New article: Price as a factor of difficulty

[noah977]

New article up on the bitcoin Math blog.  How does mining difficulty relate to price:
http://btcmath.com/2013/06/bitcoin-price-as-a-function-of-difficulty/

[dwolfman]

At least one inaccuracy in your assumptions.

The difficulty is adjusted every 2016 blocks, not every 10 minutes.  There is a new block generated about every 10 minutes, though.

Might want to rethink your logic there. 

I'd have to find it, but there was a similar discussion elsewhere on these forums recently.  I believe the correct assessment was that difficulty seems to follow price, not the other way around.

Which makes sense since more people get interested in mining when the price goes up.

[noah977]

You are technically correct, it is a new BLOCK that is generated every 10 minutes.

However, that doesn't change my conclusion:  The is very little correlation between price and difficulty.

Price is determined by the public agreeing on what they think a Bitcoin is worth - nothing else.

[Carlton Banks]

You are technically correct, it is a new BLOCK that is generated every 10 minutes.

However, that doesn't change my conclusion:  The is very little correlation between price and difficulty.

Price is determined by the public agreeing on what they think a Bitcoin is worth - nothing else.

And what they think a Bitcoin is worth is partly determined by changes in the difficulty. Not totally, but partly.

[jaywaka2713]

I believe the correct assessment was that difficulty seems to follow price, not the other way around.

Which makes sense since more people get interested in mining when the price goes up.

This isn't exactly the case. As it gets harder for people to mine because of ASICs, GPU miners (and CPU miners, if any still exist) will begin to stop mining. Because of that shift, to acquire their Bitcoins, they turn to purchasing them. Also, because of them suspending their mining, the difficulty will not skyrocket as most ASIC enthusiasts think. Higher difficulty usually means more purchasing as people will stop mining.

There also is a small dynamic where people will start mining again as Bitcoin becomes more expensive as well though.

[SgtSpike]

You are technically correct, it is a new BLOCK that is generated every 10 minutes.

However, that doesn't change my conclusion:  The is very little correlation between price and difficulty.

Price is determined by the public agreeing on what they think a Bitcoin is worth - nothing else.

And what they think a Bitcoin is worth is partly determined by changes in the difficulty. Not totally, but partly.

I would agree.  As mining becomes more difficult with specialized mining equipment required, people will be more likely to buy instead of mine to acquire the BTC they want.

[BitAddict]

I think btc price is not directly correlated with difficult, is the opposite.

Difficult needs to adjust to btc price, because less efficient miners need to shutdown their equipments.

You are technically correct, it is a new BLOCK that is generated every 10 minutes.

However, that doesn't change my conclusion:  The is very little correlation between price and difficulty.

Price is determined by the public agreeing on what they think a Bitcoin is worth - nothing else.

And what they think a Bitcoin is worth is partly determined by changes in the difficulty. Not totally, but partly.

I would agree.  As mining becomes more difficult with specialized mining equipment required, people will be more likely to buy instead of mine to acquire the BTC they want.

Yes, but also especialized mining companies need to sell all their huge earned bitcoin to keep growing the business. When you only have small home miners, they usually keep the btc for them, until the have a lot.

[Carlton Banks]

You are technically correct, it is a new BLOCK that is generated every 10 minutes.

However, that doesn't change my conclusion:  The is very little correlation between price and difficulty.

Price is determined by the public agreeing on what they think a Bitcoin is worth - nothing else.

And what they think a Bitcoin is worth is partly determined by changes in the difficulty. Not totally, but partly.

I would agree.  As mining becomes more difficult with specialized mining equipment required, people will be more likely to buy instead of mine to acquire the BTC they want.

There's more than one effect IYAM, and that's definitely one of them. I think a network with a 250 million difficulty is more valuable than a network with 1 million difficulty, that too makes the coins on the network more valuable.

[jaywaka2713]

I think btc price is not directly correlated with difficult, is the opposite.

Difficult needs to adjust to btc price, because less efficient miners need to shutdown their equipments.

So you are basically saying that as Bitcoins get more expensive, difficulty needs to go up? And because of the difficulty increase miners need to stop? So as Bitcoins get more expensive, people need to stop mining? Your point isn't exactly well thought out. Even if GPU miners aren't making profit, their mining does help the network.

There's more than one effect IYAM, and that's definitely one of them. I think a network with a 250 million difficulty is more valuable than a network with 1 million difficulty, that too makes the coins on the network more valuable.

That is also a good point as well. So difficulty does in some way affect price.

[BitAddict]

I think btc price is not directly correlated with difficult, is the opposite.

Difficult needs to adjust to btc price, because less efficient miners need to shutdown their equipments.

So you are basically saying that as Bitcoins get more expensive, difficulty needs to go up? And because of the difficulty increase miners need to stop? So as Bitcoins get more expensive, people need to stop mining? Your point isn't exactly well thought out. Even if GPU miners aren't making profit, their mining does help the network.

There's more than one effect IYAM, and that's definitely one of them. I think a network with a 250 million difficulty is more valuable than a network with 1 million difficulty, that too makes the coins on the network more valuable.

That is also a good point as well. So difficulty does in some way affect price.

I didn't explain good because my English sucks. I will try to make it clear.

Bigger price can handle more difficulty. But if price is estable and difficulty keeps rising, at some point it will stop growing (unless they keep discovering new chips using less power) or people will start losing money.

But the opposite is not directly related. Bitcoin price doesn't go up because difficulty rises.

[Gabi]

Article by Gabi: difficulty directly depends on price.

If bitcoin price increase then difficulty increase.
If bitcoin price decrease then difficulty decrease.

That's all (ignoring of course new hardware, of course if for the same price you can buy an ASIC instead of a GPU then difficulty will happily increase even if the price doesn't change or decrease, but those are rare situations, like from cpu to gpu mining or from gpu to asic mining)

[Gabi]

So you are basically saying that as Bitcoins get more expensive, difficulty needs to go up?

Oviously yes, higher price=mining is more profitable

And because of the difficulty increase miners need to stop?

What? Miners stop mining only when it is no more profitable.

So as Bitcoins get more expensive, people need to stop mining?

What? As i said, profitability is what matter for mining.

[BitAddict]

Article by Gabi: difficulty directly depends on price.

If bitcoin price increase then difficulty increase.
If bitcoin price decrease then difficulty decrease.

That's all (ignoring of course new hardware, of course if for the same price you can buy an ASIC instead of a GPU then difficulty will happily increase even if the price doesn't change or decrease, but those are rare situations, like from cpu to gpu mining or from gpu to asic mining)

+999

Is just that. Thanks.

[jaywaka2713]

Article by Gabi: difficulty directly depends on price.

If bitcoin price increase then difficulty increase.
If bitcoin price decrease then difficulty decrease.

That's all (ignoring of course new hardware, of course if for the same price you can buy an ASIC instead of a GPU then difficulty will happily increase even if the price doesn't change or decrease, but those are rare situations, like from cpu to gpu mining or from gpu to asic mining)

That is also another scenario that stands true. If Bitcoin loses value, the difficulty decreases. However, you could say it almost increases or stays normal because people jump on when they see the difficulty decrease. Also, try looking at the difficulty for the past year. Probably 2 or 3 2016 block rounds that had a difficulty decrease. So this is technically all theoretical. We'd like to think it SHOULD happen, but in reality it doesn't. People mine regardless of network/market fluctuations.

[BitAddict]

Article by Gabi: difficulty directly depends on price.

If bitcoin price increase then difficulty increase.
If bitcoin price decrease then difficulty decrease.

That's all (ignoring of course new hardware, of course if for the same price you can buy an ASIC instead of a GPU then difficulty will happily increase even if the price doesn't change or decrease, but those are rare situations, like from cpu to gpu mining or from gpu to asic mining)

That is also another scenario that stands true. If Bitcoin loses value, the difficulty decreases. However, you could say it almost increases or stays normal because people jump on when they see the difficulty decrease. Also, try looking at the difficulty for the past year. Probably 2 or 3 2016 block rounds that had a difficulty decrease. So this is technically all theoretical. We'd like to think it SHOULD happen, but in reality it doesn't. People mine regardless of network/market fluctuations.

Fast example: bitcoin goes down to $0,20, do you think hashrate will keep increasing?
Will happen the same if price go down to $50. Maybe here will just decrease the grow rate, but it probably won't come negative because now all ASICs are coming.

[Carlton Banks]

Even more specific scenario:

Major DOS wars on the mining pools for more than 2 weeks. Difficulty adjustment takes place while they're down. That would affect the price. You're all thinking of economic reasons for difficulty changes, I predict we'll get different factors as well.

[misterbigg]

What is all this nonsense? The price of bitcoin is not related to difficulty. Clearly. Difficulty has skyrocketed while bitcoin's price has merely drifted sidewise and in some respects, has fallen.

Why should there be a connection between mining and the price? I rather doubt that more people will be interested in buying bitcoin because the hash rate is 80TH/s instead of 20TH/s. More likely, they acquire Bitcoin either for speculative purposes or because it is useful in commerce. Neither of which are affected by the amount of mining power.

[noah977]

@mrbigg - Not nonsense at all. 

The mining of BTC is based on the concept of doing work.  If it takes more "work" to produce BTC, then they should be worth more.  At the very least, the lower bound on price should be the cost of electricity plus the amortized cost of hardware.  However, the introduction of ASIC rigs has skewed things as they use much less power and produce much more output per dollar cost.

Many people have postulated that the price can be tracked as a function of the difficulty factor.  I investigated and found that not to be true.