Does increased processing power deflate bitcoin value?

[rhintox]

With bitcoin mining speed increasing with new technology does it that speed increase cause deflation in value?

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[rhintox]

Don't know I'm a newbie 

[DeathAndTaxes]

No.  Mining is a zero sum game.  As faster miners are developed miners must purchase them or see their share of mining rewards decline.  Regardless of how much hashing power the network has the number of coins added to circulation follow a predictable rate.

The difficulty of mining has no effect on the price  (BTC:USD exchange rate) of bitcoin.    Price does affect network hashing power and difficulty but not the reverse.

[Koooooj]

No.  Mining is a zero sum game.  As faster miners are developed miners must purchase them or see their share of mining rewards decline.  Regardless of how much hashing power the network has the number of coins added to circulation follow a predictable rate.

The difficulty of mining has no effect on the price  (BTC:USD exchange rate) of bitcoin.    Price does affect network hashing power and difficulty but not the reverse.

Well, mining is a ~50 coins/10 minutes sum game, since there is a net gain by the miners (before electricity/hardware costs), but yeah:  difficulty increases every ~2 weeks (2016 blocks) to keep the mining rate constant, more or less, so if the network gets faster then the difficulty of finding a block just increases to offset it.

[yogi]

I have a question.

Would a coin with a variable reward, based on hash rate, be a more stable currency than bitcoin?

[dree12]

Increased processing power provably increases Bitcoin value. There are many methods of obtaining Bitcoin, and one method is mining. With a higher processing power, and eventually a higher difficulty, this method decreases in effectiveness. The net result is an increase of Bitcoin value.

This was the conclusion that coined the term "difficulty drives price", which is a fundamental principal of Bitcoin's market. However, although its converse principle "price drives difficulty" is expected to remain useful, DDP is expected to decrease in strength as the mining industry becomes relatively smaller compared to the rest of the Bitcoin economy.

[ElectricMucus]

Increased processing power provably increases Bitcoin value. There are many methods of obtaining Bitcoin, and one method is mining. With a higher processing power, and eventually a higher difficulty, this method decreases in effectiveness. The net result is an increase of Bitcoin value.

This was the conclusion that coined the term "difficulty drives price", which is a fundamental principal of Bitcoin's market. However, although its converse principle "price drives difficulty" is expected to remain useful, DDP is expected to decrease in strength as the mining industry becomes relatively smaller compared to the rest of the Bitcoin economy.

no it's complete nonsense and everybody except the diehard delusionals agrees that it is nonsense.
stop spreading nonsense.

one 4th time: NONSENSE

[dree12]

Increased processing power provably increases Bitcoin value. There are many methods of obtaining Bitcoin, and one method is mining. With a higher processing power, and eventually a higher difficulty, this method decreases in effectiveness. The net result is an increase of Bitcoin value.

This was the conclusion that coined the term "difficulty drives price", which is a fundamental principal of Bitcoin's market. However, although its converse principle "price drives difficulty" is expected to remain useful, DDP is expected to decrease in strength as the mining industry becomes relatively smaller compared to the rest of the Bitcoin economy.

no it's complete nonsense and everybody except the diehard delusionals agrees that it is nonsense.
stop spreading nonsense.

one 4th time: NONSENSE

Mining is an industry, and they earn profit from their work just like any other. If their profit decreases, especially if down to the point that it is below production costs, deflation will occur. Check this page for a more in-depth theory.

This isn't nonsense, it's a valid effect and will continue to be one until mining becomes a negligible industry.

[DeathAndTaxes]

No it is complete and utter nonsense.   "difficulty drives price" = nonsense.  Always has been and always will.

The rate of supply is fixed (well it will be reduced but the # of miners doesn't change it).  

If there is 1 miner and difficulty 1 the supply rate is still +50 BTC per block.  
If there are 100 million miners and difficulty is 40 quadrillion the supply rate is still + 50 BTC per block.

Miners quitting is like gold miner's quitting where the output (tons of gold) declines as the number of miners decline.   If miners quit the rate of minting remains the same.  If new miners join the rate of minting is still the same.  If mining is non profitable people will stop and difficulty falls but that has no effect on the money supply.  It keeps growing at the same rate*

PRICE rising makes mining more profitable (for a given difficulty) and thus higher prices result in higher difficulty (as the ROI% goes up more miners rush in to get the "easy money") and likewise PRICE falling makes mining less profitable (for a given difficulty) and thus lower prices result in lower difficulty.

so "prices drives difficulty" is a valid assertion although the relationship is often poorly correlated and lagging.  There are other factors which drive difficulty (risk, miner efficiency, block reward amount, potential new products, even the season, etc) but there is some relationship.  

"difficult drives price" was false the first time someone said it and it still is false.




* The one exception would be a massive and rapid drop is hashing power.  Since it take 2016 blocks to readjust if say 90% of hashing power quit right after difficulty adjustment then the rate of supply WOULD be affected and it would take ~20 weeks before an adjustment would occur.  Small changes in hashing power or larger changes over extended periods of time are compensated by the difficulty adjustment.

[dree12]

No it is complete and utter nonsense.   "difficulty drives price" = nonsense.  Always has been and always will.

The rate of supply is fixed (well it will be reduced but the # of miners doesn't change it). 

If there is 1 miner and difficulty 1 the supply rate is still +50 BTC per block. 
If there are 100 million miners and difficulty is 40 quadrillion the supply rate is still + 50 BTC per block.

If mining is non profitable people will stop and difficulty falls.  If mining is too profitable (ROI% is excessive compared to the risk) then more people will mine and difficulty will rise.   

PRICE rising makes mining more profitable (for a given difficulty) and thus higher prices result in higher difficulty (as the ROI% goes up more miners rush in to get the "easy money") and likewise PRICE falling makes mining less profitable (for a given difficulty) and thus lower prices result in lower difficulty.

so "prices drives difficulty" is a valid assertion although the relationship is often poorly correlated and lagging.  There are other factors which drive difficulty (risk, miner efficiency, block reward amount, potential new products, even the season, etc) but there is some relationship. 

"difficult drives price" was false the first time someone said it and it still is false.

I guess my point wasn't clear. SUPPLY is not changed (it is constant). However, DEMAND changes. This follows from the point you make:

If mining is non profitable people will stop...

If I need 600 BTC for whatever reason, I must provide a service or commodity to gain the 600 BTC from somebody else. If the difficulty is too high, I will not be as inclined to provide the "Mining" service. I must provide another service or a commodity (maybe another currency) to gain my BTC. This means that I am more inclined to purchase BTC with another currency, driving the demand for that market up.

This is better illustrated by a direct logical deduction. If one decides to bump the difficulty up to twice its value instantly (ignoring anything that may have caused this), many people would be forced to "buy rather than mine".

This is an effect of an open (non-closed) system: a decrease in demand for one industry increases the demand for others. Effectively:

Code:

  Decrease in demand for industry A
⇉ Decrease in supply for industry A
⇉ Increase in supply for other industries (equal to decrease mentioned)
⇉ Increase in demand for other industries

Because mining doesn't directly affect the price (as you stated), the decrease in demand for mining does not decrease the price. Therefore, the price is increased.

[Stephen Gornick]

If one decides to bump the difficulty up to twice its value instantly (ignoring anything that may have caused this), many people would be forced to "buy rather than mine".

Except that those bitcoins they would have gotten now go to someone else.  In the end, supply is the same.  Demand is the same.  Argument is invalid.

[dree12]

If one decides to bump the difficulty up to twice its value instantly (ignoring anything that may have caused this), many people would be forced to "buy rather than mine".

Except that those bitcoins they would have gotten now go to someone else.  In the end, supply is the same.  Demand is the same.  Argument is invalid.

As I pointed out, the demand may stay the same but is transferred to a different market. The miners do not affect the price directly, so the decreased demand there does not matter. The USD/BTC market does affect the price, so the increased demand there is significant.

[Stephen Gornick]

What will be interesting is to see how the composition of mining changes.

When you had GPU miners that bought hardware using credit cards (or worse, their unemployment checks) and were using the mining proceeds to not only pay off the hardware but to pay for the electric bills, the lower the profitability the more inclined the miner would be to sell every bit of production, regardless of the price (which, in aggregate, caused even lower profitability).  

And now when profitability is rising, there is less need to sell because the payments and electricity can be paid using a smaller amount of the mining proceeds.  Thus there is a now a reluctance to sell as there is no immediate need to sell, and that is amplified with the expectation that there will be a higher price further down the road.  And this lower supply then does further cause a positive feedback loop and the exchange rate continues to rise.

When the 7,200 BTC per day of new bitcoins was inflating currency supply at the rate of 30% or more per year, the weak miners had a bigger impact a year ago than they do today.

Now with FPGAs, mining expansion today isn't being bought using credit card debt.  And the FPGA's efficiency means the electric bill is much less of a factor.  Those wtih paid-off GPUs and FPGA hardware are now "strong miners" and probably are holding onto their bitcoins.

But if the $179 coffee warmer ASIC is real, easy to use and can be produced in massive quantity, then this could once again get us back to that "weak miner" situation, where those mining with these will sell every bit of what is produced.     But come December the 25% per year currency inlfation will drop to 12.5% (when the block reward drop occurs) and thus even though these miners would likely be weak, the chunk of the 3,600 BTC per day that they sell really has little impact anymore.

Mining as a whole continues to have less and less impact on the exchange rate each and every day (presuming there is sufficient hashing to protect the bitcoin network, and we're so over-protected at this point it isn't even a consideration.)

[Graet]

What will be interesting is to see how the composition of mining changes.

When you had GPU miners that bought hardware using credit cards (or worse, their unemployment checks) and were using the mining proceeds to not only pay off the hardware but to pay for the electric bills, the lower the profitability the more inclined the miner would be to sell every bit of production, regardless of the price (which, in aggregate, caused even lower profitability).  

And now when profitability is rising, there is less need to sell because the payments and electricity can be paid using a smaller amount of the mining proceeds.  Thus there is a now a reluctance to sell as there is no immediate need to sell, and that is amplified with the expectation that there will be a higher price further down the road.  And this lower supply then does further cause a positive feedback loop and the exchange rate continues to rise.

When the 7,200 BTC per day of new bitcoins was inflating currency supply at the rate of 30% or more per year, the weak miners had a bigger impact a year ago than they do today.

Now with FPGAs, mining expansion today isn't being bought using credit card debt.  And the FPGA's efficiency means the electric bill is much less of a factor.  Those wtih paid-off GPUs and FPGA hardware are now "strong miners" and probably are holding onto their bitcoins.

But if the $179 coffee warmer ASIC is real, easy to use and can be produced in massive quantity, then this could once again get us back to that "weak miner" situation, where those mining with these will sell every bit of what is produced.     But come December the 25% per year currency inlfation will drop to 12.5% (when the block reward drop occurs) and thus even though these miners would likely be weak, the chunk of the 3,600 BTC per day that they sell really has little impact anymore.

Mining as a whole continues to have less and less impact on the exchange rate each and every day (presuming there is sufficient hashing to protect the bitcoin network, and we're so over-protected at this point it isn't even a consideration.)

yep, except I still see people using credit card debit to buy fpga and/or people using their CC to fund other stuff to free up non-reversible funds to put deposits on hardware
same effect in the end

[FreeMoney]

Mining as a whole continues to have less and less impact on the exchange rate each and every day (presuming there is sufficient hashing to protect the bitcoin network, and we're so over-protected at this point it isn't even a consideration.)

Really? I think we're only safe at this point because govs don't care yet. I hope we're 10x more difficult when they first start analyzing for an attack.