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From chaining blocks to breaking even: A study on the profitability of bitcoin mining from 2012 to 2016

Author

Listed:
  • Jona Derks

    (Vrije Universiteit)

  • Jaap Gordijn

    (Vrije Universiteit)

  • Arjen Siegmann

    (Vrije Universiteit)

Abstract

Bitcoin is a widely-spread payment instrument, but it is doubtful whether the proof-of-work (PoW) nature of the system is financially sustainable on the long term. To assess sustainability, we focus on the bitcoin miners as they play an important role in the proof-of-work consensus mechanism of bitcoin to create trust in the currency. Miners offer their services against a reward while recurring expenses. Our results show that bitcoin mining has become less profitable over time to the extent that profits seem to converge to zero. This is what economic theory predicts for a competitive market that has a single homogenous good. We analyze the actors involved in the bitcoin system as well as the value flows between these actors using the e3value methodology. The value flows are quantified using publicly available data about the bitcoin network. However, two important value flows for the miners, namely hardware investments and expenses for electricity power, are not available from public sources. Therefore, we contribute an approach to estimate the installed base of bitcoin hardware equipment over time. Using this estimate, we can calculate the expenses miner should have. At the end of our analysis period, the marginal profit of mining a bitcoin becomes negative, i.e., to a loss for the miners. This loss is caused by the consensus mechanism of the bitcoin protocol, which requires a substantial investment in hardware and significant recurring daily expenses for energy. Therefore, a sustainable crypto currency needs higher payments for miners or more energy efficient algorithms to achieve consensus in a network about the truth of the distributed ledger.

Suggested Citation

  • Jona Derks & Jaap Gordijn & Arjen Siegmann, 2018. "From chaining blocks to breaking even: A study on the profitability of bitcoin mining from 2012 to 2016," Electronic Markets, Springer;IIM University of St. Gallen, vol. 28(3), pages 321-338, August.
    • Handle: RePEc:spr:elmark:v:28:y:2018:i:3:d:10.1007_s12525-018-0308-3
    DOI: 10.1007/s12525-018-0308-3
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    References listed on IDEAS

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    1. Jamal Bouoiyour & Refk Selmi, 2015. "What Does Bitcoin Look Like?," Annals of Economics and Finance, Society for AEF, vol. 16(2), pages 449-492, November.
    2. William Luther, 2015. "The monetary mechanism of stateless Somalia," Public Choice, Springer, vol. 165(1), pages 45-58, October.
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    Cited by:

    1. Nadine Kathrin Ostern, 2020. "Blockchain in the IS research discipline: a discussion of terminology and concepts," Electronic Markets, Springer;IIM University of St. Gallen, vol. 30(2), pages 195-210, June.
    2. Pavel Ciaian & d’Artis Kancs & Miroslava Rajcaniova, 2021. "The economic dependency of bitcoin security," Applied Economics, Taylor & Francis Journals, vol. 53(49), pages 5738-5755, October.
    3. Tea Livaic & Ana Perisic, 2019. "What can Google Tell us about Bitcoin Trading Volume in Croatia? Evidence from the Online Marketplace Localbitcoins," Interdisciplinary Description of Complex Systems - scientific journal, Croatian Interdisciplinary Society Provider Homepage: http://indecs.eu, vol. 17(4), pages 707-715.
    4. Vineet Paliwal & Shalini Chandra & Suneel Sharma, 2020. "Blockchain Technology for Sustainable Supply Chain Management: A Systematic Literature Review and a Classification Framework," Sustainability, MDPI, vol. 12(18), pages 1-39, September.
    5. Klarin, Anton, 2020. "The decade-long cryptocurrencies and the blockchain rollercoaster: Mapping the intellectual structure and charting future directions," Research in International Business and Finance, Elsevier, vol. 51(C).
    6. Nora Nahr & Marikka Heikkilä, 2022. "Uncovering the identity of Electronic Markets research through text mining techniques," Electronic Markets, Springer;IIM University of St. Gallen, vol. 32(3), pages 1257-1277, September.
    7. Rainer Alt & Roman Beck & Martin T. Smits, 2018. "FinTech and the transformation of the financial industry," Electronic Markets, Springer;IIM University of St. Gallen, vol. 28(3), pages 235-243, August.
    8. Nishant Sapra & Imlak Shaikh & Ashutosh Dash, 2023. "Impact of Proof of Work (PoW)-Based Blockchain Applications on the Environment: A Systematic Review and Research Agenda," JRFM, MDPI, vol. 16(4), pages 1-29, March.
    9. Rainer Alt, 2020. "Electronic Markets on sustainability," Electronic Markets, Springer;IIM University of St. Gallen, vol. 30(4), pages 667-674, December.

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