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Author Topic: Price vs network difficulty  (Read 70 times)
getinvestment
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April 06, 2021, 03:39:16 PM
 #1

Hello, Smiley

Our company is considering to invest in Bitcoin mining and I'm wondering whether you could help me in the following question:

- In theory, we see that as price decreases, mining profitability drops for many miners, which as an endresult makes them quit the business, which should ultimately decrease network difficulty.

- However, in reality the things seem to work the other way around: for instance after the big burst in early 2018, the network difficulty kept increasing despite the falling bitcoin prices.

Our question is what do you think of the above two thoughts?


Also, another question, what would be the correct formula for calculating the effect on mining revenues  of a certain % increase in network difficult?

Is this too vague: new revenue = old revenue / (100% + percentage  increse in network difficulty)?



Thank you in advance for your help!

C.
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philipma1957
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April 06, 2021, 09:25:00 PM
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2018 difficulty increasing from jan to about october was catch up to prices that skyrocketed in fall of 2017.

When gear caught up in oct 2018 difficulty tapered off.

At the moment gear is far far far behind price.   Tons of 3 month 5 month 6 month preorders are paid for.  If price were to drop to 50 than 40 than 30k difficulty would not drop for months to come. As the preorders are paid off and would be put into play.  They would over come low efficiency gear being turn off much like what happened for 8 months of 2018

I see BTC as the super highway and alt coins as taxis and trucks needed to move transactions.
mikeywith
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April 06, 2021, 10:13:22 PM
 #3

Our question is what do you think of the above two thoughts?

Anybody's thoughts on this are irrelevant, we have 11 years of real data publicly avaiable:




Difficulty only goes up despite the fact that bitcoin was in a downtrend for almost 5 years combined, they last from 5 months up to 2 years each, difficulty couldn't care less, of course, it does not go up in a straight line but you get the picture.

These trends will keep repeating for years to come, for many obvious reasons which are not within the scope of your question.


Quote
Also, another question, what would be the correct formula for calculating the effect on mining revenues  of a certain % increase in network difficult

it is straightforward, if difficulty doubles your new rewards are cut in half.

getinvestment
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April 07, 2021, 07:48:50 AM
 #4

Thanks for your quick reply!

As it seems the difficulty lags behind the price increase or drop.

Could you please tell me what is the main reason for this phenomenon?
philipma1957
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April 07, 2021, 11:42:59 AM
 #5

Thanks for your quick reply!

As it seems the difficulty lags behind the price increase or drop.

Could you please tell me what is the main reason for this phenomenon?

Well chip availability. And most  new asic gear is sold preorder this is an edge for the builder of the gear. He passes risk onto the buy of the gear.

Getting new gear in under a week from the original builder of the gear is not the norm.

So if you want gear now and new you over pay to a reseller. Most of the time that is a bad move. So most buyers of gear. do the preorders and wait for the gear.

I see BTC as the super highway and alt coins as taxis and trucks needed to move transactions.
mikeywith
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April 08, 2021, 01:41:06 AM
Last edit: April 08, 2021, 01:41:52 PM by mikeywith
 #6

As it seems the difficulty lags behind the price increase or drop.

Could you please tell me what is the main reason for this phenomenon?

Phill gave an excellent explanation of what is happening right now, but the long-term causes are plenty, the most important and most ignored fact is that price drop does not lead to negative mining returns.

People have this narrative that all miners are mining at close to break-even which isn't the case, when price drops, all miners earn less, but the majority don't go into a loss zone right away, and of course, miners would settle for less profit.

Those who go into the negative territory will stop mining but their gears won't disappear, they will change hands and that's all about it, this is one of the reasons why the difficulty chart isn't moving in a vertical line and it does pause, correct and continue up.

One would say, but will some gears die and thus won't be reallocated, while that's true, many gears don't die for good and they are fixed, so just like the above, they disappear for a while and come back online in a different shape or/and a different location, also since most gears that die for good are usually pretty old, and thus their hashrate is low which makes their disappearance hard to notice if 10,000 *S7s die today, who cares?

The second factor would be the efficiency improvement, if the technology reached its peak and nobody can make more efficient / cheaper gears than what we have now, eventually we will get to the point where price drop will really affect difficulty, but until then - it's not going to happen.

What people should understand is that many, many people have free or super cheap aka almost free power (my self included), I will never ever turn off a mining gear because it isn't profitable, why? because it can not be "NOT" profitable, it either dies on me or I would sell it, the latter, of course, will fall under the reallocation group which only affects the difficulty for a few days or weeks.

And then you have those people who mine for a loss,  yes there are a bunch of people who mine for a loss, some do it thinking price will go up in the future ( you can argue that they should directly buy bitcoin rather than doing that but they have all different reasons not to agree to that logic), there are also people who mine to launder their money or to own bitcoin without having to use their credit card because it's illegal/expensive, and of course, some people want "fresh" bitcoins.

I can write another hundred lines of reasons why difficulty goes up while the price goes down, but I think I have mentioned the ones I think are most important.

Now that is the reason why the price goes down while difficulty does not, the other scenario of why the price goes up and difficulty doesn't keep up, it's simply because money moves faster than mining gears by a few orders of magnitude, a rich guy like Elon can tweet something positive about bitcoin or drops a couple of billions into bitcoin and price goes up 10% in a day, 10% of the total hashrate right now is 16EH, that's the equivalent of 145,454 S19 pros,  that number of gears is impossible to manufacture in a day, even a week or perhaps a month, even if Bitmain had an unlimited supply of money they will be bottle-necked by something else.


philipma1957
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April 08, 2021, 02:48:53 AM
 #7

As it seems the difficulty lags behind the price increase or drop.

Could you please tell me what is the main reason for this phenomenon?

Phill gave an excellent explanation of what is happening right now, but the long-term causes are plenty, the most important and most ignored fact is that price drop does not lead to negative mining returns.

People have this narrative that all miners are mining at close to break-even which isn't the case, when price drops, all miners earn less, but the majority don't go into a loss zone right away, and of course, miners would settle for less profit.

Those who go into the negative territory will stop mining but their gears won't disappear, they will change hands and that's all about it, this is one of the reasons why the difficulty chart isn't moving in a vertical line and it does pause, correct and continue up.

One would say, but will some gears die and thus won't be reallocated, while that's true, many gears don't die for good and they are fixed, so just like the above, they disappear for a while and come back online in a different shape or/and a different location, also since most gears that die for good are usually pretty old, and thus their hashrate is low which makes their disappearance hard to notice if 10,000 *S7s die today, who cares?

The second factor would be the efficiency improvement, if the technology reached its peak and nobody can make more efficient / cheaper gears than what we have now, eventually we will get to the point where price drop will really affect difficulty, but until then - it's not going to happen.

What people should understand is that many, many people have free or super cheap aka almost power (my self included), I will never ever turn off a mining gear because it isn't profitable, why? because it can not be "NOT" profitable, it either dies on me or I would sell it, the latter, of course, will fall under the reallocation group which only affects the difficulty for a few days or weeks.

And then you have those people who mine for a loss,  yes there are a bunch of people who mine for a loss, some do it thinking price will go up in the future ( you can argue that they should directly buy bitcoin rather than doing that but they have all different reasons not to agree to that logic), there are also people who mine to launder their money or to own bitcoin without having to use their credit card because it's illegal/expensive, and of course, some people want "fresh" bitcoins.

I can write another hundred lines of reasons why difficulty goes up while the price goes down, but I think I have mentioned the ones I think are most important.

Now that is the reason why the price goes down while difficulty does not, the other scenario of why the price goes up and difficulty doesn't keep up, it's simply because money moves faster than mining gears by a few orders of magnitude, a rich guy like Elon can tweet something positive about bitcoin or drops a couple of billions into bitcoin and price goes up 10% in a day, 10% of the total hashrate right now is 16EH, that's the equivalent of 145,454 S19 pros,  that number of gears is impossible to manufacture in a day, even a week or perhaps a month, even if Bitmain had an unlimited supply of money they will be bottle-necked by something else.



Yeah people think bitcoin uses a lot of the worlds power.

Last i checked Niagara Falls   USA & Canadian power  plants combined woukd have enough power for the entire Crytpocoin networks all the coins mined.

So while that is a lot of power it is under 1% of the worlds power.

Major developed countries have pockets of really cheap power.

I live in New Jersey power is not cheap.

But buysolar and myself developed two farms using solar arrays about 1.5 acres of panels.

They are paid off since the 2017 run. So they are 45kwatts 24/7/365 free with about 19 years leftmon the warranty’s.

we found some warehouse complexes that had many freezers. The owner got a really good commerical deal for a five year power contract and prepaid all power until dec 2023.

He then lost forty percent of his freezer renters. Freeing up tons of the prepaid power.

So coins could drop to 10k and we still profit. Just less.

Now I could expand as we now have more space and power. We can not get gear at good prices so we have idle power and space.

I am not a big miner.
But I know a lot of people like me.

2ph btc gear
10gh ltc gear
3gh  eth gear.
all paid for.

we could 3x it. and when shit crashes we will expand.
filling out the power and space.

say 130kwatt becomes 400kwatt.

We buy when coin prices drop because we have outstanding power setup. And essentially next to zero labor cost.

ie driving to the warehouse and spending time each month.

I see BTC as the super highway and alt coins as taxis and trucks needed to move transactions.
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