Does Mining Activity Drive Crash Risks in Cryptocurrency Markets? An Application to Bitcoin

Matteo Bonato (), Riza Demirer, Rangan Gupta () and Abeeb Olaniran ()
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Matteo Bonato: Department of Economics and Econometrics, University of Johannesburg, Auckland Park, South Africa; IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France
Rangan Gupta: Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa
Abeeb Olaniran: Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa

No 202530, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper explores the role of mining activity, proxied by growth rates of electricity consumption and cost of mining, as a driver of pricing inefficiencies in cryptocurrencies. Utilizing alternative measures of crash risk proxied by the realized negative coefficient of skewness and realized down-to-up volatility, derived based on 5-minute intraday Bitcoin data, nonparametric causality-in-quantiles tests, along with sign analysis, captured by the estimates of partial average derivatives, provide evidence that mining activity can, in general, predict an increase in the entire conditional distribution of crash risk, with the strongest impact associated over the normal (median) to moderately high (upper quantiles) levels of risk. Despite the emergence of these assets in international transactions and as an investment vehicle, our results suggest that decentralized mining process can contribute to inefficiencies in the pricing of cryptocurrencies, putting further doubt into the role of these assets as a medium of exchange, alternative to conventional assets.

Keywords: Crypto currencies; Crash risk; Mining activity; Nonparametric causality-in-quantiles (search for similar items in EconPapers)
JEL-codes: C22 C53 G10 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2025-09
New Economics Papers: this item is included in nep-pay and nep-rmg
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