Unraveling Bitcoin's Market Forces: An Empirical and Analytical Investigation of Mining and Exchange

Abstract

This study examines the market forces driving Bitcoin’s interconnected exchange and mining markets, developing a systematic framework that captures the interplay between exchange rate, liquidity, and mining activities. We model how fluctuations in the Bitcoin exchange market affect the entry and exit dynamics of the mining market, characterized by the supply and demand of mining rigs. Empirically, leveraging a unique dataset of the purchase and listing of mining rigs from a leading e-commerce platform, we find that the effects of the exchange market conditions are pronounced for investors, as potential entrants to the Bitcoin mining market. They have a significant impact on the demand for mining rigs. 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. In addition, our empirical results indicate that the electricity consumption of mining Bitcoin moderates the effects, shaping the responsiveness of mining rig demand to the exchange market conditions. To further contextualize these findings, we develop a game-theoretic model that uncovers the micro-foundations of investor decision-making and the role of certain types of miners in market stabilization. Overall, this study elucidates the economic implications of Bitcoin exchanges on Bitcoin mining activities, which contribute to the operational performance of the Bitcoin system. It enriches our understanding of how investor activities are affected and coordinated within IT-enabled markets, while illuminating the information transmission and underlying connection among them.