Hotelling Meets Crypto-Currency: Do Bitcoin Rents Follow Hotelling's Rule?

46 Pages Posted: 10 Jan 2020

See all articles by Craig E. Landry

Craig E. Landry

UGA Ag & Applied Economics

Dylan Turner

University of Georgia - Department of Agricultural & Applied Economics

Jeffrey H. Dorfman

University of Georgia

Date Written: December 19, 2019

Abstract

Hotelling's Rule of non-renewable resource extraction was first proposed in 1931, but strong empirical evidence supporting Hotelling's predictions has been elusive. Recognizing the complications in natural resource markets, we test Hotelling's Rule using bitcoin rents. Bitcoin is similar to natural resources in that new coins enter the market solely through the efforts of individual agents expending computer resources to attain bitcoins, which can then be sold on exchanges for profit. Bitcoin has a fixed and known resource stock, can be accessed by anyone with a computer, exhibits a fairly homogeneous and easily modeled "mining'' technology, and extraction rates follow restricted and pre-determined patterns. Aspects of capital investment and mining returns are observable and can be tracked over time, making bitcoin an ideal test bed for Hotelling's Rule. We calculate the growth rate of the net asset price of Bitcoin, and compare it to the growth rate of several market indicies (GSPC, HYG) over the same time period. We test for and find evidence of a co-integrating relationship, providing support for Hotelling's rule in that any deviations from the theoretical price path bring economic forces to bear that restore the proper pricing relationship.

Keywords: asset pricing, bitcoin, natural resources, Hotelling's Rule

JEL Classification: G1, Q3

Suggested Citation

Landry, Craig and Turner, Dylan and Dorfman, Jeffrey H., Hotelling Meets Crypto-Currency: Do Bitcoin Rents Follow Hotelling's Rule? (December 19, 2019). Available at SSRN: https://ssrn.com/abstract=3506730 or http://dx.doi.org/10.2139/ssrn.3506730

Craig Landry (Contact Author)

UGA Ag & Applied Economics ( email )

Athens, GA 30602-7509
United States

Dylan Turner

University of Georgia - Department of Agricultural & Applied Economics ( email )

Athens, GA 30602-7509
United States

Jeffrey H. Dorfman

University of Georgia ( email )

Athens, GA 30602-6254
United States

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