Price vs Difficulty Charts - indicators for buying or mining

[bitcoinBull]

What will happen next? 

Scenario 1)  Sideways price movement coupled with the increasing difficulty means that the ratio declines to 1:1, e.g. with a price of $10.00 when there is an estimated difficulty of 1,000,000.

Scenario 2)  Rapidly increasing difficulty is met with equal increase in price, keeping the ratio at 2:1.  For example, the price breaks $10 when difficulty estimate surpasses 500,000.  Bitcoin is at $20.00 by the time the difficulty estimate is at 1,000,000.

Scenario 3)  Another pop in price pushes the ratio back up from 2:1 to 3:1.  At an estimated difficulty of 500,000 the price goes to $15.  It could come back down as low as $10 or even lower like $7.50, while difficulty increases to 1,000,000, sinking the ratio to 1:1 or 0.75:1.


These are the optimistic scenarios.  Pessimistic scenarios, like a drop in price and/or a rapidly slowing difficulty growth, don't seem likely.  As in the chart, the record low price/difficulty ratio was around 0.75 at the beginning of April.

A quick update.  Scenario 3 is has happened.

At a projected difficulty of ~600,000, the price popped over $18 so we're over the ratio of 3:1.

The question now is how high will this go in the very near-term?  With the critical mass and media explosion, we could see a return to the historic ratio highs from back in November, nearing 6:1.  That would be a doubling from $18 to $36. 

We'll see what happens over the coming weekdays when the banks open to start processing more transfers.

This is a fantastic time to be mining.  We need more miners, and fast.  Hopefully the vendors can deliver more GPUs soon.  I see the difficulty as a lagging indicator, so we need a matching rise in difficulty to support the rising price.  That is absolutely critical to avoid large corrections and instill confidence in bitcoin.

[1713516374]

1713516374

[1713516374]

1713516374

[1713516374]

1713516374

[1713516374]

1713516374

[1713516374]

1713516374

[ktomi]

Keep up the good work!

[ocharry]

What will happen next? 

Scenario 1)  Sideways price movement coupled with the increasing difficulty means that the ratio declines to 1:1, e.g. with a price of $10.00 when there is an estimated difficulty of 1,000,000.

Scenario 2)  Rapidly increasing difficulty is met with equal increase in price, keeping the ratio at 2:1.  For example, the price breaks $10 when difficulty estimate surpasses 500,000.  Bitcoin is at $20.00 by the time the difficulty estimate is at 1,000,000.

Scenario 3)  Another pop in price pushes the ratio back up from 2:1 to 3:1.  At an estimated difficulty of 500,000 the price goes to $15.  It could come back down as low as $10 or even lower like $7.50, while difficulty increases to 1,000,000, sinking the ratio to 1:1 or 0.75:1.


These are the optimistic scenarios.  Pessimistic scenarios, like a drop in price and/or a rapidly slowing difficulty growth, don't seem likely.  As in the chart, the record low price/difficulty ratio was around 0.75 at the beginning of April.

A quick update.  Scenario 3 is has happened.

At a projected difficulty of ~600,000, the price popped over $18 so we're over the ratio of 3:1.

The question now is how high will this go in the very near-term?  With the critical mass and media explosion, we could see a return to the historic ratio highs from back in November, nearing 6:1.  That would be a doubling from $18 to $36. 

We'll see what happens over the coming weekdays when the banks open to start processing more transfers.

This is a fantastic time to be mining.  We need more miners, and fast.  Hopefully the vendors can deliver more GPUs soon.  I see the difficulty as a lagging indicator, so we need a matching rise in difficulty to support the rising price.  That is absolutely critical to avoid large corrections and instill confidence in bitcoin.

I'm pretty sure we'll see an influx of new miners arriving tomorrow or Tuesday since GPUs are arriving at prospecting miners' doorsteps.

[maninas]

I'm pretty sure we'll see an influx of new miners arriving tomorrow or Tuesday since GPUs are arriving at prospecting miners' doorsteps.

Considering the huge jump in prices of the last weekdays, I am sure that many who were on the fence on whether to invest on Bitcoin and on mining hardware, have finally made up their mind. I know I did; my 2 modest 5830s have been ordered. Maybe I'll invest more soon as I get more trust out of Bitcoin.

Either way, your analytics on this thread are extraordinarily helpful to better grasp the market movement and the implications of factors like difficulty, price, Mhash/s have on proper decision making. It is very welcome and I am grateful for the time you spare.

[iMiner]

I think these kind of data should be plotted logarithmically. I did a polynomal fit, exp may be better, but still it seems to fit nicely.

http://i51.tinypic.com/2whmov6.png

[steamboat]

fantastic job btw, infinitely more helpful than the " you're going to lose all your money if you mine" posts

i did some quick fuzzy math, and given my cost of producing a coin using my existing rig, (electricity only) and expecting to make 20% on that coin, i came up with 4.752$ as the lowest price i would be willing to sell a coin at. that would be ~.83:1 ratio. that of course would be higher if i included the hardware depreciation, transaction fees, etc. call it 1.5:1 because it sounds like a good number atm. but like i said, fuzzy math.


that being said, why is the ratio so high currently, and why has it spiked in the past? pure market speculation? the only thing i see driving bitcoins atm is the price to produce one and faith in the system. forgive me if i'm missing something simple, i'm very new to bitcoin and economics was never my strong suite in college.

[fabianhjr]

Mhh, I revive the notion of real time Price vs Difficulty charts.

[landshark]

What will happen next? 

Scenario 1)  Sideways price movement coupled with the increasing difficulty means that the ratio declines to 1:1, e.g. with a price of $10.00 when there is an estimated difficulty of 1,000,000.

Scenario 2)  Rapidly increasing difficulty is met with equal increase in price, keeping the ratio at 2:1.  For example, the price breaks $10 when difficulty estimate surpasses 500,000.  Bitcoin is at $20.00 by the time the difficulty estimate is at 1,000,000.

Scenario 3)  Another pop in price pushes the ratio back up from 2:1 to 3:1.  At an estimated difficulty of 500,000 the price goes to $15.  It could come back down as low as $10 or even lower like $7.50, while difficulty increases to 1,000,000, sinking the ratio to 1:1 or 0.75:1.


These are the optimistic scenarios.  Pessimistic scenarios, like a drop in price and/or a rapidly slowing difficulty growth, don't seem likely.  As in the chart, the record low price/difficulty ratio was around 0.75 at the beginning of April.

A quick update.  Scenario 3 is has happened.

At a projected difficulty of ~600,000, the price popped over $18 so we're over the ratio of 3:1.

The question now is how high will this go in the very near-term?  With the critical mass and media explosion, we could see a return to the historic ratio highs from back in November, nearing 6:1.  That would be a doubling from $18 to $36. 

We'll see what happens over the coming weekdays when the banks open to start processing more transfers.

This is a fantastic time to be mining.  We need more miners, and fast.  Hopefully the vendors can deliver more GPUs soon.  I see the difficulty as a lagging indicator, so we need a matching rise in difficulty to support the rising price.  That is absolutely critical to avoid large corrections and instill confidence in bitcoin.

Looks like the second part of Scenario 3 is in full swing.  With an estimated 800,000+ on the way soon, and price at 15 as of now, we are on the way to much lower ratios.  Still have a way to go, however!

[Sukrim]

Mhh, I revive the notion of real time Price vs Difficulty charts.

Check out http://forum.bitcoin.org/index.php?topic=14937.0

Not 100% ideal (no annotations...), but better than nothing...

[bitcoinBull]

Mhh, I revive the notion of real time Price vs Difficulty charts.

It is hard to do a realtime ratio chart because the difficulty is hard to estimate over short intervals.  Less than 3-day averages and it is quite choppy.

But it is a back of the envelope calculation which is quite easy to do.

Look at the difficulty chart: http://bitcoin.sipa.be/

Even with the price crash over the past 48 hours, the 8-hour difficulty estimate (at the moment) is rising to touch 1.2 million.  The 3-day estimate is nearly 1 million.  By the historical ratio, $10 dollar BTC is 1:1 and way down in the bargain basement.  Would have to reach a weighted average below $7.50 to set a new record low.

Unless price suddenly recovers, the next weeks will test the theory that difficulty is a fundamental indicator which can drive price, for the second time (first time was the previous low in March).  Will it follow the 50% or greater drop in price, and enter a negative feedback loop?  Or will it stay and support a price over $10? 

Everybody that sold has a lot of USD sitting there (this time I'm not one of them, unfortunately but true to my name for once).  Either the sellers are just waiting for the bottom before going back in, or they are cashing out their millions to leave the latecomers holding the bag.

If there are bitcoin believers, they will keep their rigs mining.  If there are none, we'll be seeing a whole lot of used gaming machines go on sale.

[k]

Mhh, I revive the notion of real time Price vs Difficulty charts.

It is hard to do a realtime ratio chart because the difficulty is hard to estimate over short intervals.  Less than 3-day averages and it is quite choppy.

But it is a back of the envelope calculation which is quite easy to do.

Look at the difficulty chart: http://bitcoin.sipa.be/

Even with the price crash over the past 48 hours, the 8-hour difficulty estimate (at the moment) is rising to touch 1.2 million.  The 3-day estimate is nearly 1 million.  By the historical ratio, $10 dollar BTC is 1:1 and way down in the bargain basement.  Would have to reach a weighted average below $7.50 to set a new record low.

Unless price suddenly recovers, the next weeks will test the theory that difficulty is a fundamental indicator which can drive price, for the second time (first time was the previous low in March).  Will it follow the 50% or greater drop in price, and enter a negative feedback loop?  Or will it stay and support a price over $10? 

Everybody that sold has a lot of USD sitting there (this time I'm not one of them, unfortunately but true to my name for once).  Either the sellers are just waiting for the bottom before going back in, or they are cashing out their millions to leave the latecomers holding the bag.

If there are bitcoin believers, they will keep their rigs mining.  If there are none, we'll be seeing a whole lot of used gaming machines go on sale.

but the difficulty only changes every 2016 blocks so is quite stable. The network hash rate on the other hand fluctuates alot. I think the difficulty should be used though.

[bitcoinBull]

but the difficulty only changes every 2016 blocks so is quite stable. The network hash rate on the other hand fluctuates alot. I think the difficulty should be used though.

Sorry, sometimes I say difficulty when I mean estimated difficulty, or projected difficulty, which like you say  is just the network hash rate (in a different unit of measure).  I prefer to the use estimated/projected difficulty because the actual difficulty factor lags by 2016 blocks.  Its like a view into the future.

[k]

fair enough. a 2016 moving average of the projected difficulty (or network hash rate) should work quite well

[maninas]

Does anyone have the time to post an updated graph now that the media generated bubble has burst?

[Sukrim]

Look above, I posted a link to a regularly updated graph.

[bitcoinBull]

Thanks for the request.  IMO, difficulty is the "fundamental" of the bitcoin economy, backing and supporting the increase in price. 
Here's a quick update.

Where are we headed next?  Analyses and predictions welcome.

[Sukrim]

If you use a diffiulty estimate and not the real difficulty, you are rather comparing with the network hash rate than "difficulty", just saying.

[ukbitco.in]

I've really enjoyed these posts BitBull, i don't think i've found much technical analysis which gets right to the heart of the matter of the bitcoin conundrum like this does. Thanks.  I'm no economist but my two cents worth..

I like to keep an eye on google trends: very strong intrest in the last few days, search numbers are rocketing, perhaps after the bubble which made headlines...  

We've had some nice stability the last few days, prices hovering just below $20, i guess partly explained by many getting fingers burnt and the market becoming more nervous. Volume of trading is well down too compared to recent flurry of activity.  

But difficulty really is moving quickly now, after the jump this morning we're going to be at +1mil in 12 days! Miners need to see the price move up to keep costs down.

I really agree with poster above... now comes a major test of the relationship between price and difficulty. Can the market attract enough investment to sustain the disparity caused by every geek on earth buying a radeon and shooting up difficulty.

[k]

I really agree with poster above... now comes a major test of the relationship between price and difficulty. Can the market attract enough investment to sustain the disparity caused by every geek on earth buying a radeon and shooting up difficulty.

I was thinking price could start outstripping difficulty as the marginal supply constraints on gpus started to stall the growth in hash rate - maybe not at that point yet. If the growth in hash rate does start to stall will be interesting to see where price goes.

[Stephen Gornick]

I was thinking price could start outstripping difficulty as the marginal supply constraints on gpus started to stall the growth in hash rate - maybe not at that point yet.

The hash rate still hasn't caught up to the rise in the BTC/USD so there is much room yet for capacity to come online.  Though there are supply constraints on the most efficient hardware (e.g., 6990s, etc.) there is an even larger base of the less efficient GPU hardware yet for sale, or already in use by consumers that needs only to be re-purposed for mining.  Heck, even those with i7s and those with free electricity are profitable right now.  And don't dismiss the capacity that FPGAs do now and will soon represent.

When the difficulty reaches the point that electricity starts to eat into profits, those with the less efficient hardware and those less motivated by the declining returns will start to drop off once again.  The difficulty level will equilibrate towards whatever level the market price ends up at.