Category Archives: Guest Posts

Guest Posts

The relationship between bitcoin price and difficulty

This is a guest post by nanotube of bitcoin-otc, the leading over-the-counter bitcoin exchange. –Brock

One sees a lot of discussion about the relationship between bitcoin price and difficulty. It is often remarked on IRC and forums, when a difficulty jump is expected, that there’s an expected concomitant jump in the price forthcoming. In this post, we’ll dispel some frequently-heard misconceptions.

There is a long-run feedback cycle between difficulty and price. If price goes up, that makes mining more lucrative, and people buy new hardware to capitalize on that. As hashing power increases as a result, however, there’s actually a temporary increase in the daily bitcoin production, thereby causing an increase in the supply. This occurs because difficulty only adjusts every 2016 blocks, so as mining power increases it takes difficulty some time to catch up – and in the meantime, blocks are produced more frequently than once per 10 minutes target rate. Thus, unless new interest in bitcoin materializes in the form of more buyers, it is in fact not unreasonable to expect a bit of a price decline, due to the increasing supply. In the longer term, higher difficulty increases the security of the network, causing more confidence and an increase in demand, thereby causing increase in price, and we see the cycle begin anew. The primary effect, however, is the high price drawing new miners in, rather than new mining capacity drawing the buyers in.

This is more clearly seen when we look at what must happen in order for difficulty to decrease. If price declines far enough to make marginal mining unprofitable, we may see a decrease in mining power as marginally-profitable miners exit. The decrease in mining power may cause the marginal investor to lose confidence in the security of the bitcoin network and sell, thereby causing further mining power decrease, etc., in a similar cycle as above, but going the other way. Note, however, that until price declines to the point of making mining unprofitable for a segment of marginally-profitable miners, mining power will not exit the the network, since a rational miner will keep mining as long as the revenue exceeds the costs. Here we can clearly see that the first-order effect is the change in the price, rather than a change in mining power, and that the feedback from mining power to price is secondary.

Another side point bears discussion, and that is the idea that events the occurrence of which is known in advance, will be reflected in the price of the affected goods, due to investors/speculators trading activity in anticipation thereof. Specifically, consider the folly of people who expect immediate price increases with a difficulty change upwards. The fact that the difficulty will change, and a fairly accurate estimate of future difficulty, is available for all to see, days in advance. Thus, anyone who thinks that this should affect the price, would have already made his bets on that happening, by buying some bitcoins on the market, thus causing the price to increase. By the time the actual change in difficulty occurs, everyone who was going to make that bet has made it already, and thus there’s not going to be any new demand on that very day due to that change.

I hope this gives the reader a better idea of the price-difficulty relationship in the bitcoin system.

Protecting wetlands that protect oil revenues

The Washington crowd cannot even get this right.

“in the last two years [2004-2005], we have spent more to rebuild Iraq’s wetlands than Louisiana’s” (for those who aren’t sure, a large amount of oil is regularly pulled out of the gulf of Louisiana’s shoreline, shipped through New Orleans’ port system, and processed locally along Mississippi between the sea and Baton Rouge).

Quote is from John Barry and Newt Gingrich, Time magazine, 6 March 2006, reproduced here

C’est levee

Who should pay for recovering from Katrina?

Many think the
US government should not go too far in subsidising private choices to
live below the height of the sea.

My own view is that the
federal government is responsible for the enormous damage sustained by
the New Orleans area. The Army Corps of Engineers was grossly
negligent in designing levees it was required to build and warranted
would protect New Orleans from a storm just like Katrina.[1] As a result of that
negligence, several hundred thousand people suffered very substantial
harm.[2]
(Disclosure: This is my 12th year in New Orleans. While our property
is not in the flood plain, it was flooded, though being raised, our
home was not.)

Unfortunately, the Federal government will not
compensate residents of New Orleans beyond a fraction of the costs
caused by the levee breaches.[3]

For decades, over half a million people[4]
have invested their lives and livelihoods in the New Orleans
area. They did so in no small part based on the assurance provided by
the levee system mandated by Congress and designed, built and overseen
by the Army Corps of Engineers.[5]

The levees of New Orleans were breached[6]
by waters the Congressional standard, and the Army Corps of Engineers’
own standards, should have contained. In the case of the 17th Street
and London Street canals, Katrina generated a storm surge well within
their design specifications.[7]
However, both these canals suffered catastrophic breaks, flooding the
bulk of the “crescent” of the Orleans Parish (the land between its
western boundary and the Industrial Canal)[8]
and a large swathe of neighboring Metairie (flood
map
from the Times-Picayune, 9 December 2005). The breaches were
not caused by water over-topping the levees, but by egregious design
flaws.[9]
The foundation soils of the levees were not properly accounted for,[10]
a conclusion supported by a study from the Army Corps of Engineers.[11]

Continue reading

White House secrecy

“The Bush administration, citing the confidentiality of executive branch communications, said Tuesday that it did not plan to turn over certain documents about Hurricane Katrina or make senior White House officials available for sworn testimony before two Congressional committees investigating the storm response.” Eric Lipton, White House Declines to Provide Storm Papers, New York Times, 25 January 2006

What is with these guys that everything is some kind of state secret?

(This posting from Kodjo also appeared on Catallaxy)

Bush & the truth

“It may be hard for you to see, but from when I first came here to today, New Orleans is reminding me of the city I used to come to visit.” New York Times, 13 January 2006

Apparently King George on his motorcade trip down the freeway learned more about it than we do living in it, but then he is a greater man than mere subjects like us.

Just to give a picture: Most stores are closed here at 6. The postal service delivers every other day, but only to 20% of the city. The bulk of the city does not have electricity or gas. The city’s population is no more than 25% of what it was. Garbage collection is erratic. Even in the 20% of the city that did not flood I estimate over 1/3 of the stop lights still do not work. The Army Corpses of Ingénues has now admitted the levees won’t be built back to the standards that were supposed to be in place, but were not, until well after the hurricane seasons begins.

I could go on, but perhaps I should defer to our great wartime leader.