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Bounded pool mining and the bounded Bitcoin price

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Listed:
  • Jia, Dun
  • Li, Yifan

Abstract

We present a simple model featuring the supply side of the Bitcoin ecosystem, i.e. the market structure of “mining”, to rationalize the relationship between the Bitcoin price volatility and the market concentration in pool mining. An individual miner optimally chooses to operate individually or to delegate the mining capacity in hashrates to a mining pool. The mining pool entertains the trade-off between compromising the network derived from its market power and maintaining sufficient hashrate delegations from dispersed miners. We show that a mining pool finds it optimal to be self-constrained in size while maintaining a positive probability of compromising the network in equilibrium. As a result, the bounded market concentration in pooled mining caps the Bitcoin price fluctuations. We also document important empirical evidence which is consistent with our model predictions.

Suggested Citation

  • Jia, Dun & Li, Yifan, 2023. "Bounded pool mining and the bounded Bitcoin price," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s154461232200705x
    DOI: 10.1016/j.frl.2022.103529
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    References listed on IDEAS

    as
    1. Schilling, Linda & Uhlig, Harald, 2019. "Some simple bitcoin economics," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 16-26.
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    6. Gronwald, Marc, 2019. "Is Bitcoin a Commodity? On price jumps, demand shocks, and certainty of supply," Journal of International Money and Finance, Elsevier, vol. 97(C), pages 86-92.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bitcoin; Market structure; Price variability;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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