Quote from: rhubear on February 24, 2012, 06:29:12 PM

it appears some of my assumptions were not correct. I assumed difficulty would be rising exponentially one way. Your graphs posted indicate that difficulty & price are directly linked, and are not linear or exponential, but rising & falling.

If I assume price is related to difficulty, why does difficulty rise & fall? The more I try to learn about BTC, the more complicated it is! I'm not trying to understand all of it, just enough to decide my own involvement! LOL

Bitcoin protocol tries to keep avg block time at 10 minutes. Every 2016 blocks difficulty is adjusted to whatever difficulty would have made the last 2016 blocks take avg of 10 minutes each.

As more hashing power comes online blocks are found faster and thus difficulty rises.
As hashing power is taken offline blocks are found slower and difficulty falls.

So your question is better phrased "why is hashing power go up and down"?

Economics. If it is unprofitable miners turn off rigs and hashing power falls. As more efficient equipment comes online people expand. New miners are always joining and expanding, and inefficient miners always quitting, and scaling back. So the network will always balance itself. Now if revenue for miners is too low then the network will be very weak and easily attacked however even if hashing power was cut in half ~5TH/s is a very "hard" target.