Silk Road forums
Discussion => Off topic => Topic started by: astor on March 19, 2013, 03:50 am
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With bitcoin prices jumping again today, I thought it was time to address this. :)
The mining hashrate has no effect on the price of bitcoins.
I know it looks like it does, but it doesn't.
If you think it does, answer a simple question: How?
How does a cluster of computers repeatedly running SHA-256 hashes on blocks of data influence the price that people pay for bitcoins at the exchanges, or anywhere else?
Trace the direct causal link between the two.
There is none.
So what determines the price?
Quite simply, the standing buy and sell orders at the exchanges, and the algorithms that execute trades between them. The "price of a bitcoin" at any moment is literally the last trade at an exchange, and since MtGox handles 65% of trades, for practical purposes, the "price of a bitcoin" is the last trade at MtGox.
If I sold you a bitcoin for $10 right now, the effective price of a bitcoin for us would be $10. It's just that nobody else would know about it. Your favorite bitcoin charts get their data from the exchanges, and the "price of a bitcoin" that they show is the last_local, the last trade in a local currency, which is USD for most of us.
The standing buy and sell orders at the exchanges are determined by supply and demand, and since the supply is fixed (well, it changes but at a known, fixed rate), it is effectively determined by demand for bitcoins. So there's nothing magical happening here. It's simple economics. If more people want to buy than sell, buyers will have to compete for bitcoins, and the the price will go up.
If more people want to sell than buy, sellers will have to compete to get rid of their surplus bitcoins (relative to dollars), and the price will go down.
So why does the hashrate seem to track the bitcoin price so well?
https://blockchain.info/charts/hash-rate?timespan=1year
https://blockchain.info/charts/market-price?timespan=1year
You're confusing correlation with causation. Two factors can correlation without causally influencing each other, because a *third factor* causally influences both of them.
When the sun shines more directly in the summer, more people get sunburns, and more people wear shorts. If you plotted number of people wearing shorts with number of people getting sunburns, they would track each pretty well. They would increase and decrease together, but obviously wearing shorts doesn't cause sunburns or vice versa. A third factor, the sun, is influencing both.
In the bitcoin world, the third factor is the number of people interested in bitcoin.
As the number of people wanting to get bitcoins increases, more people buy bitcoins, increasing the price, and more people mine, increasing the hashrate. That is why hashrate and price correlate.
If a new technology comes out that drastically increases the hashrate, but the number of people interested in bitcoins remains the same, then the bitcoin price will be unaffected.
The introduction of ASICS could influence people's confidence in bitcoin, which would change the price. Ah, now we've identified a causal factor! But lots of things could influence people's confidence in bitcoin. The *math* behind mining doesn't influence the price of bitcoin at all, no matter how much of it is being executed in CPUs at a given time, which is what most people seem to think.
PS, if you want to know what caused today's spike, look here: https://bitcointalk.org/index.php?topic=154672.0
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Somebody needed to say it. +1 for an excellent post
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Great post. Great Explanation.
Does this really cause confusion among people though? I have never heard of anyone believing that the network hashrate has a direct correlation with value
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Thank-you astor you're an asset to this forum :)
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So, . . What does hash have to do with bit coin prices again ? You lost me at hash. :-). Just kidding.
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But what does effect btc prices are halvings. That decreases the supply.
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Just reading that forum post astor linked to. It worries me. Some people on there are saying its a good thing, and it may be for legitimacy in the eyes of the general public but it most definitely is not good for people who like anonymity (and that is one of the main reasons to use BTC in the first place imho). Now they can regulate it more, and actually take legal action against people/groups that do not comply. They know that a lot of BTC is bought explicitly for use on the Road, and this could be the first step of many towards throttling SR. Even if they can not track people through BTC transactions, they can start looking at the main ways people acquire BTC, and regulate/ban those if they so choose.
Wondering how much longer it will be before we will start having to actually fight for our freedom.