactive process... we'll see ~2 weeks of coins entering the wallets of miners in a shorter timeframe. This will have a negative effect on price. But only in the short term. Once the miner has 'ROI' he'll revert to only selling the coins he needs to pay electric and saving the rest... or spending them to buy goods and services in the bitcoin economy.

That being said: If miners have an effect on price... then I wouldn't expect it to vanish ever. This is what we mean when we talk about 'adoption' there must at some point be enough transaction fees to replace and exceed the block reward (it may not happen during this block reward, but I'd expect it at after the halving and before the next one). If this doesn't happen then bitcoin will fail. Miners secure the network and if the economic incentive to do so vanishes so will most of the miners - reducing the security of the network and eventually leading to the failure of bitcoin. I would expect it to grow over time as velocity increases and more and more transaction fees are packed into each block.

~

As for adoption, I think we're in solid with the black market and organized crime... at this point all we need is porn to adopt it as a primary payment method and that will be all it takes. IMO grow the mainstream as much as we're able - but don't forget that porn should be the market we chase. It's been responsible for the so many technical advances and tends to carry them from 'geeky' to 'mainstream' in a very short time period.