The Decision to Produce Altcoins: Miners' Arbitrage in Cryptocurrency Markets

6 Pages Posted: 17 Mar 2015 Last revised: 10 Jan 2016

See all articles by Adam Hayes

Adam Hayes

University of Wisconsin - Madison - Department of Sociology; The New School - Department of Economics

Date Written: March 16, 2015


Bitcoin has become the de facto 'gold' standard among cryptocurrencies as it is the most widely accepted in commerce, has the largest mining network, and greatest volume of transactions. Because of this, miners of other SHA-256 cryptocurrencies will tend to convert those altcoins into bitcoin in order to transact in a meaningful way with the real economy. The result is that bitcoin mining regulates that of all other SHA-256 blockchains. Specifically, what matters is the expected number of bitcoins produced per day given a unit of hashing (mining) power, whatever the equivalence in the coin being mined. If mining for a different coin would yield a greater return in bitcoins at the margin (per day) for a miner, an apparent arbitrage opportunity will exist to direct mining effort at that cryptocurrency and subsequently exchange those for bitcoin. These opportunities, once taken, quickly eliminate the profitable arbitrage and appear to operate in a fairly efficient and predictable manner. A model is developed in this paper to formalize this process where cryptocurrency miners seeking to maximize production in terms of bitcoins earned in a day will exploit any such opportunities. If no such opportunities exist, they will simply revert to mining bitcoins directly. There are some important implications to this process, such as a tendency for cryptocurrencies to fall in price relative to bitcoin over time, and for changes in bitcoin mining difficulty to indirectly influence the market prices of altcoins. Finally, it seems that those undertaking this process of miners' arbitrage do so at the expense of speculators and noise traders who make decisions regarding buy and sell trades without the use of fundamental data. These participants generally have poor timing, follow trends, and over-react to good and bad news. Altcoins are produced by miners and subsequently offered for sale in the market in order to obtain bitcoins; meanwhile noise traders serve as the only bid-side to the market, on average.

Keywords: bitcoin, cryptocurrency, altcoins, arbitrage, equilibrium models, currency exchanges

JEL Classification: D58, E42, E47, G1, L17, L86

Suggested Citation

Hayes, Adam, The Decision to Produce Altcoins: Miners' Arbitrage in Cryptocurrency Markets (March 16, 2015). Available at SSRN: or

Adam Hayes (Contact Author)

University of Wisconsin - Madison - Department of Sociology ( email )

8128 William H. Sewell Social Sciences Building
1180 Observatory Drive
Madison, WI 53706
United States

The New School - Department of Economics ( email )

Room 1116
6 East 16th Street
New York, NY 10003
United States

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