Does Mining Fuel Bubbles? An Experimental Study on Cryptocurrency Markets

Marco Lambrecht (), Andis Sofianos and Yilong Xu ()
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Marco Lambrecht: Hanken School of Economics & Helsinki GSE, 00100 Helsinki, Finland
Yilong Xu: Utrecht University School of Economics, Utrecht University, 3584 EC Utrecht, Netherlands

Management Science, 2025, vol. 71, issue 3, 1865-1888

Abstract: We investigate how key features associated with the Proof-of-Work consensus mechanism of Bitcoin (commonly referred to as mining) affect pricing. In a controlled laboratory experiment, we observe that price bubble formation can be attributed to mining. Moreover, overpricing is more pronounced if the mining capacity is centralized to a small group of individuals. The order book data reveal that miners seem to play a crucial role in bubble formation. Further probing the mechanism in a second study, we find that both mining costs and decisions jointly with the sluggish rate of supply of the asset contribute to the bubble formation. Our results demonstrate that erratic pricing is an inherent feature of cryptocurrencies based on a mining protocol, thus seriously limiting any prospects for such assets becoming a medium of exchange.

Keywords: Bitcoin; bubbles; cryptocurrency; financial market experiment (search for similar items in EconPapers)
Date: 2025
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http://dx.doi.org/10.1287/mnsc.2022.01238 (application/pdf)

Related works:
Working Paper: Does mining fuel bubbles? An experimental study on cryptocurrency markets (2021)
Working Paper: Does mining fuel bubbles? An experimental study on cryptocurrency markets (2020)
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