From Chaining Blocks to Breaking Even: A Study on the Profitability of Bitcoin Mining from 2012 to 2016
39 Pages Posted: 28 Sep 2016 Last revised: 10 May 2018
Date Written: February 17, 2018
Bitcoin is a widely-spread payment instrument, but it is doubtful whether the proof-of-work (PoW) nature of the system is sustainable on the long term. To assess sustainability, we focus on the bitcoin miners as they play an important role in the proof-of-work consensus mechanism of bitcoin to create trust in the currency. Miners offer their services against a reward while recurring costs. Our results show that bitcoin mining has become less profitable over time to the extent that profits seem to converge to zero. This is what economic theory predicts for a competitive market that has a single homogenous good. We analyze the actors involved in the bitcoin system as well as the value flows between these actors using the e3value methodology. Then we quantify these value flows for the period January 2012 – December 2016. Since definitive figures about the size of the bitcoin mining industry are lacking, we reverse-engineer the expenses and revenues of the participating actors by deducting these from the bitcoin value, computing power of the network and available mining hardware specifications. At the end of our analysis period, the marginal profit of mining a bitcoin becomes negative, i.e., to a loss for the miners. This is caused by the consensus mechanism of the bitcoin protocol, which requires a substantial investment in hardware and significant recurring daily expenses for energy. Therefore, a sustainable crypto currency needs more computationally efficient algorithms to achieve consensus in a network about the truth of the distributed ledger.
Keywords: Bitcoin, business model, financial sustainability
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