Bounded pool mining and the bounded Bitcoin price

Dun Jia and Yifan Li

Finance Research Letters, 2023, vol. 52, issue C

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.

Keywords: Bitcoin; Market structure; Price variability (search for similar items in EconPapers)
JEL-codes: E40 G10 L10 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s154461232200705x

DOI: 10.1016/j.frl.2022.103529

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