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.

“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

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]

The Industrial canal failed in three places. Two of these breaches
and a large number of other levee breaks along the Intracoastal
Waterway, which feeds into the Industrial Canal, and the Mississippi
River Gulf Outlet (MR-GO) essentially wiped out East New Orleans, the
Lower 9th Ward, and St Bernard Parish. The third breach in the
Industrial Canal caused flooding on its west side (map).

The storm surges along the Industrial Canal and the Intracoastal
Waterways were substantially higher than their levees were designed to
contain. But this was a design flaw. It has been well-known that these
levees would be over-topped or breached by the storm surge from a
level two or fast moving level three storm. This is because these
levees were built without properly accounting for the effects of
MR-GO. MR-GO is an Army Corps of Engineers’ 1962 white elephant and
environmental disaster that also funnels the gulf into the
Intracoastal Waterway and Industrial Canal when a hurricane follows a
course like that of Katrina.^[12]

The flooding of New Orleans was an Army Corps of Engineering
disaster. The crescent region of New Orleans was flooded because
canals breached under pressure from storm surge well within their
design tolerance. These breaches probably represent the most expensive
engineering mistake in US history. East New Orleans and the lower 9th
ward were flooded because levees were built to withstand a much weaker
storm surge than was forecast to occur for the hurricanes these levees
were supposed to provide protection against.

Notes

An earlier version of this appeared
here.
“C’est levee” stolen from Krewe de Vieux.

^[1]
“The levees were designed by congressional mandate to fend off
floodwater heights — up to about 11 or 13 feet, depending on location
– that Category 1 or 2, and some Category 3 storms would kick up.”
(John
McQuaid, Bob Marshall and Mark Schleifstein, Evidence points to
man-made disaster, Human mistakes led to N.O. levee breaches,
Times-Picayune, Thursday, December 08, 2005). The levees on the
17th St and London were designed, by the Army Corps of Engineers’ own
rules, to hold a surge of 14 feet. Bob
Marshall, Overtopping claim won’t hold water, experts say Floodwall
standards set in corps manual, Monday, February 06, 2006

^[2]
Katrina was a relatively small storm when it hit New Orleans with
maximum wind gusts of 100 mph (see the bottom of this
NOAA summary), or at most a low-end Category Two hurricane on the
Simpson-Saffir
scale (which requires sustained winds over 96 mph). There was, of
course, wind damage in the broad area, but this was relatively minor
and would not have prevented the vast bulk of the population from
returning within a few days of the hurricane passing.

^[3]
The extent of damage due to the flooding of Orleans Parish and
Metairie is extraordinary. Nearly four months after the initial
flooding, about one third of the pre-levee breach population have
returned to Orleans, 15 per cent of its schools are open^[13],
and only one emergency ward (a second, Tulane Hospital, is scheduled
to open on February 15th). Brookings also estimates 750,000 households
remain displaced over the entire gulf coast.

It would not be
hard to demonstrate that the total expenditure of the federal
government on Katrina recovery can only amount to a fraction of the
costs that the residents of the Orleans, St Bernard, and flooded
sections of the Jefferson, Parishes have and continue to bear.

^[4]
Pre-Katrina the population of Orleans Parish was just under 500,000. Immediately
to the west, Metairie, of Jefferson Parish had a population of about
146,000. While
Metairie has largely grown over its history, the
population of the city of New Orleans reached the half a million
mark in the early 1940s and peaked at around 700,000 in the
mid-1960s.

^[5]
The Army Corps of Engineering have essentially had this responsibility
since 1937, and
was authorized by Congress to build the current levee system in 1965
(for a clear and concise history see The
Subcommittee on Water Resources and Environment, Hearing on Expert
Views On Hurricane And Flood Protection And Water Resources Planning
For A Rebuilt Gulf Coast), but “[t]he levee system’s design dates
to the 1950s.” (John
McQuaid, Bob Marshall and Mark Schleifstein, Evidence points to
man-made disaster, Human mistakes led to N.O. levee breaches,
Times-Picayune, Thursday, December 08, 2005). For some sense of
the bloody-minded bureaucratic squabbles and politics of levee design
and maintenance since the early 1980s see Stephen Braun and Ralph
Vartabedian, The politics of flood control: Levees Weakened as New
Orleans Board, Federal Engineers Feuded, available in the archives of
the Los Angeles Times, December
25, 2005. For a longer history see Bob
Marshall, John McQuaid and Mark Schleifstein, For centuries canals
kept New Orleans dry. Most people never dreamed they would become
Mother Nature’s instrument of destruction, Times-Picayune, Sunday,
January 29, 2006

^[6]
Hurricane Katrina resulted in 58 catastrophic levee failures in the
area around New Orleans. One was on the 17th Street Canal, two were on
the London Street Canal, and three on the Industrial Canal. The rest
occurred largely on levees that lie south and east of the Industrial
Canal, notably on the Mississippi River Gulf Outlet (MR-GO) Mark
Schleifstein, LSU expert defends piling tests, Corps’ findings no
absolution, he says, Times-Picayune, Thursday, December 15,
2005.

^[7]
“Observational data and computer modeling indicate that storm surge
entering the canals from the lake reached heights ranging from 9 to 11
feet in the 17th Street Canal and 11 to 12 feet in the London Avenue
Canal. The walls were 13.5 feet high or higher along much of the two
canals and were designed to withstand water rising to 11.5 feet.” John
McQuaid, Bob Marshall and Mark Schleifstein, Evidence points to
man-made disaster, Human mistakes led to N.O. levee breaches,
Times-Picayune, Thursday, December 08, 2005. As is standard
engineering practice and the Army Corps of Engineers’ own manual (see
^[1]),
all levees or dams built with walls of a given height must be capable
of supporting water that fills to that height.

^[8]
Westward breaches of the Industrial Canal significantly contributed to
flooding in the lower southeast segment of the city between Esplanade
Street and the Industrial Canal. East New Orleans and the lower 9th
Ward lie on the east side of the canal and were flooded by even more
disastrous collapses of the east side of the Industrial Canal, and
numerous other levee breaches in that region. The breaches in the
Industrial Canal were also due to design failures as discussed later
in the main body of this piece.

^[9]
On the 17th Street canal: “”Our geotechnical engineers, when they did
their safety calculations, used both sheet pilings to minus 10 and
minus 17, and in both cases they indicated that the sheet piles would
have failed as the water level in the canal approached 11 feet above
sea level, which is exactly what happened in Katrina,” van Heerden [a
leader of a state team investigating New Orleans area levee failures]
said.” Mark
Schleifstein, LSU expert defends piling tests, Corps’ findings no
absolution, he says, Times-Picayune, Thursday, December 15,
2005

“The floodwall on the 17th Street Canal levee was
destined to fail long before it reached its maximum design load of 14
feet of water because the Army Corps of Engineers underestimated the
weak soil layers 10 to 25 feet below the levee, the state’s forensic
levee investigation team concluded in a report to be released this
week.”
Bob Marshall, 17th Street Canal levee was doomed, Report blames corps:
Soil could never hold, Times-Picayune, Wednesday, November 30,
2005

“After a 1980 flood caused a stretch of the city’s
London Avenue canal levee to collapse, the Army Corps of Engineers
proposed replacing it with a fortified design called a T-wall, with
sheet pile foundations driven 26 feet deep. And in 1981, a study by
Metairie design firm Modjeski & Masters found that proposed higher
levees along New Orleans’ 17th Street Canal likely would fail in high
water because they were built on ‘very soft clays with minimal
cohesion.’

“Yet when levee designs were finalized, the London
Avenue Canal wall ended up with a significantly weaker design and the
17th Street walls with shallower foundations. Both canals breached
when foundation soil slipped from underneath them as Hurricane
Katrina’s storm surge rose on Aug. 29, flooding much of central New
Orleans…

“‘There does appear to be a systemic failure along
the drainage canals because the failure occurred at two places
simultaneously,’ said David Rogers, a geotechnical engineer at the
University of Missouri-Rolla who is on a National Science Foundation
team studying the breaches. ‘There’s got to be something big that’s
causing that. . . . This is a very bad failure mark. It’s telling you
they missed the mark by a country mile on the design.’”
John McQuaid, Breaches lay bare flaws in design process. Stability
concerns date back decades, Times-Picayune, Sunday, December 18,
2005

The same article provides evidence that the Army Corps
of Engineers knew of weaknesses in the London St. Canal, and that the
implemented levee design was inadequate.

See also [11].

^[10]
Bob
Marshall, Clerical error may have doomed levee. Map maker confuses
soil descriptions, Times-Picayune, Saturday, February 04,
2006.

^[11]
“An internal review by the Army Corps of Engineers supports most of
the criticisms leveled against the New Orleans area levee system by an
independent team of engineers, including questions about soil
strength, levee maintenance and whether the system was built as
designed…

“The [Army Corps of Engineers'] task force
concurred with the independent engineers from the American Society of
Civil Engineers and the National Science Foundation that the failure
of levee walls at the 17th Street and London Avenue canals were likely
caused by failures in the foundation soils beneath them. The engineers
also have noted that sheet piling beneath the walls was too short to
properly support the walls.”Mark
Schleifstein, Corps’ own study backs critics of levee engineering,
Report calls for rebuilding system to do what it was supposed to do,
Times-Picayune, Saturday, December 10, 2005

A range of
other factors, including inappropriate dredging may have contributed
to the levee breaches (Bob
Marshall and Sheila Grissett, Dredging led to deep trouble, experts
say Levee ‘blowout’ was a concern before project began in 1980s,
Times-Picayune, Friday, December 09, 2005). In the case of the
17th Street Canal, the Army Corps of Engineers currently believes that
at the breach, the canal was built to its (grossly under-engineered)
specifications, that is, the breach was not due due to fraudulent
construction practice Mark
Schleifstein and Bob Marshall, Corps finds pilings at designed
depth. Probe shifts to original plans, Times-Picayune, Wednesday,
December 14, 2005. However, there is some evidence of contractor
fraud elsewhere
Mark Schleifstein, LSU expert defends piling tests. Corps’ findings no
absolution, he says, Times-Picayune, Thursday, December 15,
2005.

^[12]
The problems of MR-GO were known even before it was started in
1962. Hurricane Betsy demonstrated the funneling effect in 1965. (
Matthew Brown, MR-GO goes from hero to villain, Some want channel to
stay open, still, Times-Picayune, Sunday, January 08, 2006).

“Three months before Katrina, Hassan Mashriqui, a storm surge
expert at Louisiana State University’s Hurricane Center, called MR-GO
a ‘critical and fundamental flaw’ in the Corps’ hurricane defenses, a
‘Trojan Horse’ that could amplify storm surges 20 to 40
percent. Following the storm, an engineering investigation and
computer modelling showed that the outlet intensified the initial
surge by 20 percent, raised the height of the wall of water about
three feet, and increased the velocity of the surge from 3 feet per
second to 8 feet per second in the funnel. Mashriqui believes this
contributed to the scouring that undermined the levees and floodwalls
along the outlet and Industrial Canal. ‘Without MRGO, the flooding
would have been much less,’ he said. ‘The levees might have
overtopped, but they wouldn’t have been washed away.’ ” Mississippi
River-Gulf Outlet Canal, Wikipedia. For an alternative source see
the New
Scientist.

^[13]
The Brookings Institute provides statistics
on post-levee breach developments in New Orleans.

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

(This posting from Kodjo also appeared on Catallaxy)

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.