Speculate: Difficulty

[AniceInovation]

Hello,

Seems like Difficulty has grown on a steady pace.

At least until BTC reward goes down to half, i think it will grow up to 2500000, then it will go down a considerable amount, until the Bitcoin price reflects the half reward, and then it will grow up again.

In your opinion, what will it be in 6 months?

[Unacceptable]

I'm thinkin diff will fluxuate from 1.5 - 2 million until the halveing.Because when the diff gets too high most miners shut down due to low or no profit.It happened last year..................

After the halveing,BTC price will increase.By how much?? Maybe 40% or so,due to supply & demand.The diff,I'm not sure yet.

Hope I'm right,I'm banking on it 

[Stephen Gornick]

Speculate on difficulty, with bitcoins:

 - http://betsofbitco.in/search?q=difficulty

[Cluster2k]

Many people believe bitcoin's value will go up when the block reward halves.  I think the better question should be, why should it go up just because the reward has halved?  We saw last year that when difficulty was too high (ie. reward too low) that many miners stopped mining and difficulty readjusted itself.  The higher difficulty did nothing to sustain the price, and likewise I postulate that a lower reward (the same as a higher difficulty) doesn't automatically translate to more USD$ per bitcoin.

Bitcoin is just as useful at $1/btc as it is at $10 or $100.  It does the same job.

[FreeMoney]

Many people believe bitcoin's value will go up when the block reward halves.  I think the better question should be, why should it go up just because the reward has halved?  We saw last year that when difficulty was too high (ie. reward too low) that many miners stopped mining and difficulty readjusted itself.  The higher difficulty did nothing to sustain the price, and likewise I postulate that a lower reward (the same as a higher difficulty) doesn't automatically translate to more USD$ per bitcoin.

Bitcoin is just as useful at $1/btc as it is at $10 or $100.  It does the same job.

It's going to be a lot more awkward to buy a super yacht with coin at $1 than $100.

[dustintrammell]

Many people believe bitcoin's value will go up when the block reward halves.  I think the better question should be, why should it go up just because the reward has halved?  We saw last year that when difficulty was too high (ie. reward too low) that many miners stopped mining and difficulty readjusted itself.  The higher difficulty did nothing to sustain the price, and likewise I postulate that a lower reward (the same as a higher difficulty) doesn't automatically translate to more USD$ per bitcoin.

Bitcoin is just as useful at $1/btc as it is at $10 or $100.  It does the same job.

Speculators and investors believe that the value of the coins will go up when the reward is halved due to basic supply and demand.  If we assume that demand continues to increase as the Bitcoin economy grows (more merchants, more users), however the rate of increased supply is decreased by 50%, the delta between supply and demand will widen.  When demand outpaces supply, value goes up.

The difficulty to mine blocks is irrelevant as it is self-regulating and will always average out to one new block roughly every 10 minutes, which keeps the rate of supply steady.  What will be changing is the AMOUNT of supply provided at that consistent rate.

[proudhon]

Many people believe bitcoin's value will go up when the block reward halves.  I think the better question should be, why should it go up just because the reward has halved?  We saw last year that when difficulty was too high (ie. reward too low) that many miners stopped mining and difficulty readjusted itself.  The higher difficulty did nothing to sustain the price, and likewise I postulate that a lower reward (the same as a higher difficulty) doesn't automatically translate to more USD$ per bitcoin.

Bitcoin is just as useful at $1/btc as it is at $10 or $100.  It does the same job.

Speculators and investors believe that the value of the coins will go up when the reward is halved due to basic supply and demand.  If we assume that demand continues to increase as the Bitcoin economy grows (more merchants, more users), however the rate of increased supply is decreased by 50%, the delta between supply and demand will widen.  When demand outpaces supply, value goes up.

The difficulty to mine blocks is irrelevant as it is self-regulating and will always average out to one new block roughly every 10 minutes, which keeps the rate of supply steady.  What will be changing is the AMOUNT of supply provided at that consistent rate.

[Stephen Gornick]

Clearly, BTC at $1 doesn't support a $2,100,000,000 BTC economy.

You are misusing the term "economy".  I see sometimes the term "market cap" used to describe the number that is the quantity X exchange rate, but neither term really is really accurate.

As a currency, Bitcoin's value is increased when there is demand for its use in transactions.  i.e., how much spending occurs using bitcoins.   If you notice the following chart, you'll see that we are approaching on average 2 million BTCs spent each day now (up from a level a quarter as high just a few months ago):
 - http://blockchain.info/charts/output-volume?timespan=60days&daysAverageString=7

Extrapolated over a month, that would mean 60 millon BTCs spent in a single month, at $5 each = $300 million USD.  Multiply out twelve months and that is nearly a $4 trillion [Edit: oops, ... billion] USD "economy".  Obviously that's the biggest numerical fantasy since Ben Bernanke last opened his mouth.

This "total spending" metric is flawed because Bitcoin doesn't indicate which transaction is a change transaction versus the amount that was truly spent in that transaction.  There are more flaws to calling this number "spending" because, for instance, a party mixing coins is going to create a lot of spending with nearly no net addition to this "economy".   And now with online gambling becoming a more significant portion of transaction activity, the "spending" level means less when 99% of the transaction amount totals are retained by the originating party.  Thus without the funds changing hands some concepts such as "velocity" of money mean different things.

The point I'm trying to make is that the exchange rate isn't the only thing that is used to measure the size of the economy.  A $2.1 trillion [Edit: oops, ... billion] USD economy could exist with a $0.01 BTC/USD even.

[julz]

Many people believe bitcoin's value will go up when the block reward halves.  I think the better question should be, why should it go up just because the reward has halved?  We saw last year that when difficulty was too high (ie. reward too low) that many miners stopped mining and difficulty readjusted itself.  The higher difficulty did nothing to sustain the price, and likewise I postulate that a lower reward (the same as a higher difficulty) doesn't automatically translate to more USD$ per bitcoin.
...

Obviously a lower reward is only the same as a higher difficulty from each miner's perspective.
From the perspective of bitcoiners as a whole, less coins are being added to the system per unit time - so it's necessary to consider that aspect when thinking about a possible price effect.

[elux]

Extrapolated over a month, that would mean 60 millon BTCs spent in a single month, at $5 each = $300 million USD.  
Multiply out twelve months and that is nearly a $4 trillion USD "economy".  

While your general point may be sound, your numbers are not.
Three hundred million times twelve does not four trillion make.

[Stephen Gornick]

While your general point may be sound, your numbers are not.
Three hundred million times twelve does not four trillion make.

Oops, ... corrected.  Thank you.

It will be interesting to see certain uses for Bitcoin that tend to be high velocity versus those that are not.  For instance, remittance payments sent across borders.  The time lag after bitcoins are purchased, sent, and converted back to fiat by the recipient might be something could occur in just a matter of minutes.  On the other end of the spectrum there will be things like escrows where the funds are committed and thus just sit in a wallet rather than be found criss-crossing the globse.

[notme]

Many people believe bitcoin's value will go up when the block reward halves.  I think the better question should be, why should it go up just because the reward has halved?  We saw last year that when difficulty was too high (ie. reward too low) that many miners stopped mining and difficulty readjusted itself.  The higher difficulty did nothing to sustain the price, and likewise I postulate that a lower reward (the same as a higher difficulty) doesn't automatically translate to more USD$ per bitcoin.

Bitcoin is just as useful at $1/btc as it is at $10 or $100.  It does the same job.

$1/BTC x 21,000,000 = $21,000,000 BTC economy
$10/BTC x 21,000,000 = $210,000,000 BTC economy
$100/BTC x 21,000,000 = $2,100,000,000 BTC economy.

Clearly, BTC at $1 doesn't support a $2,100,000,000 BTC economy.

You're neglecting time and the velocity of money.

[dropt]

I only skimmed through, but did any one actually look at the daily transaction volume vs. number of newly minted bitcoins per day?   IIRC the mining only represents a small percentage of the daily trade volume, and that is if each newly mined coin is sold immediately.

TL;DR:  I don't think the reward halving is going to have much effect on the price at all.

[blueadept]

It would be interesting to have futures and options not just on Bitcoin price but also on mining difficulty. Also on volatility (like the VIX but for Bitcoin price rather than an index price). Things like this would let miners hedge against difficulty increases and even let merchants in the future pay for security indirectly by betting on a low difficulty (with the miners supplementing their income by betting on high difficulty and mining at a loss, making up the difference with the trades). This of course matters more when fees make up most of the block reward rather than the subsidy.

[Stephen Gornick]

It would be interesting to have futures and options not just on Bitcoin price but also on mining difficulty.

Well, these essentially do that:
 - http://polimedia.us/bitcoin/mpex.php?mpsic=O.HASH.C10TH
 - http://polimedia.us/bitcoin/mpex.php?mpsic=O.HASH.P10TH

 - http://en.bitcoin.it/wiki/MPEx

Also on volatility (like the VIX but for Bitcoin price rather than an index price).

Discussed here:
 - http://bitcointalk.org/index.php?topic=80841.0

[blueadept]

Ooh, awesome! Noted, thanks Stephen!

[realnowhereman]

Speculators and investors believe that the value of the coins will go up when the reward is halved due to basic supply and demand.  If we assume that demand continues to increase as the Bitcoin economy grows (more merchants, more users), however the rate of increased supply is decreased by 50%, the delta between supply and demand will widen.  When demand outpaces supply, value goes up.

The problem is, of course that the market knows that this event is coming, so there is at least the possibility that that reduction of supply has already been priced in.

I suspect that that is exactly the case.  The price might have gone up by then for other reasons (bitcoin price is hardly an essay in stability), but I don't see it happening that any price change will be correlated with the block reward rate halving.

[blablahblah]

In 6 months... that would be what, November?
US election time,
the UEFA championship and the Olympics will be a distant memory...
AAPL after the bubble; Facebook a total facepalm,
the world paying for oil in anything but the dollar,
even more Mid East tensions; pissed off troops deserting; OWS doing whatever,
China waking up from its slumber and threatening some military shit,
a tsunami of dollars starts hitting US shores and everybody screams holy-hyper-inflation-f*ck!
More stuff happens with the PIIGS; the Dollar and the Euro battle it out to see who will self-destruct faster...

Meanwhile, Bitcoin continues to meander along at say, $6.50?? Bitcoin is screaming out to early adopters right now, it's just not so obvious from a distance. All this uncertainty means that you could be right, or a huge wave of adoption could conceivably be just round the corner, which pushes the price up to $80 (May 2012 dollars), and the difficulty gets ramped up by a factor of 10. By then everyone will be too busy ripping out each other's eyeballs to notice a decrease in the mine supply.

[Raize]

Speculate on difficulty, with bitcoins:

 - http://betsofbitco.in/search?q=difficulty

The main problem with this being the time you have to wait and the lack of liquidity. I agree with a lot of others that indicate that miners really don't have a good way to hedge against significant difficulty increases just as for the longest time, investors didn't have a good way to hedge against significant price decreases. Bitcoinica offered a way to moderately do the latter.

[AniceInovation]

I have to reiterate.

With the humongous amount of FPGA being sold, difficulty will get a good amount higher.
I now believe we will get more than 4000000 difficulty by the time bitcon reward halves.

After that, GPU miners will leave the bitcoin scene, but not the FPGA miners. The lowest we will see at the beginning of 2013 will be 2000000 difficulty.