[CHART] Correlation Between Bitcoin Price and Difficulty

[maxsong1003]

To better investigate the relationship between Bitcoin price and difficulty, I made the following interactive graph.

Live graph: http://bitcointrends.herokuapp.com/

https://s3.amazonaws.com/bitcointrends/graphcaptured.PNG
https://s3.amazonaws.com/bitcointrends/ratiograph.PNG

It seems there's a direct correlation (as expected) between Bitcoin price and difficulty. I assumed that difficulty is one of the
biggest factors that affects bitcoin's price, and the graphs seems to support this assumption. What's more interesting is the graph
that compares price and difficulty/price. Do you think it is reasonable to indicate whether bitcoin is overpriced from studying this graph?

Live graph: http://bitcointrends.herokuapp.com/

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[justusranvier]

That first graph would be better if you made it a log scale so that we can actually see the data from before February.

[maxsong1003]

That first graph would be better if you made it a log scale so that we can actually see the data from before February.

Great suggestion Meanwhile, you can zoom in to the graph to see the data better.

[lukestokes]

I've thought about this also... I think the price of mining could be an anchor to the price of bitcoin.

Why would someone pay $10,000 or $20,000 for a single bitcoin if they can buy a mining rig for, say, $15,000 which will get them a bitcoin in, say 6 days. If a single bitcoin will really be worth $100,000 or so as some have claimed, wouldn't it be logical to think a mining rig for producing a bitcoin would have to be about the same price? And if that's true, how high would the difficulty be? How much power consumption are we talking about?

Am I missing something obvious?

[odolvlobo]

I second the need for a log scale on the first graph. I also want to point out that the fact that price and difficulty are both rising exponentially does not indicate correlation.

It seems there's a direct correlation (as expected) between Bitcoin price and difficulty. I assumed that difficulty is one of the
biggest factors that affects bitcoin's price, and the graphs seems to support this assumption. What's more interesting is the graph
that compares price and difficulty/price. Do you think it is reasonable to indicate whether bitcoin is overpriced from studying this graph?

I believe that your assumption that difficulty affects price is incorrect, and that your graphs do not support your assumption. Correlation is not causation. You can't assume that difficulty affect price just because there is a correlation.

Simple logic demonstrates that there is a loose correlation between price and difficulty, and that difficulty depends on price (and not the other way around). Simply stated, the total hash rate (and thus the difficulty) rises or falls depending on the profitability of mining. Miners (at least the rational ones) won't mine if it is not profitable. If the price falls, miners will stop mining and the difficulty will fall. If the price rises, miners will mine more and the difficulty will rise.

What complicates the correlation is the change in the efficiency of mining in terms of the cost. Because of advances in mining technology, the efficiency of mining has increased dramatically, and in waves. If you adjust for the change in efficiency I'm sure you will see a correlation.

[diedicar]

I second the need for a log scale on the first graph. I also want to point out that the fact that price and difficulty are both rising exponentially does not indicate correlation.

It seems there's a direct correlation (as expected) between Bitcoin price and difficulty. I assumed that difficulty is one of the
biggest factors that affects bitcoin's price, and the graphs seems to support this assumption. What's more interesting is the graph
that compares price and difficulty/price. Do you think it is reasonable to indicate whether bitcoin is overpriced from studying this graph?

I believe that your assumption that difficulty affects price is incorrect, and that your graphs do not support your assumption. Correlation is not causation. You can't assume that difficulty affect price just because there is a correlation.

Simple logic demonstrates that there is a loose correlation between price and difficulty, and that difficulty depends on price (and not the other way around). Simply stated, the total hash rate (and thus the difficulty) rises or falls depending on the profitability of mining. Miners (at least the rational ones) won't mine if it is not profitable. If the price falls, miners will stop mining and the difficulty will fall. If the price rises, miners will mine more and the difficulty will rise.

What complicates the correlation is the change in the efficiency of mining in terms of the cost. Because of advances in mining technology, the efficiency of mining has increased dramatically, and in waves. If you adjust for the change in efficiency I'm sure you will see a correlation.

i'm new to btc so i must think again about it. But i find a little flaw in this kind of reasoning: mininig is always profitable. If difficulty changes you will always keep a mark up for the traders who do not mine. so there will be always an incentive to mine and increase the overall difficulty giving momentum to the price.

[odolvlobo]

i'm new to btc so i must think again about it. But i find a little flaw in this kind of reasoning: mining is always profitable. If difficulty changes you will always keep a mark up for the traders who do not mine. so there will be always an incentive to mine and increase the overall difficulty giving momentum to the price.

It doesn't matter. If it costs $1000 to buy a bitcoin, but $1100 to mine it, then there is no incentive to mine. Why would someone pay $1100 to mine a bitcoin if they could just buy it for $1000? If the price goes down, miners stop mining, so the difficulty goes down. If the price goes up, then miners mine more because it is more profitable, so the difficulty goes up.

Here is a simple example of how to lose money by mining:

Let's suppose that you have a graphics card with a hash rate of 300 MH/s and a power consumption of 100 watts, and electricity costs $0.10 kWH and 1 BTC is worth $1000.

At the current difficulty, your card will mine $0.20 per day. It will consume 2.4 kWH, which will cost $0.24. If you mine with this video card, you will lose 4 cents per day.

"Not so!", the newbie cries out, "What if the price of BTC goes up?"

Alright, at the current difficulty, your card will mine 0.0002 BTC per day. It will consume 2.4 kWH, which will cost 0.00024. If you mine with this video card, you will lose 0.00004 BTC per day. You are better off buying it than mining it.

[odolvlobo]

I've thought about this also... I think the price of mining could be an anchor to the price of bitcoin.

Why would someone pay $10,000 or $20,000 for a single bitcoin if they can buy a mining rig for, say, $15,000 which will get them a bitcoin in, say 6 days. If a single bitcoin will really be worth $100,000 or so as some have claimed, wouldn't it be logical to think a mining rig for producing a bitcoin would have to be about the same price? And if that's true, how high would the difficulty be? How much power consumption are we talking about?

Am I missing something obvious?

The amount of newly mined bitcoins is a very small fraction of the total supply (3600 mined per day vs 187,000 traded per day), so it can't have any significant effect on price.

If you think that mining bitcoins is a cheaper way to get them, then I'll bet that you haven't looked at what's available and done the math. While it may be possible to buy mining equipment that will generate a profit, most people do not or can not.

[diedicar]

yes but if difficulty goes down following the price, at wathever price, mining restarts because it always brings profits fore someone (in terms of bitocoins) and we are back to 2011 then the process follows the very same pattern with miners investing their good dollars to buy power to mine useless coins just because some of them mines better than others.

[DustyRah]

If you think that mining bitcoins is a cheaper way to get them, then I'll bet that you haven't looked at what's available and done the math. While it may be possible to buy mining equipment that will generate a profit, most people do not or can not.

I mine....and I have grown to the point that I can't believe this is happening. Its quite profitable.

[odolvlobo]

I mine....and I have grown to the point that I can't believe this is happening. Its quite profitable.

People always say this but never provide the numbers to back it up. Please show me how profitable it really is. How much did you pay for your equipment (in bitcoins)? What is your hash rate? How much have you mined so far?

[phr0stbyt3]

I mine....and I have grown to the point that I can't believe this is happening. Its quite profitable.

People always say this but never provide the numbers to back it up. Please show me how profitable it really is. How much did you pay for your equipment (in bitcoins)? What is your hash rate? How much have you mined so far?

I spent $65,000 (65 BTC) for a 60 GH/s single upgrade.
Technically back in September I only spent $700 based on the exchange rate, but you see the problem here right?

Mining is definitely not profitable.

[DustyRah]

I've thought about this also... I think the price of mining could be an anchor to the price of bitcoin.

Why would someone pay $10,000 or $20,000 for a single bitcoin if they can buy a mining rig for, say, $15,000 which will get them a bitcoin in, say 6 days. If a single bitcoin will really be worth $100,000 or so as some have claimed, wouldn't it be logical to think a mining rig for producing a bitcoin would have to be about the same price? And if that's true, how high would the difficulty be? How much power consumption are we talking about?

Am I missing something obvious?

That's the point people are missing. Also the flipside which is if it costs some bugger $1000 to mine a coin, he ain't gonna sell it for $100 either.

[DustyRah]

I mine....and I have grown to the point that I can't believe this is happening. Its quite profitable.

People always say this but never provide the numbers to back it up. Please show me how profitable it really is. How much did you pay for your equipment (in bitcoins)? What is your hash rate? How much have you mined so far?

I spent $65,000 (65 BTC) for a 60 GH/s single upgrade.
Technically back in September I only spent $700 based on the exchange rate, but you see the problem here right?

Mining is definitely not profitable.

Ok, why did you not buy the miner for $700 and mine a whole bunch of bitcoins which would be worth quite a bit today? At the end of the day, I think and I hope BTC will continue to rise in value.

[mestar]

That's the point people are missing. Also the flipside which is if it costs some bugger $1000 to mine a coin, he ain't gonna sell it for $100 either.

But others will, so, who cares what that bugger's cost was.   Market determines price, cost is irrelevant.

However, once market has set a price, the cost will tend to go somewhere close but still below that price.  So, price causes difficulty. 

But, this also confuses many people into thinking that difficulty causes price, and markets being what they are, that thinking can actually cause the price to rise, when people think it should rise because of the difficulty rising, even if difficulty increase is caused by other reasons like change in mining tech.  Therefore, bubbles. 

There is an another mechanism, although a slow one, that regulates this positive feedback loop, see here:
https://bitcointalk.org/index.php?topic=414657.0

[phr0stbyt3]

I mine....and I have grown to the point that I can't believe this is happening. Its quite profitable.

People always say this but never provide the numbers to back it up. Please show me how profitable it really is. How much did you pay for your equipment (in bitcoins)? What is your hash rate? How much have you mined so far?

I spent $65,000 (65 BTC) for a 60 GH/s single upgrade.
Technically back in September I only spent $700 based on the exchange rate, but you see the problem here right?

Mining is definitely not profitable.

Ok, why did you not buy the miner for $700 and mine a whole bunch of bitcoins which would be worth quite a bit today? At the end of the day, I think and I hope BTC will continue to rise in value.

I guess I should clarify this.

I pre-ordered from BFL and we all remember that debacle. Unless a unit is -IN STOCK, ASSEMBLED, READY TO SHIP TODAY- then it probably isn't worth it from a breakeven BTC standpoint. I spent 65 BTC on miners that would never mine 65 BTC. We can postulate that if they were in stock at the time that -maybe- they would have made close to 65BTC, but the nature of mining is diminishing returns at its finest. Every difficulty change yields less and less. If you have any question about this just fire up the genesis block; insert some conservative figures for shits and giggles and you'll still never see a positive BTC return. With all the new mining manufacturers and die shrinking we are probably facing another 1000x difficulty increase very soon. I will absolutely -never- pre-order a miner ever again, and if I happen to have spare cash I will just buy BTC instead from now on. YMMV but that's just my two satoshis.

[komar]

[Soomple_Pompler]

A perspective to add to the difficulty:price debate: exchanging currency for bitcoin in an exchange that waits a significant amount of time to allow that transaction to be proven in the registrar is significantly less expensive than instantly purchasing them instantly off of Ebay, for example.  I have not checked on the success or exact rate difference of these auctions, but the price differential between an instant (assumed more risky) exchange and an exchange that that has a much higher liklihood of being proven in the registrar was telling me there is still a major demand for BTC even at much higher prices.

Also to consider:  If a greater total hash rate (greater difficultly) does directly increase the value of a bitcoin, mining returns would only decrease in quantity of BTC you would likely be rewarded.   I feel as though a greater total hash rate WILL improve the exchange rate of national currencies to bitcoin, in favor of the bitcoin.  However, I also feel it will promote the micronization of bitcoin denominations.  This in turn,  I theorize,  will increase proliferation and accessibility of the currency;  which could serve to increase the intrinsic value of what bitcoin stands for.  This means more transactions in the registrar that need confirming... I would keep going but it's all theory and I think you can see my point by now.

[Undone]

Also to consider:  If a greater total hash rate (greater difficultly) does directly increase the value of a bitcoin, mining returns would only decrease in quantity of BTC you would likely be rewarded.   I feel as though a greater total hash rate WILL improve the exchange rate of national currencies to bitcoin, in favor of the bitcoin.

A decrease in quantity of BTC you would likely be rewarded? ]That's the only thing that matters if you're mining...along with your costs, which you can't pay in bitcoin. You have to pay it in dollars. So then the price down due to mining costs that mestar points out put an even greater downward pressure on the exchange rate of bitcoin.

You make it sound like a decrease in your mining output is not a big deal. So, what then? The miners just keep mining and say, "Oh well, my output is now significantly less"? You first.

Miners will cut losses, more and more awareness will spread about the unlikelihood of mining profitability at current difficulties/current cost(s) of mining, and the cycle may or may not continue.

New, fresh buyers will pump higher and higher amounts of cash into the bid price on the exchanges long term only if they believe that bitcoin is a good store of value. Not with regards to the network hashrate.

[the joint]

Are people really still suggesting that price affects difficulty but not vice versa?  It's pretty absurd -- difficulty affects our perceptions about how rare or valuable a coin is.  All it takes is one case of somebody saying something like "difficulty is skyrocketing, I better hold onto my coins" to demonstrate that difficulty affects price (in this case, by increasing demand).