Hacker News Reader

Comment by sundaymorning | Hacker News Reader

I don't see a mechanism for mining difficulty to affect bitcoin price.

The price of bitcoin affects bitcoin miners. People will turn off / sell miners when the price plummets, or go out and buy a miner/hardware when the price is on the rise.

Bitcoin miners affect the difficulty level directly, by mining or not.

Furthermore, there are a finite number of bitcoins to be mined. The higher the difficulty, the faster they are being mined. Therefore, the scarcity of each individual coin is going UP as they are mined. Let me say that another way: before a coin is mined, it is still available for anyone to get by mining. After it is mined, it is in a private wallet number, worth whatever the market says the owner should reasonably receive for it. As coins are mined, the supply of total available coins goes DOWN. As long as demand continues, price will go UP. BTC become more scarce with each coin mined, because there is one fewer to mine in the future, and every one to be mined after it will need to be done so at the new (assumedly higher) mining cost.

The difficulty level might be thought of as a direct index of the COST of mining a new coin. As that cost increases, supply for coins goes DOWN. Ceterus paribus, supply DECREASES, price INCREASES.

> The higher the difficulty, the faster they are being mined. Therefore, the scarcity of each individual coin is going UP as they are mined.

You are wrong. Coins are mined at a mostly fixed rate regardless of difficulty.

> BTC become more scarce with each coin mined

They are actually becoming less scarce since the total amount of coins in circulation increases every ~10 minutes (until there are ~21M coins in circulation). Believe it or not, supply is increasing but demand is increasing at a much faster rate, hence the price going up.

Mining difficulty on the other hand has pretty much no influence on price (although price does have an effect on mining difficulty).

I concede to your point, that makes sense. The rise in difficulty is to regulate that fixed rate of producing new coins, I'm certainly wrong there.

Scarcity of coins to the market goes down w/ each new coin mined, you're right. BUT, because we know exactly how many coins there are available to mine, doesn't this make the total number of coins available to you via mining go DOWN? If all the world's gold was in a single, perfectly measurable and publically accessible vein, would someone moving it from that publically minable place to a private reserve make its scarcity go UP or DOWN? There is the risk of the blockchain failing drastically, but past that it can be assumed that you have THAT MANY FEWER COINS available to mine, in total, right?

I may be thinking about this in the wrong way entirely, appreciate the comment.

While bitcoin is many things to many people (a currency, an investment vehicle), it is also a commodity, produced by miners who need to make back the money spent mining. When their costs go up, they will raise their prices to match, just like farmers, coal miners, or RAM manufacturers. If the market is supply-constrained, the price increase will be accepted.

You have it backwards. If I spend $1M doing some awesome product and will ask for it $1.1M to cover my costs and make some profit, then it says nothing about how many people would actually pay that price.

Miners invest in mining in expectation of price rise. They could equally go to exchange and buy bitcoins in expectation of higher price in the future. Whether they are correct or not will be decided not by them, but by all other people who demand bitcoins and bid up the prices.

If there is no new demand for bitcoins, price will not grow because there won't be competition for buying them.

Bitcoin is a little bit weird because it is a currency which (essentially) nothing is priced in.

So actual users of bitcoin-the-currency don't really care what the price of a bitcoin is, as long as it is stable enough for them to complete a transaction. They don't need to buy 1 or 0.1 or 10 bitcoins, they need to buy exactly $100 or $10 or $1000 of bitcoins to complete their transaction, and the actual price per bitcoin doesn't matter.

You are right that exact price of Bitcoin is irrelevant when you need to convert 8 hours of your day job into an iPhone. But for anything to be a medium of exchange it must have value. And the value is derived solely from the desire to hold Bitcoins vs. holding dollars, euros, oil, gold, consumption goods etc. The more people on the market want to hold Bitcoins, the more liquid it is (regardless of the price). But since the amount of Bitcoins is fixed, increasing liquidity would always have to come with a growing price. Simply because for every new person to come in and buy a Bitcoin, he need to outbid all other people like him, and also outbid time preference of the existing holders.

In other words, growing price of a good in a fixed supply sends a signal of its bigger liquidity. Meaning it's even better medium of exchange for you to accept (even if you don't invest in it yourself).

Things don't need to be priced in Bitcoin for it to have value and to be used in exchange with this value. Things will be priced in the most stable, most liquid commodity and today it is fiat currency. Bitcoin needs to be spread to many more hands than it is today. This is what happens today and we are still at less than 0.1% of global population that is even aware that this technology exists.

I will say that BTC has risen another ~10% since the discussion started, in the lead up to what had been predicted as a 11% difficulty increase (now predicted at 15%), which looks bad for my hypothesis.

Governments can print money whenever they want. It's harder to saturate Bitcoins. Demand is rising more than the amount that it can be mined at. Pretty simple.

That's not completely correct. Governments don't print money, central banks do. Governments still have have to sell bonds to actually have money to spend. The amount of money in circulation affects the interest on these bonds, but it's not as simple as saying governments can just print money without consequences (maybe it should be, but that's a different discussion).

> Governments don't print money, central banks do.

I think most money is created by private banks, not central banks.

No, credit is created by private banks, but the money supply is controlled by central banks, for example like the FED does right now by scooping up assets (quantitative easing, ie: increasing the money supply). This is popularly called 'printing money' but obviously that just an allegory: nothing is actually 'printed', and the amount of currency (notes and coins) in circulation is completely unrelated to the money supply.

Yes, if anything I'd imagine the Bitcoin price influences the mining difficulty. If a Bitcoin is worth more, miners can invest more in mining hardware, thereby increasing the difficulty.

Indeed. The price should affect mining difficulty, not the other way around (price goes up -> mining becomes more profitable -> more mining).

Reply on news.ycombinator.com