Toward Understanding the Bitcoin Mining and Exchange Markets

Abstract

In this study, we formulate a systematic framework that encompasses key dimensions of the Bitcoin exchange market, exchange rate, and liquidity and jointly model the entry and exit of the Bitcoin mining market, characterized by the supply and demand of mining rigs. We develop a game-theoretic model that derives the equilibrium quantity of investors participating in trading and mining and then empirically estimate the effect of the Bitcoin exchange market on the mining market. We demonstrate that Bitcoin investors tend to associate a higher valuation of Bitcoin with a higher Bitcoin exchange rate and consider the liquidity of the market when making mining decisions. By leveraging a unique dataset of the purchase and listing of mining rigs from a leading e-commerce platform, we find that the effects of key dimensions are pronounced for investors, as potential entrants to the Bitcoin mining market. They have a significant impact on the demand for mining rigs. Furthermore, our results indicate that the electricity consumption of mining Bitcoin moderates the effect of the Bitcoin exchange rate and liquidity on the demand for mining rigs. The findings of our study elucidate the economic implications of Bitcoin exchanges on Bitcoin mining activities, which contribute to the operational performance of the Bitcoin system.

Keywords: Blockchain, Bitcoin, Mining Rig, Trading