From Hotelling to Nakamoto: The Economics of Bitcoin Mining
41 Pages Posted: 18 Feb 2021
Date Written: February 7, 2021
We propose a unified dynamic framework to study the economics of the supply side of bitcoin mining, such as endogenous transaction fees, the miners' liquidation policies, and endogenous inventory holdings, in the face of declining system block rewards and stochastic demand. The model yields two economic insights: First, high jump risk and transaction fees income can be major forces driving miners to significantly reduce their inventory even when bitcoin prices are relatively low. Second, the model explains the observed co-movements of average transaction fees, average block sizes, and Bitcoin prices.
Keywords: Cryptocurrency, bitcoin mining, jump risk, transaction fees, inventory
JEL Classification: G23 G31 G32 D81
Suggested Citation: Suggested Citation