Hashrate VS Price

[Frozenlock]

I've read at multiple places that some of you think that a higher hashrate means a higher price, while in fact I think it's the opposite.

But before, here's a little economic theory:

People will do hard stuff to obtain something because it is valuable, not the other way around.

With concrete example:

A man will go underwater to get a pearl because it's valuable; the pearl is not valuable because a man has to go get it.

People go deep to mine gold because it's valuable; gold is not valuable because people have to go deep to mine it.

In relation to Bitcoin, we could say that miners mine Bitcoin because it's valuable.
(Otherwise they would just fork the client and mine their own coin. Clearly the "mining" in itself isn't the goal.)

Further than that, here's a little graph:



What I want to show you is that a surge in price occurs before an increase in hashrate.
The price is driving the hashrate, not the other way around.

Each time there's a little bump in the price, you can see a response in the hashrate, lagging a few months behind.
The lag is understandable, as it takes time to purchase and set up a mining rig.
In case of falling prices, it can take a while for the miners to accept to stop their operations.

Some of you argue that the current rising hashrate indicates a future higher price.
On the contrary, I say that the rising hashrate is only a response of the recent price increase.

[notme]

I agree with your overall point, but the data doesn't quite tell the story you are trying to portray.  The piece you are missing is that the 2011 run up and the recent run up in difficulty were both triggered by a new technology that dramatically improved the efficiency of mining.  In 2011 it was GPUs and in 2013 it is ASICs.  ASICs are still being deployed and I expect a minimum of triple the current hash rate before we see difficulty top.  As much as 10X the current difficulty may happen, depending on how the price goes.  <-- Again, I agree price ultimately drives difficulty, but technology improvements shift gears.  That being said, as soon as 28nm ASICs make up the majority of the network, we will see technology improvements capped by Moore's Law.  We will then be in "top gear" and we can drive this thing like we stole it.

[dillpicklechips]

I'd be interested not in the hashrate but guesses on an average electricity used vs price. ASICs are a pretty big change in technology and the hashrate may be distorted for this transition period.

[Frozenlock]

I agree with your overall point, but the data doesn't quite tell the story you are trying to portray.  The piece you are missing is that the 2011 run up and the recent run up in difficulty were both triggered by a new technology that dramatically improved the efficiency of mining.  In 2011 it was GPUs and in 2013 it is ASICs.  ASICs are still being deployed and I expect a minimum of triple the current hash rate before we see difficulty top.  As much as 10X the current difficulty may happen, depending on how the price goes.  <-- Again, I agree price ultimately drives difficulty, but technology improvements shift gears.  That being said, as soon as 28nm ASICs make up the majority of the network, we will see technology improvements capped by Moore's Law.  We will then be in "top gear" and we can drive this thing like we stole it.

New and improved technologies do push the hashrate up, but one can still see the clear relation between price and hashrate.

In your explanation, where do the FPGAs fit?

[mgio]

Yes, you are right.

Most people have it backwards.

Mostly it's just wishful thinking on their part that more difficult mining will somehow cause their coins to be worth more. It's not true at all.

[cypherdoc]

So, if you are right, then you expect hashrate to imminently begin to go sideways for a couple of months?

[Frozenlock]

So, if you are right, then you expect hashrate to imminently begin to go sideways for a couple of months?

I expect it to follow the same pattern as the price: to peak and slowly diminish after that.
Last price peak in 2012 induced a hashrate increase that lasted for months.

Anyone has any data pointing to a reverse relationship, where hashrate would be driving price?

[byronbb]

Imagine two identical gold mines, mined by two different companies, both offer stock. Mine Co A has a bunch of labourers with pick-axes and donkeys to pull mine carts, Mine Co B has a drill, dynamite, rail engines, and rock crushers. Obviously Mine Co B's stock will be worth more because they will be more efficient.  

[Cranky4u]

Hash rates are simply a lag indicator of price...

[Frozenlock]

Imagine two identical gold mines, mined by two different companies, both offer stock. Mine Co A has a bunch of labourers with pick-axes and donkeys to pull mine carts, Mine Co B has a drill, dynamite, rail engines, and rock crushers. Obviously Mine Co B's stock will be worth more because they will be more efficient.  

Except Bitcoin isn't a stock in your example, it's the gold.

[cypherdoc]

So, if you are right, then you expect hashrate to imminently begin to go sideways for a couple of months?

I expect it to follow the same pattern as the price: to peak and slowly diminish after that.
Last price peak in 2012 induced a hashrate increase that lasted for months.

Anyone has any data pointing to a reverse relationship, where hashrate would be driving price?

Well then you're gonna have some explaining to do in regards to timing because we are not going to peak and slowly diminish any time soon as Avalon batch 2 will be delivered in 1-3 days followed by batch 3 and more asicminers.

I also disagree with your visual interpretation of price always leading. If you really zoom in and look carefully I could make the opposite argument that hashrate leads. It's just that the price spikes are so violent in comparison that it looks like they're leading.

Your gold mining analogy is also off as gold miners do not have a philosophical motivation to help or secure a network as do bitcoin miners.

[N12]

Is the collective wisdom NOT buying Bitcoins purely because they deem the difficulty too low? If not, it has no effect on price.

However, I believe there is another effect, and it's that an increase in profit margin is bullish because miners can afford to speculate with a larger portion, ie hold them. Currently, the profit margins are of course rapidly decreasing due to sideways/downwards price action and still skyrocketing difficulty. My assumption is that the percentage of the daily mining subsidy (3600 BTC) that is released to the market is increasing because the costs that have to be covered are rising.

I don't expect hashrate to top out very soon, and that's thanks to the incompetence of the suppliers who are lagging extremely. There's already hardware for multiple hundreds of TH/s it seems. I do expect it to top out again sometime, as always, people will order far more ASICs than profitable for some of them in this arms race and some of them will have to drop out. Funny thing though that the prices for ASICs can plummet far further on the open market than GPUs because they have no other purpose than generating profits in Bitcoin's POW. Quite risky particularly when you have no clue when they will ship.

[Frozenlock]

Well then you're gonna have some explaining to do in regards to timing because we are not going to peak and slowly diminish any time soon as Avalon batch 2 will be delivered in 1-3 days followed by batch 3 and more asicminers.

So, what you are saying is that the Avalon batch 2 and the batch 3 of asicminers are not going to increase the hashrate?
Because such a jump in the hashrate sure would look like a peak following the price in my book.

Reddit was full of people investing in mining a month ago. Now it's rather... silent.
My guess is many bought mining equipment and they will receive it in the coming weeks/months.

I also disagree with your visual interpretation of price always leading. If you really zoom in and look carefully I could make the opposite argument that hashrate leads. It's just that the price spikes are so violent in comparison that it looks like they're leading.

Do it! I'm open to discussion. If you can zoom in and circle the interesting parts, I'll be happy to look.

Your gold mining analogy is also off as gold miners do not have a philosophical motivation to help or secure a network as do bitcoin miners.

Ok... and the consequences of the philosophical motivations are....?



While some argue some of my points, I've yet to see an opposing argument showing that hashrate influences the price.

[Frozenlock]

Is the collective wisdom NOT buying Bitcoins purely because they deem the difficulty too low? If not, it has no effect on price.

Indeed.
I've yet to see a single person making that argument.

"Eh, Bitcoin is interesting, but the hashrate is too low for now... network isn't secure enough."

[N12]

Is the collective wisdom NOT buying Bitcoins purely because they deem the difficulty too low? If not, it has no effect on price.

Indeed.
I've yet to see a single person making that argument.

"Eh, Bitcoin is interesting, but the hashrate is too low for now... network isn't secure enough."

"Wow, Bitcoins look like an interesting hedge. Time to allocate a few % of my holdings and pour a few millions into it – ah, the difficulty is only 15 million and hashrate 150 TH/s. How overvalued. Will wait a couple months, then."

Seriously, back when we routinely had people buying multimillion USD worth of BTC, I don't think the difficulty was of any consideration. I don't believe it is a metric people base investment decisions on, other than mining hardware.

One case that can be made though is that it's a cyclical alternation between investment in BTC and investment in mining hardware as the one gets unprofitable and the other more attractive. But I'm not sure, most of the time, both are attractive at the same time and unattractive at the same time.

[cypherdoc]

Since being in bitcoin since January of 2011, the only real dip in hashrate that I witnessed was for a brief few months from about August to November 2011. Otherwise it's been steadily if not parabolically increasing.

My explanation to fit my perceived notion and experience as a miner of this is that there is literally a rush to secure as many bitcoins in hand as fast as possible in anticipation of a price rise and before the asymptotic decrease in rewards kicks in. This is all irrespective of the price.

Also there is a community aspect to bitcoin mining that does not exist for gold.  It's not purely profit driven.

[Frozenlock]

Since being in bitcoin since January of 2011, the only real dip in hashrate that I witnessed was for a brief few months from about August to November 2011. Otherwise it's been steadily if not parabolically increasing.

My explanation to fit my perceived notion and experience as a miner of this is that there is literally a rush to secure as many bitcoins in hand as fast as possible in anticipation of a price rise and before the asymptotic decrease in rewards kicks in. This is all irrespective of the price.

Interesting. If they want bitcoins, why wouldn't they just buy, instead of mine?

Also there is a community aspect to bitcoin mining that does not exist for gold.  It's not purely profit driven.

Ok.
Does that give the hashrate any way to influence the price?

[N12]

One case that can be made though is that it's a cyclical alternation between investment in BTC and investment in mining hardware as the one gets unprofitable and the other more attractive. But I'm not sure, most of the time, both are attractive at the same time and unattractive at the same time.

Here is a great past analysis of it that begun in early May 2011.

the only real dip in hashrate that I witnessed was for a brief few months from about August to November 2011. Otherwise it's been steadily if not parabolically increasing.

There was another dip beginning December 2012 following a period of sideways. Two consecutive difficulty decreases, one increase and another decrease that ended up the bottom.

It's not purely profit driven.

Sure, some are more inclined to mine at a loss etc., but the upwards motion is first technology and second price driven.

[cypherdoc]

Since being in bitcoin since January of 2011, the only real dip in hashrate that I witnessed was for a brief few months from about August to November 2011. Otherwise it's been steadily if not parabolically increasing.

My explanation to fit my perceived notion and experience as a miner of this is that there is literally a rush to secure as many bitcoins in hand as fast as possible in anticipation of a price rise and before the asymptotic decrease in rewards kicks in. This is all irrespective of the price.

Interesting. If they want bitcoins, why wouldn't they just buy, instead of mining?

Also there is a community aspect to bitcoin mining that does not exist for gold.  It's not purely profit driven.

Ok.
Does that give the hashrate any way to influence the price?

That actually allows me to highlight another reason why miners mine.

For enjoyment. They're geeks after all and this is what they do.

Hashrate influences the price by making speculators more confident that their money won't disappear from a 51%attack.

[cypherdoc]

One case that can be made though is that it's a cyclical alternation between investment in BTC and investment in mining hardware as the one gets unprofitable and the other more attractive. But I'm not sure, most of the time, both are attractive at the same time and unattractive at the same time.

Here is a great past analysis of it that begun
 in early May 2011.

the only real dip in hashrate that I witnessed was for a brief few months from about August to November 2011. Otherwise it's been steadily if not parabolically increasing.

There was another dip beginning December 2012 following a period of sideways. Two consecutive difficulty decreases, one increase and another decrease that ended up the bottom.

It's not purely profit driven.

Sure, some are more inclined to mine at a loss etc., but the upwards motion is first technology and second price driven.

The cyclical alternation is probably the best explanation as there are no absolutes when talking about anything related to prices.