This forum post provides an excellent analysis of the relationship between the bitcoin market exchange rate and mining difficulty. The rule of thumb has been that difficulty trails price, with a several week lag. Now we have data over a long enough period of time where a chart can be made and it clearly shows this rule as being fairly accurate.
For those considering entering mining or adding mining capacity, the primary risk is that the difficulty will increase faster than the market exchange rate. The above chart shows that right now is one of the better times to be mining and most miners will agree wth that sentiment. The picture could change dramatically, however, with the next difficulty adjustment.
The barriers to entry for mining are dropping thanks to new innovations, better software, better guides and a larger community involved in mining. Additional upside remains thanks to the increased market exchange rate so the primary contraints will likely be access to an adequate supply of graphics cards. This is Bitcoin mining’s Malthusian check as at some point this growth rate will exceed AMD’s capacity to produce the cards, regardless of the price.
Additional unkowns inlcude an if and/or when ASIC or FPGA designs might appear on the scene. One mining innovator reportedly has “tens of Ghash/s” of capacity from these low-powered albeit expensive, custom designs. Once GPU supplies are constrained though, these will likely be where the next Thash/s of capacity will come from.
Longer term, the first 50% decrease in the mining reward (from 50 BTC to 25 BTC) is about twenty months away. Any mining configurations that are even close to not returning at least a significant profit prior to that point will likely be taken out of service. The amount of transaction fees could become significant by then however the decrease in the reward should certainly be considered when making plans further out.
For the next few weeks though if the exchange rate doesn’t recede then those already mining are not going to be disappointed about having put forth the effort and their investment.