From Hotelling to Nakamoto: The Economics of Bitcoin Mining

41 Pages Posted: 18 Feb 2021

See all articles by Min Dai

Min Dai

The Hong Kong Polytechnic University

Wei Jiang

Hong Kong University of Science and Technology

Steven Kou

Boston University

Cong Qin

Soochow University

Date Written: February 7, 2021

Abstract

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

Dai, Min and Jiang, Wei and Kou, Steven and Qin, Cong, From Hotelling to Nakamoto: The Economics of Bitcoin Mining (February 7, 2021). Available at SSRN: https://ssrn.com/abstract=3780858 or http://dx.doi.org/10.2139/ssrn.3780858

Min Dai

The Hong Kong Polytechnic University ( email )

Wei Jiang (Contact Author)

Hong Kong University of Science and Technology ( email )

Clear water bay
Kowloon
Hong Kong
China

Steven Kou

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
6173583318 (Phone)

Cong Qin

Soochow University ( email )

No. 1 Shizi Street, Center for Financial Engineeri
Suzhou, 215006
China
13656190706 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
222
Abstract Views
1,320
rank
195,310
PlumX Metrics