Cryptocurrency, Mining Pools' Concentration, and Asset Prices

56 Pages Posted: 9 Aug 2021 Last revised: 13 Jan 2024

See all articles by Bikramaditya Datta

Bikramaditya Datta

Indian Institute of Technology (IIT), Kanpur

Idan Hodor

Monash University

Date Written: January 12, 2024

Abstract

This paper introduces mining pools' concentration into a dynamic asset pricing setup. Our theory builds on the intuitive yet novel insight that modeling competition in equilibrium requires market clearing at each mining pool individually. Our model predicts that as concentration increases, the cryptocurrency price falls, and its volatility spikes---in line with empirical findings on Bitcoin. We further reveal that the rise and fall of mining pools affect prices only through their effect on concentration. Lastly, equilibrium predicts that mining pools' revenues determine the cryptocurrency's value and volatility, and if a pricing bubble exists, it amplifies the concentration effects.

Keywords: Cryptocurrency Volatility, Cryptocurrency Pricing, Mining Pools' Revenues, Concentration, Exogenous Price Bubble

JEL Classification: G12, G15, G23

Suggested Citation

Datta, Bikramaditya and Hodor, Idan, Cryptocurrency, Mining Pools' Concentration, and Asset Prices (January 12, 2024). Available at SSRN: https://ssrn.com/abstract=3887256 or http://dx.doi.org/10.2139/ssrn.3887256

Bikramaditya Datta

Indian Institute of Technology (IIT), Kanpur ( email )

IIT Kanpur
kalyanpur
Kanpur, 208016
India

Idan Hodor (Contact Author)

Monash University ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia

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