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Dynamics of mining markets: Equilibrium implications for professional and casual miners

Author

Listed:
  • Pezzo, Luca
  • Wang, Lei
  • Shin, Seungho
  • Zirek, Duygu

Abstract

We design a simple equilibrium model to analyze the dynamics of the mining market in the presence of professional and casual miners. The model endogenously recovers two major unobservable drivers: the supply of computing power, and the dynamics of the fixed costs of mining. We calibrate the model to the market of Bitcoin and Ethereum and find that positive shocks to the supply of computing power (technological enhancements) translate into positive price shocks, and the benefits of these hikes are creamed off by professional miners. We also find that fixed costs are inversely related to technological enhancements, decrease at an exponential rate (which is twice as big for Bitcoin), and are the smallest during periods when professional miners have a monopoly.

Suggested Citation

  • Pezzo, Luca & Wang, Lei & Shin, Seungho & Zirek, Duygu, 2023. "Dynamics of mining markets: Equilibrium implications for professional and casual miners," Global Finance Journal, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:glofin:v:57:y:2023:i:c:s1044028323000613
    DOI: 10.1016/j.gfj.2023.100866
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    References listed on IDEAS

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    1. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta & Albert J. Menkveld, 2023. "Equilibrium Bitcoin Pricing," Journal of Finance, American Finance Association, vol. 78(2), pages 967-1014, April.
    2. Julien Prat & Benjamin Walter, 2021. "An Equilibrium Model of the Market for Bitcoin Mining," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2415-2452.
    3. Delgado-Mohatar, Oscar & Felis-Rota, Marta & Fernández-Herraiz, Carlos, 2019. "The Bitcoin mining breakdown: Is mining still profitable?," Economics Letters, Elsevier, vol. 184(C).
    4. Easley, David & O'Hara, Maureen & Basu, Soumya, 2019. "From mining to markets: The evolution of bitcoin transaction fees," Journal of Financial Economics, Elsevier, vol. 134(1), pages 91-109.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Crypto-currencies; Technological enhancements; Professional versus casual miners; Computing power; Fixed costs; Equilibrium model; Monopoly; Kalman filter;
    All these keywords.

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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