Before the next big rise, I just wanted to get my two cents in

[westkybitcoins]

There's a fundamental flaw I think in supposing that difficulty dictates price. I'd take it the other way: price determines difficulty.

I think this has been proven to be not exactly accurate.  For instance as the exchange rate went from $30+ down to around $7 or 8, the difficulty did not drop at all.  In fact it kept on rising to ridonkulous levels.

But for how long? Difficulty adjustments happen every 2 weeks, and people don't just start mining in a couple minutes on a whim. It takes a while for new miners to get through the pipeline. And even though a miner can turn off his rigs at will, the decision to do so (never mind getting rid of equipment) can also take a while, and isn't always immediate.

So a response to a price rise isn't instant... what we saw was the slower difficulty rise in response to the high prices override the (potentially pretty fast) difficulty drop in response to price drops.

In the end though, difficulty HAS come down, and is continuing to come down. There's just a lag between the price's affect on difficulty.

[Tomatocage]

But for how long? Difficulty adjustments happen every 2 weeks, and people don't just start mining in a couple minutes on a whim.

Difficulty follows network hash rate, not price.  And adjustments take place every 2016 blocks, not every 2 weeks.  I prefer precision to assumptions based on anecdotal evidence.

[westkybitcoins]

But for how long? Difficulty adjustments happen every 2 weeks, and people don't just start mining in a couple minutes on a whim.

Difficulty follows network hash rate, not price.  And adjustments take place every 2016 blocks, not every 2 weeks.  I prefer precision to assumptions based on anecdotal evidence.

And what does network hash rate follow?

[SlaveInDebt]

And what does network hash rate follow?

Mining profitability based on energy cost, hardware cost, advances in hardware/software, BTC value, ROI.

[Tomatocage]

And what does network hash rate follow?

Network hash rate follows the amount of processing power dedicated to mining, period.  Since the peak in June there have been a number of different factors which would cause people to stop mining and subsequently cause the hash rate to drop off:

1. New content releases in WoW
2. Diablo III beta opens
3. Exchange rate for Bitcoins dropping
4. Battlefield 3 & Modern Warfare 3
5. Peak of summer when electric bills are highest

The list goes on, but nobody can (with a straight face anyway) lay claim to any single one of those factors as being the one that causes the network hash rate to drop.

[westkybitcoins]

And what does network hash rate follow?

Mining profitability based on energy cost, hardware cost, advances in hardware/software, BTC value, ROI.

I see in price (BTC value) in there.

So then difficulty is moved by price, rather than the other way around, yes?

[westkybitcoins]

And what does network hash rate follow?

Network hash rate follows the amount of processing power dedicated to mining, period.  Since the peak in June there have been a number of different factors which would cause people to stop mining and subsequently cause the hash rate to drop off:

1. New content releases in WoW
2. Diablo III beta opens
3. Exchange rate for Bitcoins dropping
4. Battlefield 3 & Modern Warfare 3
5. Peak of summer when electric bills are highest

The list goes on, but nobody can (with a straight face anyway) lay claim to any single one of those factors as being the one that causes the network hash rate to drop.

The point is that clearly, it is price that influences difficulty, and not the other way around.

In particular, the price has dropped from $30 to $3. I find it odd that anyone would try to suggest any other factor as having anywhere near the influence on the difficulty drop as price.

When the price-follows-difficulty versus difficulty-follows-price issue crops up, I'm not going to interject that difficulty follows hash rate, which technically follows price, new game releases, and weather. I'm going to state that the correct assertion is that difficulty follows price.

Doesn't that make sense?

[Mousepotato]

So then difficulty is moved by price, rather than the other way around, yes?

If difficulty is moved by price, then what caused difficulty to increase before there were Bitcoin exchanges?  

[notme]

So then difficulty is moved by price, rather than the other way around, yes?

If difficulty is moved by price, then what caused difficulty to increase before there were Bitcoin exchanges?  

Organic growth.  Difficulty is certainly moved by price, but price is not the only factor.  Back then, each new user was significant with their CPU mining.

[Mousepotato]

Organic growth.  Difficulty is certainly moved by price, but price is not the only factor.  Back then, each new user was significant with their CPU mining.

Exactly!  And that's all I'm saying really.  The whole "price follows difficulty vs. difficulty follows price" arguments are silly, because IMHO they're both wrong.  You could argue back and forth which one holds a lesser degree of "wrongness" I guess, but at that point you're just arguing on the internet.

[westkybitcoins]

So then difficulty is moved by price, rather than the other way around, yes?

If difficulty is moved by price, then what caused difficulty to increase before there were Bitcoin exchanges?  

Organic growth.  Difficulty is certainly moved by price, but price is not the only factor.  Back then, each new user was significant with their CPU mining.

Even in the absence of new users, the difficulty would tend to slightly increase on its own. As pointed out above, the impact of advancing technology means there will always be more hashes per second for the same investment in equipment and energy expenditure (until Moore's law breaks, if ever.)

[trogdorjw73]

So then difficulty is moved by price, rather than the other way around, yes?

If difficulty is moved by price, then what caused difficulty to increase before there were Bitcoin exchanges? 

Organic growth.  Difficulty is certainly moved by price, but price is not the only factor.  Back then, each new user was significant with their CPU mining.

Even in the absence of new users, the difficulty would tend to slightly increase on its own. As pointed out above, the impact of advancing technology means there will always be more hashes per second for the same investment in equipment and energy expenditure (until Moore's law breaks, if ever.)

Since I sort of started this argument, let me clarify that I wasn't suggesting price as the *only* factor in difficulty. However, we will not sustain the current difficulty if the price drops to $0.50 like it was early this year -- we might eventually reach this difficulty again if the price were that low, but it would take much longer than what we saw with the bubble.

[westkybitcoins]

So then difficulty is moved by price, rather than the other way around, yes?

If difficulty is moved by price, then what caused difficulty to increase before there were Bitcoin exchanges? 

Organic growth.  Difficulty is certainly moved by price, but price is not the only factor.  Back then, each new user was significant with their CPU mining.

Even in the absence of new users, the difficulty would tend to slightly increase on its own. As pointed out above, the impact of advancing technology means there will always be more hashes per second for the same investment in equipment and energy expenditure (until Moore's law breaks, if ever.)

Since I sort of started this argument, let me clarify that I wasn't suggesting price as the *only* factor in difficulty.

Thank you. It didn't at all seem to me that that was implied.

However, we will not sustain the current difficulty if the price drops to $0.50 like it was early this year -- we might eventually reach this difficulty again if the price were that low, but it would take much longer than what we saw with the bubble.

Agreed.

[nmat]

Interesting discussion here (since every thread in this board has random content, I hadn't actually noticed this). I have been thinking about how to predict difficulty, mainly because I might buy an FPGA and also because I want to add fancy charts to my calculator , but it is almost as hard to predict as Bitcoin price.

I agree with most of what has been written. I think that the average Mhash/J plays a very important factor here and, as soon as FPGAs come out, difficulty will rise a lot, regardless of the price. Every time new mining hardware comes out, difficulty will increase and electricity price will always be the bottleneck. So even if you buy a fancy new FPGA to save on electricity costs, the higher difficulty will make mining barely profitable again. Unless of course, we see price swings like we saw in June, but I highly doubt that.

[Raize]

This is exactly the sort of discussion I wanted to start.

I do think price drives difficulty, but I believe there is a small impact of difficulty on price.

If difficulty is moved by price, then what caused difficulty to increase before there were Bitcoin exchanges?

I'm glad someone said this, because this is essentially the point I wanted to get to. Even if Bitcoin was unprofitable for everyone, there would still be people mining it. Just look at the alternate cryptocurrencies forum if you don't believe that people are willing to mine at a loss.

While I haven't mined at a loss, it has been clear to me that some people have. If demand for Bitcoin ever exceeds 7200 btc/day, the price has to increase, even if the people who are mining at profitability sell immediately.

Additionally, what would you, as a miner, do if Bitcoin was $.01 tomorrow?

I would and can buy every single Bitcoin at that price (and far higher). This is the miner's incentive, to get the coin at the rates that make his profitability worthwhile.

I'm going to stop responding now, but in addition to my purchase at $.85 prior to the latest increase, I recently made a 500+ Bitcoin purchase at exactly $2.01, compared to a several-month running low of $1.99 or whatever.

Ask yourself how the hell someone without a degree in economics does something like this? On November 14th, the person driving the price of Bitcoin down lost control. This is hugely significant, but no one talks about it. The new control-holder now seems have a surplus of BTC, and they need the price to increase. This is all a game of supply vs. demand, and risk vs. reward. In the future, when it is evident that $2.01 is never going to be seen again, people are going to be asking us, the early adopters, why it is that we knew what to do, and it is important that we learn that difficulty does, in fact, have a slight impact on price due to the conditions surrounding *why* the difficulty stabilizes, and that the impact these conditions have, *accumulates* the longer the price stays low and miners are mining unprofitably.

Anyway, I just wanted to end on a note that reiterates the point that we should help those individuals who want it within present leadership, because if we don't, they will probably start wars with each other. I'd really, really, like to avoid that. I think we can get the public to lend us their faith, and, in turn, so will the politicians and bankers. We just have to be cordial and supportive. We are technical geeks, after all, we don't really have any grand aspirations. We just want to see our fellow man, happy, right?

I'll admit, this post is going to make virtually no sense today, December 8th, 2011. But people looking back on this are going to seriously WTF over it. I have to believe that there are technical and econ nerds/geeks like myself that understand the nature of what is going on.

[trogdorjw73]

On November 14th, the person driving the price of Bitcoin down lost control.

What evidence of this is there? I don't think anyone is intentionally trying to drive down cost; I'd say the reverse may be more likely, but most likely is that there are simply people trying to make as much money as they can off of BTC. It's just like the "manipulator got sold into at $2.90" stuff. Sure he did, but then I've seen a pretty steady trickle of coins back out into the market at $3+ in the five days following that. Whoever bought at less than $2.90 could be selling at a profit. It's "only" a 3.5% increase, but many people would be pretty happy about a potential 3.5% per week increase in their savings (which would work out to 483% per year if you're interested).

[Raize]

What evidence of this is there?

Where'd the bid-walls go?

All they have to do to prove this isn't the case is put up another 80k BTC bidwall.

It ain't going to happen. At least, not now...

[trogdorjw73]

What evidence of this is there?

Where'd the bid-walls go?
All they have to do to prove this isn't the case is put up another 80k BTC bidwall.
It ain't going to happen. At least, not now...

I thought the consensus (such as it were) was that the giant bid wall was to try to support the price. There really hasn't been a giant sell wall, which is what would typically drive the price down in my opinion. And if you look at MtGox, there's now >70K BTC willing to be purchased for anything over $2.50, so if it's one person putting up staggered bids (which would make sense considering the history of the past couple months where there's a big sell off between the 7th and 15th of the month), moving your bid wall down is a safe bet. The real question -- the the thing we can't answer -- is whether the person who put up the large bid wall has sold off some of those coins at a profit, or if they're just holding them waiting for the prices to go higher. Either is possible, depending on whether the owner(s) are day trading or playing a longer term game.

[ElectricMucus]

A silent tip for the rational types: The sentimental bulls have declared victory, this is a great time to short.

[dancupid]

A silent tip for the rational types: The sentimental bulls have declared victory, this is a great time to short.

That's also a sentiment - all we have is sentiment. There's nothing rational here (otherwise we'd all do the rational thing if we knew what it was)