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Author Topic: Why don`t prices follow difficulty change?  (Read 4604 times)
Apolo29
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May 20, 2011, 01:56:16 AM
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In the last difficulty changes prices went up following ( or even passing ) difficulty, but this time prices are stable over 6.5 - 7, why is that happening?
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steelhouse
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May 20, 2011, 02:02:43 AM
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Because there is no guarantee difficulty is related to bitcoin price.  After difficulty it did cut new supply by 30%, but that new supply is slowly building again.   
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May 20, 2011, 02:11:34 AM
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difficulty changes don't cut supply except in a very short-term way, and even then not in the steady state. the new supply for any two week period is roughly the same (16,800 btc) until the block-generation subsidy halves (every four years), modulo simple lagging effects related to the fact that difficulty changes are abrupt rather than continuous (by necessity).

given that, asking 'why don't prices follow difficulty' is much like asking 'why doesn't the price of gold rise as people start subdividing the existing gold mines?' the same amount of gold is there. it's just being spread out among more people.

causal effects in markets are hard to describe, but on most simple analyses, there's good reason to think the effect works the other way around: as price increases, we should expect difficulty to increase as the value of mining has increased. if the speculative frenzy in the btc/usd exchange rate popped today, we would expect to see fewer miners subsequently.
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May 20, 2011, 02:20:47 AM
 #4

In the last difficulty changes prices went up following ( or even passing ) difficulty, but this time prices are stable over 6.5 - 7, why is that happening?

Why don't you describe why you think it should have?
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May 20, 2011, 03:14:44 AM
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Price drags difficulty not the other way. If people value coins more highly then people will pay more to mine for them. But people paying more to mine for them doesn't make people willing to pay more.

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May 20, 2011, 03:21:54 AM
 #6

The best answer is that difficulty increases are already priced in.
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May 20, 2011, 03:36:52 AM
 #7

Difficulty does have a small effect on price.  When difficulty is high relative to the price, people looking to invest in bitcoin are more likely to buy bitcoins than hardware.

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marcus_of_augustus
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May 20, 2011, 04:47:46 AM
 #8

Difficulty does have a small effect on price.  When difficulty is high relative to the price, people looking to invest in bitcoin are more likely to buy bitcoins than hardware.

Yes quite. Difficulty provides the bottom line to the price channel.

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May 20, 2011, 05:16:34 AM
 #9

do you mean in some 'technical' chartist way?

otherwise i still don't see it. if demand were to dry up, the cost to mine a bitcoin today doesn't provide a fundamental floor to its value. what i paid to mine a bitcoin is a sunk cost.
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May 20, 2011, 07:18:02 AM
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do you mean in some 'technical' chartist way?

otherwise i still don't see it. if demand were to dry up, the cost to mine a bitcoin today doesn't provide a fundamental floor to its value. what i paid to mine a bitcoin is a sunk cost.

no, not a sunk cost since at the point that it becomes cheaper to switch off the miners and start buying BTC on the market the already invested core will do that .... what do you think is boot-strapping this thing into existence?

fairies?

... there is something real underneath all this, it just takes some thought to see it, the fundamental floor that is.

The-miner
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May 20, 2011, 08:58:45 AM
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yes, too many people mining and not enough buying tends to do that to the market. soon enough people will realize and switch over and it will even out.
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May 20, 2011, 09:10:47 AM
 #12

prices went up following ( or even passing ) difficulty
you answered your own question,
even passing, that's why, difficulty tries to catch up to the price.

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May 20, 2011, 11:55:17 AM
 #13

Price drives difficulty: http://bitcointalk.org/index.php?topic=3979.0

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May 20, 2011, 12:58:45 PM
 #14

Mining costs are a sunk cost when it comes time to sell BTC. Therefore, price drives difficulty.
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May 20, 2011, 01:28:44 PM
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People don't pay a lot of money for crabs because people risk their lives to fish for them.
Crab fisherman risk their lives because people will pay a lot of money for crabs.
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May 20, 2011, 01:41:11 PM
 #16

While initially it made some sort of sense that price should follow Difficulty increases, it was to simple of a correlation for one to believe. As in all financial industries, it is a formula that is illusive. One must take into account Demand (a human element), THashes/s (competition), Greed (people cashing out), Speculation (Gamblers), and Fundamentals (the math on various elements).

  If anyone can come up with a formula to properly show a correlation of those elements, let me know. I'll put a 1 BTC bounty on it.

The best one can do and it works but does not put it in a time frame is Supply/Demand. There is currently a high Ask:Bid Ratio. It hovers around 5 (pretty high). But in general as this ratio goes up, prices stabilize and then come down and vice versa.

If you are a Day Trader use the same AB Ratio but at different price bands, asks under 7 : bids over 6, asks under 7.5 : bids over 5.5, to ride the waves and reap the spreads and small upticks. Currently there is support for the price rising to over 7 between a set price band but overall the price is set to decline. And that is the news from CNBTC Smiley

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tomcollins
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May 20, 2011, 02:29:01 PM
 #17

People don't pay a lot of money for crabs because people risk their lives to fish for them.
Crab fisherman risk their lives because people will pay a lot of money for crabs.

Very good analogy.  Too many people hold labor theory of value.  If something is hard to do, then it must be valuable!
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May 20, 2011, 02:38:31 PM
 #18

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If anyone can come up with a formula to properly show a correlation of those elements, let me know.

Well, first you assume a spherical Bitcoin trader...


price  =  demand + speculation + difficulty
              --------------------------------------------
               greed + competition + supply


Then you can make up some reasonable figures to plug in...

price = steady

difficulty = +50%
demand = +5% (growth of economy)
speculation = X (ie. we don't know)

competition = +20% (influx of new miners)
supply = +5% (increases at constant rate)
greed = +5% (slight increase)

And then solving for X gives you...

X = -25%

A reasonable explanation for steady price in the face of rising difficulty -- 25% less speculation?

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tomcollins
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May 20, 2011, 02:42:25 PM
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Quote
If anyone can come up with a formula to properly show a correlation of those elements, let me know.

Well, first you assume a spherical Bitcoin trader...


price  =  demand + speculation + difficulty
              --------------------------------------------
               greed + competition + supply


Then you can make up some reasonable figures to plug in...

price = steady

difficulty = +50%
demand = +5% (growth of economy)
speculation = X (ie. we don't know)

competition = +20% (influx of new miners)
supply = +5% (increases at constant rate)
greed = +5% (slight increase)

And then solving for X gives you...

X = -25%

A reasonable explanation for steady price in the face of rising difficulty -- 25% less speculation?

I have no idea how you could have possibly made such an equation or thought it was actually useful in any way, but if that's all it takes, congrats to get 1 BTC.
FreeMoney
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May 20, 2011, 02:45:25 PM
 #20


speculation = X (ie. we don't know)
 

Ah, I get it. If it wasn't speculation we would now for sure. So since it is speculation we must not know and this must be the variable portion.

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