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repsilat

Isn't the price (softly) bounded above by the mining cost? I guess there's a demand/supply time-lag.

No, wait, I think I get it:

1. Lots of demand. Price spikes.

2. Supply increases,

3. Mining difficulty ratchets up.

Because mining difficulty is a function of mined bitcoins (and not a function of time) this price estimate isn't a refutation of Moore's law. It basically means that the demand for bitcoin, quantified I-don't-know-how, is going to double quite a bit faster than dollar-normalised processing power.

(Can anyone tell me whether increases in mining difficulty happen smoothly or sharply? I wonder whether the current market is smart enough to price a cliff in the rate.)

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The difficulty changes every 2 weeks. So it happens sharply.

Also, the price will feed into mining activity, but mining activity won't especially feed into the price. It will some, but the giant size of the network means that mining power won't increase so much that it will substantially impact the ongoing supply (so the new coins should mostly be factored into the current market).

Mining difficulty is a function of both mined coins and time, the adjustment tries to make the time between new blocks 10 minutes.

http://bitcoin.sipa.be/

http://bitcoinwisdom.com/bitcoin/difficulty

Very interesting. Now to try to corellate it with price swings...

It's tricky, because mining is also affected by hardware efficiency. So, if some new hotness arrives on the scene, difficulty can jump dramatically, with no corresponding price increase.

Also, since we're in the age where only asics can effectively mine, and they are output by small shops that have limited capacity, the hardware supply is more of a limiter to mining than demand. Generally, more interest in mining simply drives up the price of mining equipment, rather than immediately driving up mining rates.

Of course, over time, more demand leads to more companies wanting to build asics, so more of them do. However, that's a very slow response, since making mining equipment that works well is non-trivial.

It's interesting, for sure, but I think it probably affects ebay a lot more directly than difficulty ;)

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