Why Fixed Costs Matter for Proof-of-Work Based Cryptocurrencies

67 Pages Posted: 13 May 2020 Last revised: 12 Apr 2023

See all articles by Rodney Garratt

Rodney Garratt

University of California, Santa Barbara (UCSB)

Maarten R.C. van Oordt

Tinbergen Institute; VU University Amsterdam

Date Written: April 1, 2020


We assess how the cost structure of cryptocurrency mining affects the response of miners to exchange rate fluctuations and the immutability of cryptocurrency ledgers that rely on proof-of-work. We show that the amount of mining power supplied to currencies that rely on specialized hardware, such as Bitcoin, responds less to adverse exchange rate shocks than other currencies respond to such shocks, a fact that is instrumental to avoiding double-spending attacks. The results may change if mining equipment used for one cryptocurrency can be transferred to another. For smaller currencies with low exchange rate correlation, transferability eliminates the protection that fixed costs provide. Our results weaken doomsday predictions for Bitcoin and other cryptocurrencies with declining block rewards.

Keywords: Cryptocurrency, Block-chain, Mining, Valuation, Industrial Organization, Bitcoin

JEL Classification: E4, G31, L1

Suggested Citation

Garratt, Rodney and van Oordt, Maarten R.C. and van Oordt, Maarten R.C., Why Fixed Costs Matter for Proof-of-Work Based Cryptocurrencies (April 1, 2020). Available at SSRN: https://ssrn.com/abstract=3572400 or http://dx.doi.org/10.2139/ssrn.3572400

Rodney Garratt (Contact Author)

University of California, Santa Barbara (UCSB) ( email )

South Hall 5504

Maarten R.C. Van Oordt

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV

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